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New Advice Strategies: Alan Smith on an ‘intelligent investing’ focus

Capital Asset Management chief executive Alan Smith talks to Cherry Reynard about using outsourcing to get a professional service at an affordable cost.

smith

When Alan Smith started Capital Asset Management in 2005, he was clear that he wanted to build a business of which he would happily be a client.

This meant a focus on clients’ lifestyle goals and priorities, rather than simply selling plans or products. The investment segment had to fit in with that agenda. As with many new businesses, Capital Asset Management was faced with the decision of where to seek external help and how much to build in-house.

The investment management part was a clear dilemma. Eventually Smith concluded that rather than using a fully outsourced solution for investment, they would build an in-house investment proposition but call on external resources to help with its structure and design.

He says: “There were compliance issues in deciding to use an in-house model, but we found that they were not insurmountable. We concluded from a compliance point of view, it was neutral.”

“Intelligent Investing” – the strategy built by the group – moves away from a fund picking, historic performance-led model and instead is tailored to meet the individual client’s objectives.

All the group’s portfolios have an inflation benchmark and from there, the group establishes the average rate of return required by the client to ensure their personal goals and lifestyle objectives are met. For example, they may need a return of 3 per cent above inflation to achieve their desired outcomes.

This is then blended with an assessment of a client’s capacity to take risk. Often, this will lead to a frank discussion about how a client may need to adapt their goals to suit their means and/or capacity for risk.

For example, a client with ambitions for an early retirement but a low tolerance for risk and relatively few assets would have to adapt their lifestyle or adjust their plans. The resulting investment portfolio is then built predominantly using index funds after Capital’s research suggested that there was little evidence that buying active funds was likely to deliver outperformance.

However, although the business keeps control, it has made use of external consultants both on a temporary and permanent basis.

In building its solution, it hired consultants to fine-tune the range and it works with Tim Hale, author of Smarter Investing and chief executive of Albion Strategic Consulting, on an ongoing basis and who, Smith says, provides a useful sounding board and a check on the group’s investment activities.

Capital has an investment committee that sits quarterly and acts as a check on the robustness of the business’s proposition. Hale sits on this committee alongside the apital Asset Management senior team.

Smith says: “We have built a clear investment philosophy, but it is good to have it challenged.”

He says that this has been particularly important in the post-RDR world.

“We have to consider our investment strategies to remain independent. If there is new evidence or information about an asset class, we debate it at these meetings and maintain a clear audit trail reflecting the research decisions agreed.”

Rebalancing will also be under discussion. The business deals with this on a client by client basis, but Smith says that Capital will not rebalance client portfolios unnecessarily and always tries to ensure that its rebalancing policy is fit for purpose. Smith believes that having an investment committee also ensures that the implementation of the business’s philosophy is robust and consistent. He adds: “It ensures that advisers and clients are not going off and doing individual things that would affect their overall strategy.”

However, the business decided that it needed fully to outsource its compliance function. It has been a client of threesixty for several years, which provides basic compliance support, plus regular regulatory updates. Smith says it has been good at keeping the group abreast of everything it needs to consider.

That said, as good as threesixty has been, Smith recognises that it is an information service and someone needs to physically implement the regulatory initiatives. He says: “This posed a dilemma because we need to keep the fixed payroll at manageable levels. We are not at a level where we can support a full time compliance officer.”

The solution has been to buy ‘days’ from a freelance compliance professional.

Smith says: “He makes sure that the things that need to be happening from a compliance front are actually happening. For example, he makes sure we are fully prepared for the annual audit, that we have money-laundering checks and balances in place, that staff training is up to date.”

Equally, for technology, Capital retains the services of an external supplier. Last year, there was a server upgrade and it was a significant undertaking. Having worked with the same technology group for some time, it knew CAM’s back-office systems and made the process relatively easy. Smith says: “They have been a very useful resource to have. We consider them part of the team and they are always at the end of a telephone line or answering email. Like all IFAs, we have specialist software and they understand how this integrates with Microsoft, for example.”

For all the business’s service providers there is an annual review process, which ensures that they are still providing value for money.

For each of them, Smith makes sure there is an ongoing due diligence process and records kept.

Smith concludes: “We have some activities that are the things we do all day long. Then there are the things we do periodically, such as IT compliance. In terms of profitability and applying resource, we want to pay for those services on an as-needed basis. We have to weigh up the fact that we do not have complete control if we want something done very quickly. We recognise that we have to fit in with other work, but that is relatively easily managed.”

Underpinning the advice

Compliance: threesixty
Directly authorised/Part of network? Directly authorised
Number of advisers: 5
Number of staff: 10 in total including advisers
Platforms used: Standard Life
Investment strategy: In-house with external consultants
Estimated assets under advice: £180m
Clients: 200 families

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When to make drawdown your client’s flexible friend

 

The start of the baby boomer generation reaching state pension age is creating a new and significant retirement advice marketplace. Statistics provided from the 2011 census show that over three million people will reach state pension age over the next five years.

With people living longer and looking forward to a period of active retirement, managing and delivering effective retirement income from their accumulated savings will be key to that process.

A proportion of these clients will have benefited throughout their working life from the best value the state pension system will deliver, as well as receiving benefits from final-salary scheme pension arrangements that many were members of for at least part of their working life.

Guaranteed pension income from the state and from final-salary pension arrangements can provide a bedrock of guaranteed income with potential inflation proofing applying to at least part of that income base. Money-purchase pension savings, alongside other savings clients may have, are the potential areas where advice is needed on how best to use those savings to deliver income needs. Such advice can add real value to client relationships.

The money-purchase pension savings element of a client’s overall savings presents a number of income alternatives.

For many, the purchase of a lifetime annuity will be the only real option available and effective use of the open market option to secure the best available rates is now an essential “to do” action.

People with larger pension savings may want the ability to take income but continue to retain control of their investments, at least for the foreseeable future and is something they are happy to embrace. The use of capped drawdown is a solution that these individuals may seek to use, giving them control of their pension capital and access to a regulated annual income.

Timing of capped drawdown

Timing the move to capped drawdown to achieve the income levels they require can be fraught with difficulty, something which is becoming increasingly difficult as more and more legislative changes come into play.

So much has changed in just the last few months, from the changes as a result of gender neutrality in December 2012, to the increase in income factors by 20 per cent that started to take effect from 26 March this year, to the latest announcement of a new consultation on the GAD tables. It is no wonder advisers and their clients find it hard to keep up and the financial planning process has become increasingly complex.

Factors such as gilt yields that currently determine the maximum income available from capped drawdown arrangements fall outside an individual’s control.

Phasing in of retirement income from pension savings is becoming increasingly used as a means of retaining as much of a client’s pension savings for future use while at the same time creating effective generational tax planning if a client dies before age 75, lessening the tax charges on death.

Avoid the headache with flexible drawdown

Flexible drawdown would help avoid some of the headaches caused by today’s regulatory and economic environment for clients wishing to take full control of how they deliver income from their pension savings.

To benefit from flexible drawdown, people need to have a guaranteed pension income of £20,000 a year, so it is not available for everyone.

Someone retiring today at the age of 65 could potentially need to use up £260,418 of their money-purchase pension fund to meet the £20,000 per annum income criteria (to buy an annuity of £14,273 a year to top up their £5,727 a year basic state pension, assuming no final-salary pension and 25 per cent tax free cash taken).

They then have unrestricted access to the remainder of their money purchase pension savings.

Estate planning benefits

Flexible drawdown has many advantages over capped income withdrawal, but the estate planning advantages are possibly the most significant.

Phasing in their money purchase pension savings to produce the required income uses up less of their pension savings than capped drawdown would require. This leaves more of those savings for future use, and for payment of any lump-sum death benefit (which is not subject to the 55 per cent death tax before age 75).

Of course, once they approach age 75, the estate planning issues are even more prevalent.

Rather than leave money in a pension fund, subject to a 55 per cent tax charge on death, flexible drawdown enables them to withdraw more of their capital immediately, either to take as income or to gift to their beneficiaries while they are still alive, thereby making their overall estate more tax-efficient.

It gives clients complete control of how they want to use their pension savings to deliver their retirement income strategy, without the changing controls imposed under capped drawdown.

Holistic financial planning benefits

People with significant pension savings are also likely to have other savings, and looking at the client’s portfolio as a whole will enable the adviser to put a holistic financial plan in place.

As an example, someone with significant Isa savings could use that to provide tax free income in the early stages of retirement, initially leaving their pension untouched, meaning more could pass on to beneficiaries outside of their estate and free of tax

(if they die before age 75).

They could supplement their Isa income with some income from their pension savings under the flexible drawdown route – so still only moving into drawdown exactly what they need.

In summary

Meeting the flexible drawdown criteria is a one-off event. Once this is met, the individual can simply choose as and when they take their pension savings.

The Government has scheduled its review of the flexible drawdown £20,000 minimum income threshold for 2016.

The benefits of flexible drawdown are significant to eligible clients. Not only does it help protect their income level in retirement from any adverse regulatory conditions, but it gives them control and flexibility over how they use their money-purchase pension savings as part of an overall retirement income strategy.

Adrian Walker is pension specialist at Skandia

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