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Passive resistance

In light of the recent FSA report, Saving for Retirement, do you expect to

see greater use of Isas in retirement planning?

MD: Isas are already used extensively in retirement planning. The FSA

report will, however, add more weight to the use of Isas first before a

pension. However there are two problems associated with an approach which

seems sensible on the surface. First, investors have access to the money.

This means many are likely to have spent the money before retirement. Also,

should you wish to claim benefits, for example, if you become unemployed, a

pension fund will not count toward eligibility but an Isa will. This is

something that needs to be addressed.

GH: Theoretically, yes. But, performance being a function of costs and

performance, judging the specific pro-duct will be difficult.

From an IFA perspective, and all other things being equal, it is difficult

to recommend an alternative to a product offering 22 per cent tax relief at

the front end. You can almost see the headlines in 10 years time, can&#39t

you? “Isa sales scandal deprives pensioners of lifetime income.”

GB: Isas already have a big role to play in the advice we give clients on

retirement planning. Unfortunately, many people still automatically think

retirement planning is just about pensions. Pensions do have the advantage

of up-front tax relief on contributions but they can lose out in the

flexibility stakes.

However, people are increasingly being educated to look at using other

vehicles in addition to pensions. The recent FSA report helps to underline

the fact that pensions and Isas can be used together in order to achieve

maximum flexibility.

Has the sell-off in technol-ogy stocks resulted in tech funds being a

no-go area or a good opportunity?

MD: The investment case for technology stocks remains intact for the long

term. The majority of these companies are simply growing more strongly than

other sectors in a low-inflationary environment. But this doesn&#39t stop

overvaluations. This year will prove to be a consolidating year for tech

stocks. This summer will prove to be a major buying opportunity,

unfortunately missed by many clients.

GH: The long-term story for technology funds remains valid. What it should

have taught investors is not to over-commit too much to one particular

area, ever.

GB: Many investors using technology funds to utilise their Isa allowance

in March and April will have been hit hard by the sell-off. However, the

vast majority of investors who bought funds on the advice of an IFA will

not be too concerned. The risks will have been fully explained and the

funds will have been recommended for the right reasons.

It is investors who bought purely on the back of spectacular past

performance who may feel badly burnt. However, the fundamental reasons for

investing in technology have not changed. The fall in technology fund

prices just means that you can now buy in at a more reasonable price.

What is the your stance on active versus passive investment strategies in

light of current stockmarket volatility?

MD: Passive will remain an investment force. However, the changes in the

FTSE 100 over the last three months clearly highlight the problem for

passive funds, in that they have to buy what is fashionable and sell what

is unfashionable. Not a great long-term policy, really. The best active

fund managers should be able to give the passive funds a run for their


GH: We have long been advocates of both, depending on a client&#39s specific

circumstances. Since the recent re-rat-ing of the FTSE 100 index in favour

of technology stocks, it is fair to say we are very much in favour of more

active fund management.

GB: It is interesting to look at this issue in relation to the FTSE 100.

Some stocks elevated to the index in March will be ejected in the June

review. These stocks were bought by tracker funds when they were high and

will be sold when they are low. Buy high and sell low does not make good

investment sense.

Another consideration is that trackers have to buy the replacement

constituents just after they have had the good run which has elevated them

into the index. I think the climate of volatility presents some good

opportunities for active managers to outperform their benchmark indices.

Has the AITC&#39s “its” campaign resulted in a greater use of investment

trusts in your business?

MD: It has not made any big difference. We have been and remain big

buyers of investment trusts.

GH: Not really. The campaign has been excellent in terms of content and

structure but we have not seen clients storming the ramparts and demanding

to buy investment trusts.

GB: There is no doubt that the campaign resulted in greater interest in

investment trusts from clients. However, as advisers, we were already using

them and the campaign has not resulted in a significant increase in our

investment trust business levels. I think the educational benefits of the

campaign extended both to advisers and investors. I am also in no doubt

that some advisers who previously did not use them will now be dipping a

toe in the water.

Fixed-term stockmarket-linked high-income products have become popular

with investors but do they really understand them?

MD: I doubt it very much. So far, none of these have failed because of

the strength of markets but the law of averages suggests one day there will

be a failure. Then all kinds of misselling arguments will come out. There

are accidents waiting to happen.

GH: Generally, clients do understand them. What gets confusing for them is

when the return of capital gets dependent on more than one event – that&#39s

when investors could be seduced by the high rate of return and overlook or

not fully understand what factors affect the return of capital.

GB: I think that when investors are presented with such a product, their

focus is on the income level. They often ignore the finer details and

simply select and buy on the basis of the income. Investors do need to be

made fully aware of any capital risk associated with these products. It is

important to discriminate as they are not always linked to a UK index.

They could be linked to a European index or even a technology index. These

indices have differing levels of risk, so it is an aspect that needs to be


Another concern is that some of these products have ridiculously short

terms such as one year. The risk to capital is higher when you are looking

at such a short-term equity-linked investment.

Do you have concerns about online investment advice?

MD: I remain somewhat sceptical about how it will work. It may be fine on

very simple cases but clients usually wish either to receive advice over

the phone or person to person. This is still a people business. It remains

a new source of distribution but it will not take over all other channels

of advice.

GH: The point about advice is that, in its purest form, it is specific to

the individual. That may be difficult to deliver online. Any move away

from that idea needs to be closely examined.

GB: As long as communications between the investor and the adviser&#39s site

remain secure, there isn&#39t a problem. It is about investors having the

choice to obtain advice in the manner that they prefer. There will be

circumstances where the benefits of face-to-face advice cannot be replaced.

Bigger, more complex cases can probably be handled better on face to face.


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