Sandra Haurant 8 May 2017 11:00am

How investors can build a solid financial plan

Times are challenging for investors, and the goalposts keep moving. Sandra Haurant asks the experts how to build a resilient financial plan

Caption: Sandra Haurant asks the experts how to build a resilient financial plan in a challenging time for investors.

Low interest rates, creeping inflation, global political uncertainty, inflated asset prices, changes to tax regulations and allowances – the climate for investors managing their money is not exactly hospitable.

And there is an additional challenge that faces many chartered accountants in particular: they are frequently too busy sorting out other people’s financial matters to spend adequate time on their own financial planning. “What you find is that people have an awful lot of commercial acumen, but there is often inertia when it comes to acting, because people are just too busy,” says Jonnie Whittle, financial planner at Clarion Wealth Planning, who has long worked with accountants.

But there is good news. “Chartered accountants tend to make very good personal financial planners, because they are used to doing financial modelling,” says John Gaskell, head of personal financial planning at ICAEW.

But where to begin? After all, when it comes to creating a strong personal financial plan, to use a cliché, there is no one-size-fits-all answer. “It depends on a number of different issues – for example, which part of their financial life a person is in,” says Paul Garwood, director and head of financial planning at Smith & Williamson. “Because very different strategies can apply for different people.

Make a plan

The key to successfully managing your money, says Gaskell, is to approach it as you might approach a business plan. “Translate your personal family balance sheet, through the prism of your objectives, into a realisable financial plan.” There are a number of building blocks that are likely to form the foundations – beginning, he says, with proper risk management. “That would be the personal protection policies, products answering questions like ‘what happens if I am ill or can’t work because of an accident?’. They are your contingency against disaster,” says Gaskell. “This might include life assurance, critical illness insurance and income protection.”

Next, he says, it’s important to think about putting together a budget. “Work out what surplus resources you will have from income. How will you allocate your surplus income, or wealth, in an efficient and sensible way?”

There are as many ways to allocate that wealth as there are people, of course. Younger investors may need to look at paying off student debts or saving for a deposit to buy a home as top priorities, and for those in a position to invest, the most suitable types of investment are likely to be very different to those that might suit an older investor. “If you are in your 20s and saving, you want to put away as much as you can, and short-term risk is not as important as it is for someone coming up to retirement,” says Garwood. “A much longer-term investor can potentially take a lot more risk, because risk is usually a measure of market volatility. When you are investing for the longer term, volatility and risks tend to be less of a factor than they might be for somebody who is much closer to retirement.”

One area that should be a priority for investors of all ages, according to Gaskell, is tax efficiency. “Tax planning is at the heart of personal financial planning: tax on income, capital gains and estate planning taxes, as well as wealth accumulation strategies and questions around which type of vehicle it is best to use,” he explains. “Does it make better sense to have a pension, or an ISA, or a combination of the two? This is all about making your resources work efficiently for you, and making the best of your tax allowances.”

Of course, investing tax efficiently does not need to be particularly complex, but it may require specialist advice. “It doesn’t have to be left field or challenging, it’s just a question of using your allowances sensibly to best effect,” adds Gaskell. “If you can successfully manage your tax allowances that’s a given return – investment performance is an unknown, but tax efficiency is something you can control.”

Keep it strong

For Nicholas Nesbitt, director of financial planning at Mazars, it is important, particularly in times of uncertainty such as these, to build resilience into a portfolio. “It’s about longevity, and giving yourself enough of a low volatility, low risk asset base, so that if we do have a ‘wobble’ you are in a good position to ride it out.”

In spite of the challenges facing deposit accounts, with low interest rates and inflation eating into returns, Nesbitt believes cash still plays an important stabilising role. “We are now recommending much greater degrees of cash holding than we did,” he says. Depending on a person’s circumstances and attitude to risk, Nesbitt suggests having between three and five years’ worth of income in cash savings could help to overcome any serious market downturns – falls in the markets only really become a problem if people need to realise their investments when they are at the bottom.

Of course, finding a decent cash deposit is a challenge in itself. For one thing, the experiences of 2008 taught savers that banks were far from watertight. As such, savers with significant cash sums need to bear in mind that a maximum of £85,000 (per person, per firm in default) is covered by the Financial Services Compensation Scheme, and should spread their cash savings across different account providers accordingly, avoiding exceeding this limit. Alternatively, NS&I savings products offer full security for unlimited savings. “With interest rates the way they are, NS&I income bonds and savings accounts are pretty competitive compared with institutions that are much less credit-worthy,” says Nesbitt.

As well as cash, Nesbitt suggests that a strong portfolio should be built on a foundation of diversity. “An asset base in retirement should be as diverse as possible. Pension funds are still tax efficient and still represent one of the most tax efficient ways to save, but you also need to consider ISAs and many other elements.”

Strength in diversity

And it’s not just about the choice of product or wrapper; choosing the asset classes that go in them can be tough, particularly when the ground keeps shifting under investors’ feet. As Nesbitt says: “The main challenge is probably high asset classes across the board. The stock market is relatively high, we are seeing high bond prices with low yield, and even if you remove the volatility, there is always the question of whether you are investing at the right time.” Traditionally low-risk investments are no longer as dependable as they were, and investors are obliged to make decisions based on a different set of rules.

Portfolio construction needs expert advice, says Garwood: “There are all sorts of things that we need to consider very carefully when constructing portfolios and allocating assets to different sectors, depending upon different risk profiles of investors,” he says.

Property, he says, is an obvious sector and one considered by many. The government may have given investors pause for thought with changes to the purchase of second homes or rental properties, such as an additional 3% on stamp duty land tax, the removal of tax relief on mortgage interest and exclusion from a capital gains tax reduction.

But property as an asset class still holds appeal.

“The changes have played on people’s minds but it is not a huge additional cost if you are looking at a 10- or 20-year investment,” says Nesbitt. “If, a couple of years ago, it was right for you to have a rental property as part of your financial plan, there is perhaps no reason why today it is not. A bigger question is what are you buying it for – income or capital growth? You’ve got to know what you are trying to get out of it and you need to assess how realistic that growth and yield are. A lot of my clients see property as a good means of diversification and a fairly dependable source of regular income for retirement or later in life.”

The choices are broad and, with changing objectives, are unlikely to remain fixed. What is appropriate for an investor today may not be in a year or so. Regular financial reviews play an important part in keeping financial planning on track. As Gaskell says: “There are different events in the course of people’s lives that will make them focus on major decisions, and so reviewing annually or even every six months is important. This is a cradle to grave issue.”

Taxing matters

While the level of returns on investments may be uncertain, one way to be sure you are getting the most from your investments is to get the most out of your tax allowances, such as pension contributions and ISA allowances.

Cash – no longer king?

Low interest rates on cash accounts combined with creeping inflation mean that returns are being eroded. But having carefully spread cash savings to use if times get tough could well help you to ride out lows in the markets. After all, falling markets are only really a problem if you need to realise investments when they are at rock bottom.