Client Trends October 2019:
Doubts over passives and BPR investments bubble up

Passive investments are a mainstay of DIY investment portfolios, but there is increasing concern that they represent a bubble that could soon burst. Affluent individuals also have future-proofing their inheritance tax reduction strategies front of mind this month.

DIY investors worry over passives “bubble” warning

Michael Burry, the hedge fund manager famed for seeing the Global Financial Crisis coming, has pronounced passive investments as the next bubble and his warnings it could soon burst in “ugly” fashion are prompting DIY investors to think again.

The stellar growth of passive investing has been one of the most significant investment stories of our time. The ability to buy tracker or Exchange-Traded Funds that mirror a certain index or basket of assets, rather than buying the individual securities themselves, has given millions a low-cost way to start building a portfolio. In fact, such is their popularity that 16% of all UK retail investment money went into passives last year.

We certainly encounter many DIY investors who have achieved impressive returns from portfolios focused on index fund and ETFs, but Burry’s comments seem to have crystallised what the savvier ones are now thinking: “What happens when markets are no longer going up?”

Recessionary fears are now running very high indeed and DIY investors are increasingly questioning whether they should place all their faith in passives. We are advising anyone with significant holdings to discuss their portfolio – and its risk exposure – with a professional so that timely protective measures can be put in place

The issue at stake is that passives tend to back companies on the basis of their size, rather than their fundamentals (indicators of quality). According to detractors, this means that many companies in leading indices have become overvalued and vulnerable to dramatic falls in share price when the next recession comes and stock markets fall. What’s more, UK investors could be hit particularly hard since many of the FTSE’s largest stocks are considered to be past their peak.

Recessionary fears are now running very high indeed and DIY investors are increasingly questioning whether they should place all their faith in passives. We are advising anyone with significant holdings to discuss their portfolio – and its risk exposure – with a professional so that timely protective measures can be put in place. Make sure you won’t get caught out if this “bubble” does indeed burst.

Affluent families seek new ways to mitigate Inheritance Tax

Inheritance tax has been absolutely front of mind for our users in recent months, not least due to the threat of a Labour government making swingeing cuts to allowances that could amount to the loss of £875,000 in tax breaks for each family. How to structure and bequeath wealth tax-efficiently has dominated our financial planning conversations, but we’re now also hearing more on the investment side of things too.

The reason, it seems, is seriously dented confidence in the tax-efficient investment regime. Making investments that qualify for Business Property Relief, like AIM-listed growth companies, has been popular way for affluent individuals to dramatically reduce their IHT bill while also supporting UK industry. But now BPR related tax savings have dropped to their lowest level in a decade amid calls for these tax breaks to be abolished and an economic climate that might make investing in the junior market seem too risky.

How to structure and bequeath wealth tax-efficiently has dominated our financial planning conversations, but we’re now also hearing more on the investment side of things too

Tax efficiency is the third pillar of wealth management (after capital protection and growth) and BPR investing has been a key weapon in the wealth management arsenal, particularly through forestry and the Enterprise Investment Scheme. The reliefs available may remain, but it is great to see affluent individuals trying to get ahead of the issue and explore alternative ways that they can legitimately reduce IHT and other taxes that hit the wealthy hard.

Any changes will hopefully take a good while to come in, but it is well worth tuning up your IHT mitigation plans now. There are myriad tax planning strategies you can pursue, but this is an area where professional advice is absolutely vital to avoid falling afoul of the taxman.

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Top Tip

Brexit and the threat of a socialist government head a huge list of uncertainties facing investors, but it is vital not to become paralysed by them. All too often people miss out on great investment opportunities by waiting for calmer times, but you can find tailored professional advice using our free online matching tool. Time is your greatest ally in building wealth and you can drip-feed money into the markets so that timing them correctly is less of a concern. Market stress can also throw up excellent value investing opportunities for the brave, so consider the opportunity cost of staying on the side-lines.
Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

Investors cry out for the human touch and news, not noise

You would have to go back to the global financial crisis to think of a time when investors faced such a potent combination of economic and political uncertainty as they do now, and this is feeding into great interest in how wealth managers service their clients in practice. We’re getting more and more enquiries from people who are entirely new to professional wealth management and are wondering if this is the route to the reassurance they seek.

The short answer to that question is a resounding yes. One of the big draws to proper wealth management (as opposed to robo-advice or DIY investing) is that you will get a dedicated adviser or team who are always on hand. They will swiftly interpret how events might affect your investments and financial planning, and can take appropriate action without even having to bother you (if you have chosen to give them discretionary control over your portfolio).

One of the big draws to proper wealth management (as opposed to robo-advice or DIY investing) is that you will get a dedicated adviser or team who are always on hand

Perhaps just as important is a wealth manager’s ability to cut through all the “noise” to provide pertinent information and reassurance when you need it most. Some people may enjoy poring over the broadsheets for clues as to how they should position their investments, but the DIY investors we speak to are finding it very difficult to keep up with developments at home and abroad – let alone how they might impact on their wealth.

Even if you prefer a more hands-on advisory relationship, there is huge value in having an objective voice to calm your fears and prevent any moves motivated by panic.

All in all, these troubled times mean the human touch is more important than ever. If you are starting to feel the strain of being responsible for a significant portfolio in a highly uncertain investment environment, then you are not alone. Nor do you have to be alone in navigating what are likely to be extremely troubled waters ahead. At the very least, why not discuss your situation with a professional money manager to see how you can tackle the panoply of risks now in view?

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