Jeff Salway: Challenge to bring out best in this year’s IFA

When our 2008 contest drew to a close there was a sense that market conditions couldn’t have been harder. That was the year when financial advisers found themselves reassuring their clients less about the quality of their investments than the security of them as the banking crisis unfolded and raised doubts over the very future of our biggest financial institutions.

Every adviser in the contest ended in negative territory, but they all underlined the value of good advice by successfully managing the losses. Some advisers sat out the last two competitions in hope of entering during calmer times. They could be waiting a while.

In some ways the investment climate is even more challenging now, thanks largely to the political dimension.

The coming year could potentially bring the break-up of the Eurozone, fresh turmoil in the Middle East, a new leader in the US, a sharp slowdown in China and fresh recessions in Europe and the UK.

As in 2008, there’s no obvious asset or region into which advisers and investors can retreat with some certainty. The winners of the last two competitions turned to emerging markets, riding the wave of seemingly unstoppable economic growth in India, China and Brazil. Even that’s less clear-cut now, with emerging market economies hit by tailwinds from the Eurozone and the US.

That’s why the winning IFA is likely to be one who sticks to the fundamentals and, in particular, remembers the value of dividends. Not only do re-invested payouts provide the bulk of returns, but in this low-growth environment more people are turning to equity funds for their regular income. Expect the latest IFAs doing battle to have a sizeable exposure to global income and UK equity income funds.

Absolute return funds, which aim to deliver growth regardless of market conditions, are the flavour of the month right now. But with many flattering to deceive, it’ll be interesting to see how many of our competitors turn to these funds.

There is no doubt about it – these are uncertain and potentially treacherous times for investors, yet they also present real opportunities. That’s what makes this year’s challenge one that Scotland’s best IFAs and financial planners will surely find difficult to resist.

THE SCENARIO

Victor Fleming is a 56-year-old engineer who works with an established national company based in Edinburgh earning £48,000 a year. He and his wife, Jean, live in West Lothian, where they brought up their three children. Jean works as a part-time special needs assistant and earns £12,000 a year.

Their eldest son, Craig, is married and lives with his young family in Midlothian. Their middle daughter, Ellen works in New Zealand. Victor and Jean’s youngest daughter, Susan, is in her first year at university, studying at the University of Kent. Her parents help with her expenses and course fees, which cost them around £10,000 per annum. Susan has two more years of her course remaining.

Victor enjoys his work and has had a satisfying career, but he is looking forward to retiring at 65, when he hopes to spend more time with his family, especially his young grandchildren.Victor also wants to attend language classes to keep up his French and Spanish, in which he used to be fluent when he worked abroad in the past. He may even get to use them when he and Jean do the globe-trotting they have always promised themselves. In any case, they certainly want to explore more of their future son-in-law’s country, and see more of their daughter’s surroundings.

Victor and Jean have a balance of £87,500 remaining on their mortgage, and the property has been recently valued at around £345,000.

Unfortunately, after a short illness, Jean’s mother died and left her holiday home in Portugal to Jean. To her surprise, the property was valued at around £395,000.

Victor and Jean are uncertain what to do to secure a comfortable future for themselves. Should they sell the Portugal property and clear their outstanding mortgage? Should they be increasing their pension pot? Victor’s personal pension fund is currently valued at around £400,000, and is in his current provider’s With Profits fund.

He has never felt confident about dealing with financial issues and delayed action but now he and Jean feel they must seek the services of a professional independent financial adviser who can give them solid advice on pensions, inheritance tax and their entire financial future.

HOW TO ENTER: THE CHALLENEGE FOR COMPETITORS

1 Construct a portfolio for Victor and Jean Fleming that will achieve their long-term objectives and reflect their risk profile, as indicated in the scenario above.

2 Your portfolio can either consist entirely of sector funds, or you can choose to use a “core and satellite” approach – should you wish to use a risk-rated multi-manager fund.

3 Switching and rebalancing can be completed online via the Cofunds website, www.cofunds.co.uk. This will be charged at 0.25 per cent of the total value of the funds bought or sold.

4 Prepare an investment report for Victor and Jean Fleming based on the information provided in the case study – construct an investment portfolio and justify your recommendations.

E-mail your completed report to [email protected] before Wednesday, 29 February 2012