No Monkey Business: a no nonsense clearing in the personal finance jungle

Saturday, May 26th

Charges: wake up and smell the coffee

In the weekend FT Money Josephine Cumbo tells of a reader looking for an income drawdown manager ‘who was stunned to find that charges ranging from £74,000 to £115,000 would be deducted from his wife’s pension pot depending on whether annual returns of 5, 7 or 9% were achieved’. The pot was £154,000. The provider was St James’s Place Capital. Its quoted charge of 2.7% pa would absorb 38% of the mid-range return. It is also near enough 100% of the ‘risk premium’ relative to a risk-free investment strategy. Challenged to defend its charges, SJP claimed they were justified by access to top fund managers.

Do people really believe this nonsense? This FT reader didn’t but most do. St James’s Place clients fit the profile of middle- and upper-income households who have been serial victims of this conflicted industry. They don’t think for themselves and they don’t do even the simplest maths. Too busy or too lazy, they just want to delegate it all to someone who talks the talk. No wonder the FSA despairs that people who really should be capable of taking care of themselves when dealing with the industry just can’t be bothered. I think we’ll hear more of this when it reports the outcome of its Retail Distribution Review on 27th June.
Stuart Fowler on 05.26.07 @ 05:45 PM GMT [">link]

Tuesday, May 15th

Are equities overvalued?

Folowing a series of articles and letters in the FT disputing whether US equities are under- or overvalued, I sent a letter. My contribution to the debate reflects our company's use, in wealth management, of a ‘long-term asset model’ which, amongst other clever things, generates projections for future real returns from market indices. The model relies on time series data for returns alone, rather than modeling all the variables affecting returns, such as profits and profit margins. It is a method that brings objectivity which is generally a good thing when trying to value markets. But you can only do this when you have the luxury of long histories of reliable data.

The letter referred only to the US, which we find to be normally, or ‘fairly’, valued. But what of the other markets, including the UK? We can observe that the UK is about 35% overvalued – but this is still not by any means extreme. Europe is also overvalued (but has much less history). Only Japan offers above-average long-term returns. Read on if you would like to see the numbers and read the letter.
Stuart Fowler on 05.15.07 @ 09:54 PM GMT [">more..]

Sunday, May 13th

More grounds for scepticism about computer models of climate change

My first post on 'the science' of climate variance was very sceptical. No scientist, I do have experience of financial data analysis and the modeling of financial systems. Here is an interesting video from a group of Canadian sceptics, who call themselves Friends of Science. On their home page are links to other scientific groups. I was particularly struck by this paper recording the failure of past attempts to model climate variance: out of sample observations for the past 19 years have failed to validate the predictions. I doubt the scientists were surprised: this a hugely complex and little-understood system to make hypotheses about. In finance, we wouldn't even attempt it. There seem to be a lot of non-scientists (the IPCC included) who are eager to attribute greater certainty than is plausible. Do they have an agenda? Or has a popular delusion developed its own momentum (a familiar feature of financial markets)?
Stuart Fowler on 05.13.07 @ 10:37 PM GMT [">link]

The housing ladder: what exactly pushes it out of reach?

Surely a silly question! Rising prices relative to income make house prices unaffordable. I’m not a property economist but if I apply my expertise in both financial asset pricing and personal financial planning, I think I gain further insights. I hope some property experts will take these further.

Ownership (relative to renting) satisfies several non-monetary desires but also a financial one. The latter is broken down into lifetime enjoyment and a ‘bequest’: the value we pass to our heirs. In periods of high inflation and high discount rates, the cost to a first-time buyer of the bequest portion was virtually nil. With lower discount rates, it is now significant, though much the smaller part. It is a form of over-investment and it is unaffordable. This anomaly may remain even after freehold prices fall from a valuation level in real terms which is about 50% above the sustainable rate (see my latest real house price update). These economics can be tested in the leasehold market. Long leases look like part of the solution to the problem that affordability varies massively through time but our need to satisfy lifetime enjoyment is pretty much fixed by our age.

Stuart Fowler on 05.13.07 @ 07:17 PM GMT [">more..]

Sunday, May 6th

What you need to find out about charges when selecting an IFA

In "Advisers face questions over who pulls the strings" (FT Money, 5th May), Elaine Moore reports that it is now very difficult for consumers to select an IFA based on how they charge. Correct. ‘Fee-only’ superficially holds out the best hope of avoiding bias, but it wastes an adviser’s ability to game the commission system for the benefit if their client. It is also often a sign that the firm is predominantly a financial planner and cannot or should not be managing investment portfolios. Commissions are most likely to be associated with bias. But the area in between, called ‘fee-based’, in which a schedule-based fee is offset by setting commissions received against it (as the article explains), is a grey area.

I have covered the unholy trinity of commissions, biases and irrational costs in many previous articles. These are cross-referenced in the topical headings at right or may be found using the search facility. In many cases, the best generic products (or the most cost-effective terms for those products) do not pay a commission. If a fee-based adviser cannot make a fee option stick, it means they will have to advise sub-optimal commission-paying products in order to make their business model work – in which case there is no gain from so-called independence. If you are a smart customer, you value independence enough to get out your cheque book. But to get it out for the right firm, you need to be sure the fee-based firm has enough customers paying fees to make an offset model work without bias. The conversations you need are therefore about how their customers actually pay, and the scale of their business in non-commission products, not just how they charge.

Stuart Fowler on 05.06.07 @ 05:36 PM GMT [">link]

<>May 2007
S	M	T	W	T	F	S
		1	2	3	4	5
6	7	8	9	10	11	12
13	14	15	16	17	18	19
20	21	22	23	24	25	26
27	28	29	30	31

nomonkeybusiness.org

a no-nonsense clearing in
the personal finance jungle

By whom

For whom

Business connections

Charges: wake up and smell the coffee

Are equities overvalued?

More grounds for scepticism about computer models of climate change

The housing ladder: what exactly pushes it out of reach?

What you need to find out about charges when selecting an IFA

Topical Index:

External Links:

nomonkeybusiness.org

a no-nonsense clearing in the personal finance jungle

By whom

For whom

Business connections

Charges: wake up and smell the coffee

Are equities overvalued?

More grounds for scepticism about computer models of climate change

The housing ladder: what exactly pushes it out of reach?

What you need to find out about charges when selecting an IFA

Topical Index:

External Links:

a no-nonsense clearing in
the personal finance jungle