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# 1
KiKi
Old 10-11-2010, 2:30 PM
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Hello everyone

I'm usually offering advice on other areas of the board, but now need some advice for a friend of mine! She has inherited around 100K, and wants to put it away.

She plans to put the majority of that 100K in high interest savings accounts, split between accounts for security.

However, she has seen an IFA about investing some of it, perhaps up to 50K, certainly no more. Her one criteria is that she must get the capital back, so investment must be cautious and the capital guaranteed.

He recommended three products:
1 - Prufund Protected Cautious Fund (10 year investment, but can be accessed after 5)
2 - RBS Autopilot International (5 year investment)
3 - L&G Autopilot Plan 5 (5.5 year investment)

With the last two, although the capital is protected, it's not guaranteed if the bank were to become insolvent. Therefore she has pretty much decided against them.

However, if she invested 50K with the Prufund product, the effect of the total deductions could amount to nearly 13K. The 50K would be guaranteed to be returned after five years, probably less if she accessed it earlier. She has no plans to touch it for at least five years.

Although I can understand the literature, I have no experience of investments. And, of course, you don't know what you don't know!

Can anyone make any comment on the Prufund product (or the other two)? Or make any suggestions for other guaranteed cautious plans which do not take such a large proportion in fees? That may be unrealistic, but with no experience I'm not sure what to expect.

Thank you if anyone has any comments, particularly on the Pru product.

Cheers
KiKi

Last edited by KiKi; 10-11-2010 at 2:33 PM.
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# 2
dunstonh
Old 10-11-2010, 4:10 PM
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She is pretty much restricting herself to a very small handful of products, of which the pru protect is one of.

Whilst she seems very focused on investment risk and provider risk and taking an abnormally over cautious stance, she is leaving herself open to inflation risk and shortfall risk. What is the money going to be for? how long? what is her tax position?
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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# 3
Reaper
Old 10-11-2010, 4:13 PM
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She has tied the IFA's hands by insisting the capital is not at risk. Investments always involve risk. These ones that say they don't do so by putting the bulk of the money in interest earning things (eg gilts) and only actually investing a small part of it. That way the interest covers any possible losses. So that Pru one for example only actually invests 30% of the money in shares. That and the charges pretty much guarantee a poor return even if the markets do well.

If you want my opinion she should choose a smaller amount to invest that she is actually willing to take a risk on and remove the insistance of getting her money back.
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# 4
KiKi
Old 10-11-2010, 4:36 PM
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Quote:
Originally Posted by dunstonh View Post
She is pretty much restricting herself to a very small handful of products, of which the pru protect is one of.

Whilst she seems very focused on investment risk and provider risk and taking an abnormally over cautious stance, she is leaving herself open to inflation risk and shortfall risk. What is the money going to be for? how long? what is her tax position?
Yes, she's definitely restricting herself. It's to put away for whenever she might need it in the future (she's 51), and so she doesn't have it sitting in her bank account earning 0.01% which it is currently!

Her only objective is to protect it and earn interest on it. She has no interest whatsoever in making lots of money or risking it. If saving is the better option, she'll go with that; investing is just something she's looking at.

She can put it away for at least 5 years, probably 10 - although I advised her that I wouldn't lock it away for that in case she needs the money to live on. Plus, of course, the economy and savings and investment products will change in that time.

She has just finished working, and is taking a year out (she has money to live on already). She has a home, no mortgage, few bills. She would pay 20% tax on any interest this year (ISAs excepting) and, depending on her income next year, possibly no income other than interest on savings.


Quote:
She has tied the IFA's hands by insisting the capital is not at risk. Investments always involve risk. These ones that say they don't do so by putting the bulk of the money in interest earning things (eg gilts) and only actually investing a small part of it. That way the interest covers any possible losses. So that Pru one for example only actually invests 30% of the money in shares. That and the charges pretty much guarantee a poor return even if the markets do well.

If you want my opinion she should choose a smaller amount to invest that she is actually willing to take a risk on and remove the insistance of getting her money back.
Thank you. Yes, she has tied the IFA's hands, but that's her stance. She's not adamant about investing at all - she's just exploring her options for the best return without risking her cash. It looks like saving may be better for her. She hasn't even really saved in the past, and she finds admin and paperwork very burdensome, so just getting her head around these things is a minefield for her. Thankfully she was strong minded enough not to commit to anything that was suggested, and has taken it away to review.

I calculated that if the Pru product returned 5% a year, because of the fees she would still be better off putting the money in a savings account at 3-4% a year!

I might talk to her about saving it for now, and looking at an S&S ISA next year. Break her in very gently!


Thanks both for the advice and opinions, I appreciate your time.
KiKi
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# 5
KiKi
Old 10-11-2010, 4:49 PM
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Edited due to spamming post being removed.

Last edited by KiKi; 10-11-2010 at 5:11 PM.
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# 6
Ifts
Old 10-11-2010, 5:09 PM
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Quote:
Originally Posted by KiKi View Post
No, I don't think I will.

Post reported.
Please just press the Spam button. Try not to quote these parasites, because when their posts eventually get removed by admin the link to the spamming site is still shown in your post.
Never let the perfume of the premium overpower the odour of the risk
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# 7
KiKi
Old 10-11-2010, 5:10 PM
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Originally Posted by Ifts View Post
Please just press the Spam button. Try not to quote these parasites, because when their posts eventually get removed by admin the link to the spamming site is still shown in your post.
I did hit 'spam' - that's what I meant by reporting. Will unquote.
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# 8
jimjames
Old 10-11-2010, 7:36 PM
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She needs to consider what is the bigger risk. Inflation at 4.6% and cash savings rates at 3% or the potential of growth via investments. She also needs to bear in mind that during the first 5 years the chance is fairly high that she could be able to get a higher amount of money back if she needed the money and had invested in shares than if she had invested in the protected bond as the bond does not guarantee return of capital in the first 5 years.

Even over the last 10 years which have been the worst for UK shares for some time, had you invested at the peak in 2000 you would still have made money over this time span - admittedly not much different to a building society account. I think it puts in context what a capital guarantee might mean when shares held over this period have endured the dot com bubble and the worst recession/banking crisis since 1930s yet still have returned the original capital. (Obviously all based on UK market averages not individual shares)

Personally I just wouldn't see the point in a 50k low risk investment that took 13k in fees when the return from a bank is so close to it with flexiblity to get your money whenever you want.
Remember the saying: if it looks too good to be true it almost certainly is.

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# 9
KiKi
Old 11-11-2010, 11:17 AM
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Quote:
Originally Posted by jimjames View Post
She needs to consider what is the bigger risk. Inflation at 4.6% and cash savings rates at 3% or the potential of growth via investments. She also needs to bear in mind that during the first 5 years the chance is fairly high that she could be able to get a higher amount of money back if she needed the money and had invested in shares than if she had invested in the protected bond as the bond does not guarantee return of capital in the first 5 years.

Even over the last 10 years which have been the worst for UK shares for some time, had you invested at the peak in 2000 you would still have made money over this time span - admittedly not much different to a building society account. I think it puts in context what a capital guarantee might mean when shares held over this period have endured the dot com bubble and the worst recession/banking crisis since 1930s yet still have returned the original capital. (Obviously all based on UK market averages not individual shares)

Personally I just wouldn't see the point in a 50k low risk investment that took 13k in fees when the return from a bank is so close to it with flexiblity to get your money whenever you want.
Thank you for your advice and opinions, I appreciate your time. It seems that she'll either have to take some risk, or just put it in a good savings account.

Thanks again.
KiKi
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# 10
feesarefare
Old 11-11-2010, 11:19 AM
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[QUOTE=KiKi;38341912]

Quote:
Yes, she has tied the IFA's hands
If she went to a fee based adviser then that wouldnt be a problem as they wouldnt be forced to sell a product to get paid. They would just give the most suitable advice!
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# 11
asc99c
Old 11-11-2010, 1:46 PM
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Capital guaranteed investments are quite a bit more common I think - Barclays has a couple of options and also many other high street banks. But I would say no-risk investments are a bit of an oxymoron. Other than the banks supplying them, not many people are too positive about these structured products. If you want no risk, savings accounts are very definitely the way forwards.

I realise my attitude toward risk is only my own, but I do wonder why, if someone has 50k in savings, do they feel an additional 50k needs to be in a no-risk account. Personally, I've got two full cash ISAs, and at that point started to wonder why I really needed any more cash savings than that. 100% of my additional spare money now goes into investments.
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# 12
KiKi
Old 11-11-2010, 3:50 PM
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Originally Posted by asc99c View Post
I realise my attitude toward risk is only my own, but I do wonder why, if someone has 50k in savings, do they feel an additional 50k needs to be in a no-risk account.
Quite simply because she's not happy to risk any of her money; that's her personal attitude. She has no job at the moment, so she is living off the inheritance she has been given. She has absolutely zero experience of saving or investing, so although 50K in savings and investing the rest might be comfortable for you, it's not for her.

Thanks everyone for your views.

KiKi
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# 13
dunstonh
Old 11-11-2010, 4:17 PM
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Quote:
Quite simply because she's not happy to risk any of her money; that's her personal attitude. She has no job at the moment, so she is living off the inheritance she has been given.
From what you say she is risking the money then. Living off the inheritance puts her at shortfall risk and inflation risk. For income there is no "no risk" option. If she draws all the interest/income on 100k then in 10 years time that 100k will be worth around 65k in real terms. Thats a real terms loss of 35k. In 20 years it will be worth around 42k in real terms.

Taking some investment risk with some of the money doesnt mean she has to go gung ho right up the risk scale. It may be just dipping the toes in the water with some of the money and staying down the lower risk end. Risk is not on/off. its a sliding scale.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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# 14
KiKi
Old 11-11-2010, 6:40 PM
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Quote:
Originally Posted by dunstonh View Post
From what you say she is risking the money then. Living off the inheritance puts her at shortfall risk and inflation risk. For income there is no "no risk" option. If she draws all the interest/income on 100k then in 10 years time that 100k will be worth around 65k in real terms. Thats a real terms loss of 35k. In 20 years it will be worth around 42k in real terms.

Taking some investment risk with some of the money doesnt mean she has to go gung ho right up the risk scale. It may be just dipping the toes in the water with some of the money and staying down the lower risk end. Risk is not on/off. its a sliding scale.
Thanks, and yes, I understand it's a scale. And I understand the shortfall and inflation risk. However, as she's so new to this, and completely unsavvy with finance, the argument that the money is worth 'less' in the future goes over her head; she can still 'see' it in savings - and that gives her a sense of security, no matter what the inflation and shortfall arguments are!

I will pass on all this advice, of course, but as she's just too new to this, I think I'll start by introducing her to S&S ISAs, as she understands the ISA concept - she does actually have a cash ISA (which she's had for years paying something stupid like 0.5%). I've convinced her to transfer it!

I know that may all seem silly to those who are investment and finance savvy, but this is someone who has never saved, and struggles to understand finance. Rather than throwing her in the deep end when she doesn't understand it, and when she worries about the security of the money, I think I'll just start off with baby steps and convince her to use her S&S ISA allowance this year!

Thanks again for all the excellent advice on here.
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# 15
jimjames
Old 11-11-2010, 9:05 PM
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Its a perfectly logical consideration on her part when being asked to put money into something that you dont necessarily understand. I was the same when I started but with a lot of experience down the line know more about specific areas.

Part of the problem is the way the mainstream press treat stories about the stock market. Its always "50 billion wiped off share prices" which gives one view of risk rather than Mrs Smith from Devon invested 100 per month and now has 50,000 in her portfolio rather than the 10,000 she would have had in the bank.

These numbers are made up but you get the idea of how the media run the dramatic stories not the ones about the successful long term investors.
Remember the saying: if it looks too good to be true it almost certainly is.

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# 16
KiKi
Old 11-11-2010, 10:52 PM
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Originally Posted by jimjames View Post
Its a perfectly logical consideration on her part when being asked to put money into something that you dont necessarily understand. I was the same when I started but with a lot of experience down the line know more about specific areas.
Well, this is the thing; I see lots of posters on these boards signing up for things (particularly credit cards) that they don't understand, then posting about how they feel scammed by the companies! There tends to be little sympathy for it, understandably, and my friend shouldn't sign up to something she doesn't understand or have confidence in.


Quote:
Part of the problem is the way the mainstream press treat stories about the stock market. Its always "50 billion wiped off share prices" which gives one view of risk rather than Mrs Smith from Devon invested 100 per month and now has 50,000 in her portfolio rather than the 10,000 she would have had in the bank.

All numbers are made up but you get the idea of how the media run the dramatic stories not the ones about the successful long term investors.
Absolutely! An ex-colleague of mine regularly talks me through his investment products, and it's only by chatting to him that I've come to some understanding of how it all works. He lost some shares in Northern Rock when it crashed a few years ago, but that loss was nothing compared to how well he's done with other funds!

Thanks again
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# 17
dunstonh
Old 11-11-2010, 11:03 PM
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Quote:
Absolutely! An ex-colleague of mine regularly talks me through his investment products, and it's only by chatting to him that I've come to some understanding of how it all works. He lost some shares in Northern Rock when it crashed a few years ago, but that loss was nothing compared to how well he's done with other funds!
Remember back to 2008 in September when the markets dropped heavily and quickly (as they normally do in a stockmarket crash) and the news had tracker on screen and making big deals of how much was being lost. it was big new coverage. Yet did you know in 2009 you had one of the biggest growth years on record on the stockmarket. When it goes down it gets lots of coverage. When it goes up it gets far less.

Other things to look out for is emphasis. When something goes down and its bad that its gone down then they use words like "plummet".

Or, they try to make the figure sound bigger than it is. That was common with respossessions data last year where they used percentage increases rather than actual figures. That was because the actual figures were coming off low amounts and despite the recesssion, the repossession figures were low and lower than the last recession. Yet when expressed in percentage terms as an increase, they sounded higher.

And last, a favorite is "since records began". There were frequent times when bad data was referred to as the worst since records began. However, a number of times, the records only started in the mid 90s after the last recession. So, the records up to that point had only had growth years and no recession. So by default the recession data this time would be the worst since records began.

You would think this is the first financial crisis there has been. However, there have been 8 since 1956. They average once every 7 years. The problem this time is that there was a longer gap between them and more of a bubble to burst. So, nearly a whole generation had not experienced a recession. Plus, we had 24 hour news that loves to feed on the negative.
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# 18
pqrdef
Old 12-11-2010, 10:51 AM
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The best available guarantee over 5 years comes in two versions.

(A) Stick the money in fixed-rate deposits and you can easily guarantee 115-120% of the original capital.

(B) Or, you can use index-linked gilts to protect 100% of the real value of the capital, but at current prices you won't get much above that.

Settling for any smaller guarantee is gambling the difference in the hope of increasing it, at the risk of losing it. There's nothing special about guaranteeing 100% of the original capital in inflated money. That's not the point where you start losing - at that point, you've lost quite a lot already.

Tricky one after 50. Personally I think diminishing returns sets in - the extra things you can buy if you've won aren't worth as much as the things you can't buy if you've lost.
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# 19
feesarefare
Old 12-11-2010, 11:43 AM
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Originally Posted by dunstonh View Post
From what you say she is risking the money then. Living off the inheritance puts her at shortfall risk and inflation risk
Using lifetime cashflow forecasting can mean the shortfall and inflation risk can be managed/avoided. The problem is most IFAs wouldnt want you to know that, so choose not to use the tools.

Better to tell you there is a risk (even if there isnt) so you invest in a commission based product.
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# 20
dunstonh
Old 12-11-2010, 12:03 PM
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Quote:
Using lifetime cashflow forecasting can mean the shortfall and inflation risk can be managed/avoided. The problem is most IFAs wouldnt want you to know that, so choose not to use the tools.
Using an excel spreadsheet with a graphical front end doesnt magically give you 5% a year.

Quote:
Better to tell you there is a risk (even if there isnt) so you invest in a commission based product.
Better than some CFP spouting rubbish about how much better their method is without actually addressing the issues.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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