Case Study 1: Using your pension to purchase your bakery

Mr Baker has owned a small bakery for the past 20 years and he is close to retirement. He currently rents his commercial unit. He is interested in purchasing his premises without any recourse to any costly loans. He spoke to a financial adviser who had told him he could potentially use his pension to purchase his commercial premises.

Mr Baker has a private pension plan valued at £750,000. The commercial unit will cost £450,000 to purchase outright. Mr Baker’s current private pension does not allow him to invest in commercial units directly. Mr Baker, will need to transfer his pension to an appropriate Self Invested Personal Pension or SIPP, which allows direct investments into commercial property. This is sometimes referred to as a full SIPP.

Following the 30 day pension transfer cancellation period, the pension funds can be used to purchase the commercial unit. The SIPP can also be used to pay for associated legal, surveyor, and Stamp Duty Land Tax fees.

Pros:

• Mr Baker no longer pays rent to a third party; rather he pays it directly into his pension.
• The rental payments itself are tax deductible, as they are a legitimate business expense.
• The commercial unit is also outside the Mr Baker’s estate for inheritance tax purposes.
• If Mr Baker wanted to sell the commercial unit at a later date, it can be sold free of any capital gains tax.
• Mr Baker could decide to retire as per normal and rent the commercial unit to someone else who would pay rent into his SIPP. Mr Baker could then draw on his pension fund which would then come to him as income, at which point it would be subject to his marginal rate of tax.

Cons:

• Mr Baker is investing 60% of his pension into a single asset. Therefore, should the value of his commercial property plummet, the value of his overall pension would plummet too. This could mean his retirement income needs are not met.
• Mr Baker will not be able to use this commercial unit as a security against any future lending he may require.
• The full implementation cost could be prohibitive and would require an adequate investment horizon before the costs are fully recovered.

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The Future of Wealth Advice in the UK

The financial services industry is in an interesting place in 2015. It has been nearly 3 years since RDR and for the large part the industry has spent their resources focused on transitioning into a new and more rigorous regulatory landscape. The pressures from regulatory change have now subsided and organisations have adapted and the demand for advice in light of pension reforms and the threat of inheritance tax has increased. The demand is also unlikely to recede as people live longer and the need for more complex advice on how to grow and extract wealth becomes relevant to more people.

In today’s marketplace close to 60% of investors look for advice online despite 25% conceding that there is not enough quality information available to base their decisions on. Although what is positive is that once engaged with an adviser almost 90% are extremely or mostly very happy with the quality of the service provided by their adviser. The challenge therefore is clear, in a time poor society, with ever increasing pressures, the traditional mode of face to face contact with wealth advisers is seriously threatened for the mass consumer and more needs to be done to harmonise technology with a client centric experience whilst also improving on business efficiency.

Any thoughts that the future of wealth advice would be the preserve of the wealthier older generation who would prefer direct face to face interaction is likely to be short-sighted as the penetration of social media engagement crosses all age demographics. Consider the fact that Facebook’s membership growth is the fastest among those aged 55+, and if you are wondering how Facebook relates to the dignified professional realm of wealth advice, it’s because of leveraged multiplier marketing; that is creating awareness and recommendations from peers in a digital space. This stems from the synergy created between the digital space and mobile technology, forcing advertising to become more personalised, bringing the producer or service provider closer to the customer in terms of engagement be it via Twitter or Facebook as customers engage with their devices at all times of the day.

What’s more, the figure from Facebook tells us something else, it is that confidence is growing among older clients in using the internet to converse and relate to others. So, just imagine that same demographic, taking a further step into the use of quality internet banking services, and now being exposed to quality investment management and advisory services...all online.

Resting on one’s laurels would be ill advised for the traditional advisory firm regardless of how successful they may be right now or have been in the past especially with the rise of relatively low cost web based advisory solutions offered by the likes of Wealth Horizon and True Potential which offer self-directed investment propositions tailored to one’s risk profile but also allow personalised financial advice over the telephone or face to face. Another popular investment platform with a strong brand that has plastered the London Underground with their advertisements for the last few years has been Nutmeg. Since their inception, they have attracted users due to their very low cost and transparent fee structure coupled with a straightforward and simple user interface but has not offered any advice services for their client base. What’s interesting is that they plan do so now and are currently on a recruitment drive to incorporate financial advisers into their proposition.

Although the latter organisations are new into the marketplace and despite the fact that their customer base and market share is relatively small they all have phenomenal potential as they have been able to build a compliant client centric infrastructure without the burden of dealing with legacy clients and systems which is an unfortunate challenge to the traditional wealth advisory organisations. Provided that these emerging tech savvy solutions can also overcome a potential recruitment obstacle in finding the right talent who also share their passion and can also relate to the new age of web based and cross platform wealth management solutions they pose the strongest medium to long term threat to the traditional model of wealth advice.

Consider the fact that only 10 years ago Facebook raised $12.7 million for capital investment, or the fact that Blockbuster was valued at $8 billion, YouTube was just founded, and as for Uber it was still 3 years away. Today however, Facebook is valued at $230 billion, Blockbuster is defunct, YouTube is valued at $70 billion and Uber is valued at $50 billion. Facebook and YouTube innovated and recognised a market opportunity that has since changed our behaviour and our relationship with our mobile devices and much more, Blockbuster couldn’t innovate fast enough and as for Uber it is the single biggest threat to the black taxi trade as we currently know it. So, what does this mean? Basically, innovate, otherwise risk becoming another Blockbuster.

What does the future hold? There will always be a strong demand for advisers, as an advisers role is not merely to instruct clients where and how to invest but also provide bespoke advice around tax planning, wealth extraction, inheritance tax and even death planning which can never be automated as every client situation is different. However, the delivery of this advice for the large part is likely to be over the phone and internet for most clients.

Although demand will be strong for advisers, ironically, the industry on the whole is not doing enough to attract quality candidates despite the fact that roles exist aplenty for experienced advisers. You only need to ask a Financial Adviser who has their profile on LinkedIn for the number of requests they get to consider new opportunities. Although, something can be said for the likes of Towry, which has been in the industry for over 50 years and have come through a number of downward markets to continue to be in a strong solvent position managing billions of client funds. They’ve invested considerably into their operations to train quality future advisers to service their client base as their existing experienced advisers retire and move on. They have also recognised the mass market opportunity utilising web based and telephony services and have made some interesting developments to adapt their proposition towards the millennial client.

Traditional firms are however, more expensive, and the millennial client is tech savvy and engaged and an opportunity exists to tap into this demographic sooner rather than later. It’s interesting that the banks have managed to do something right – that is maintaining customer loyalty. We are more likely to change our partner than we are to change our banks; in actual fact our relationship with our banks tend to last over 16 years which is longer than the average length of a romantic relationship which is at 14 years.

If only wealth advice firms thought about ways to garner that loyalty early on, possibly at the same time individuals leave school or go to university by offering a web based service such as a budget planner or a platform to view all their bank and credit accounts whilst showing the monthly expenditure patterns. This way wealth management firms will be on a journey with their clients as they move through different income zones whence they will require different types and level of advice.

Certainly, traditional firms will need to adapt or lose their existing clientele to newer more tech savvy propositions with a desktop and mobile interface but this will essentially mean finding lower cost propositions for their clients as they compete over cost whilst also finding the resources and capital to invest into the new service offering, all the while being compounded by the fact that firms may have debt accrued due to RDR. As the impetus for web based solutions get more traction we may see more acquisitions take place by the larger traditional firms of their smaller but growing competition.

On the whole, it’s an exciting time for the industry and for consumers alike and I'm looking forward to participating in it.