Nationwide – Mortgages made for later life. Really?

 

Recently, I’ve been approached by a potential equity release customer and the story of his treatment by the country’s biggest building society has, frankly, left me reeling.

Tom (not his real name) is 73 years old. He’s semi-retired and receives pension income totalling around £1,200 per month. To supplement that, he also has a part time job, which brings in another £500 a month.

He has an interest only mortgage with Nationwide. It’s got around £120,000 outstanding and the value of his home is £160,000. Currently his mortgage costs him £276 per month, so, taken all around, he’s quite comfortably off.

Recently though, he was disturbed to receive a communication from Nationwide advising him that his mortgage term was coming to an end and they wanted to know how he planned to repay the £120k.

Tom didn’t have an answer for that. He doesn’t have that kind of money. At some point in the past, he had an endowment policy but it appears that, when he was diagnosed with prostate cancer, that policy first lapsed and was later cashed in.

Now we can all get judgemental about such decisions and say he shouldn’t have done those things – but think on. Maybe if you believed you didn’t have that long to live, your priorities might change a little too.

Tom had asked about equity release as a way to get Nationwide (who were becoming increasingly insistent in their demands) off his back. Unfortunately though, at 75% of the value of the property, he was unable to raise sufficient funds.

We looked at other options, including a joint mortgage with one of his children and borrowing from other family members and, although those avenues are still being pursued, as yet, there’s no firm solution in sight. He had also been having some conversations with a sale and leaseback company (although I advised him to tread very carefully in those waters).

Tom’s had a number of discussions with Nationwide but, although they had been willing to extend his original mortgage term two or three years ago, this time they are immovable. ‘We don’t offer interest only mortgages anymore’ the man from Nationwide told Tom, ‘and anyway, even if we did, we don’t think the mortgage is affordable to you’ he added. Tom was incredulous – given that he has always (and continues to) paid this ‘unaffordable’ mortgage.

The helpful Nationwide man suggested he might sell the house and rent – thereby doubling to trebling his monthly housing cost (the one they have already concluded is ‘unaffordable’). Oh and, at the same time, removing him from the home in which he has been comfortable and familiar for many years.

Nice job guys.

Why do they want to drive this? Purely, it would seem, to get their £120,000 back. But why should they care? At the moment that money is:

• lent out to a homeowner (surely one of Nationwide’s core business activities)
• having interest payments consistently met and
• enjoying the benefit of a 25% headroom equity buffer

 

Why can’t Nationwide just leave this loan to run its course until Tom is no longer with us and collect their cash then?

Ah, but, Nationwide might say; ‘what if interest rates rise? He may be able to afford it now but what if he can’t in the future’?

To which I say ‘well worry about that if and when it happens’. Tom tells me he can afford up to £600 a month so, unless rates go above 6%, he’s all good.

Nationwide could build in some extra protection by offering the man a 5 year fixed rate if they are that worried.

But no!

They don’t do that. They don’t show any flexibility at all. Nor do they show the slightest inclination to help what might be termed a ‘vulnerable customer’ (though I suspect Tom might ‘cuff my ear’ if he heard me describe him in such terms).

Instead, they behave in this intractable and belligerent manner, which is to the shame of the entire mortgage lending industry.

As things stand, we are still trying to work out if a combination of a Retirement Interest Only mortgage plus some borrowing from his family members can pull together enough cash to get the Nationwide ‘harpies’ off his back.

Wish us luck

Can’t dance, can’t sing…

https://www.moneymarketing.co.uk/asset-allocation-static-tactical/?cmpid=pmalert_4212576&utm_medium=email&utm_source=newsletter&utm_campaign=mm_daily_news&adg=C0528523-AF3A-46DF-86C6-DD614E7790B3

Which goes to show that fund managers are no better at calling markets than they are at choosing stocks – and that begs the question: So just What ARE you people paying them for?

It’s going to start hotting up in active manager land

https://www.moneymarketing.co.uk/fidelity-introduced-performance-fees/?cmpid=amalert_4102117&utm_medium=email&utm_source=newsletter&utm_campaign=mm_daily_news&adg=C0528523-AF3A-46DF-86C6-DD614E7790B3

Interesting times ahead at Fidelity because, given where the passive fund charges now sit, exactly where will Fidelity pitch its low end charge (i.e. the fees it levies when it fails to deliver out-performance)?

Either this will be below the passive charge – in which case they are going to have one hell of a job turning a profit on those funds – or it’s going to be above the passive charge – thereby coming clean and explicitly owning up to the fact that their active funds charge you more for worse performance’.

That’s hardly an ad-mans dream.

Strikes me that Fidelity have stood themselves in a corner and started painting the floor.

But then again, following the FCA’s Asset Management Study, maybe that floor was already being painted for them.

Who cares about your ‘process’? Show me the proof

Here’s Hargreaves Lansdown waxing on the subject of fund selection

https://www.moneymarketing.co.uk/issues/5-october-2017/investment-uncovered-hargreaves-lansdown/

The question I am interested in the answer to is simply this:

If we listed your ‘favoured funds’ from, say, 2012, compared their performance over designated periods (say, 3 years and 5 years), established appropriate benchmarks and compared your funds to those benchmarks, what percentage of them would have shown net-of-fees out-performance?

Then, having established that percentage, next year, we could look at the ‘class of 2013’ and so on.

Over time, you would (if you are up to your job) be able to show a consistent track record of genuinely adding value.

You see, if I were in the business of qualitative fund selection, that would be the first data set I would start building – and when it proved my excellent fund picking skills I would be annoying the hell out of everyone by trumpeting the facts as loudly as I could into the ear of everyone who would listen – and most of those who wouldn’t too.

Why do I never hear this message? From anyone? Ever?

Regulator DOES have backbone then

https://www.ftadviser.com/investments/2017/09/14/fca-refers-investment-consultants-to-competition-watchdog/?utm_campaign=FTAdviser+news&utm_source=emailCampaign&utm_medium=email&utm_content

I feared the regulator would buckle in the face of powerful industry vested interests. Pleased to see it has not.

It’s high time this murky business was sorted out.

This can only be good news for investors

Who ARE active managers serving then?

http://www.etf.com/sections/index-investor-corner/swedroe-active-even-fails-institutions?nopaging=1&lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_recent_activity_details_all%3BunHQjNsJRWm8IJah11GNag%3D%3D

If this is, as some people suggest, the beginning of a ‘Copernican Revolution’, then every investor the length and breadth of the nation will owe a debt of gratitude to Jack Bogle who stood alone, for decades, in the fight against the powerful vested interests of the investment management industry’s ‘Ptolemys’

Contingent Charging – Things could be worse

There’s been a lot of hot air blowing around on the subject of ‘contingent charging’ in relation to pension transfers (and especially transfers from final salary pension schemes) lately so I thought it was high time I added some of my own to the storm.

For those not in financial services, contingent charging means we (the advisers) will only charge you a fee if we recommend a particular course of action – usually the recommendation to transfer your pension from where it is now to someplace else.

The FCA has definitely tilted its lance against this form of remuneration – and I can see exactly why. They recognise that such a payment system increases the risk of biased outcomes. lf an adviser gets paid for recommending A (transfer) but not for recommending B (leave it where it is)……well, I think we can all see where some people might be led to in that scenario.

So the answer’s obvious then. Ban all contingent charging.

Well, that’s the route some people are advocating but here at Park we are an altogether more thoughtful bunch so here’s why we don’t think that’s such a neatly parcelled up little answer as some think.

For once, financial services people, let’s stop thinking about ourselves. Let’s take a step back and think about the other side of our transactions – the customers.

One thing about our customers is that they are (l think I can say ‘universally’) human beings and that means they can deliver some pretty kooky responses – not all of which are in their own best interests.

To them, contingent charging actually looks fair and reasonable – just as it does to us too……when we’re operating in another environment to our own, that is.

Think about your own typical financial transactions and you’ll see that your economic activities are littered with contingent charging.

Buying a house? Or a car? Or a television from Currys? Contingent charging. Hiring a plasterer? Stand by for some contingent charging. Can you imagine the plasterer who says ‘actually, guv, that wall doesn’t need anything, the existing plaster is fine. That’ll be sixty quid please‘.

Now there’s a tradesman who doesn’t get a good rating on Check-a-trade I bet.

Consumers are so familiar with the concept of paying money and receiving something in return that when they perceive that they have paid something and received nothing……well, they are not best pleased.

‘Ah’, you say, ‘but the customer who has been told not to transfer has received something. He’s had top quality advice’ – and I would wholeheartedly agree with you.

The trouble is, after reading an article in the Sunday Times or watching a TV programme on Channel 4 about pensions, he didn’t come to you for advice. He came because he wanted you to transfer his pension. So from his perspective, you haven’t given him anything of value at all. Yet here you stand with the brass neck to present an invoice.

You see, value is not as straightforward as some would have us believe. It is, as often as not, an abstract concept driven by the recipient’s own personal views. How else can you explain the prices paid for Prada handbags?

So, where does taking the ‘high moral ground’ on contingent charging leave us?

Well, one fairly predictable outcome is that some customers will vote with their feet and move to pastures more, shall we say, ‘accommodative of their desires’.

Now you might think ‘Well, that’s no bad thing. Who needs clients that cannot appreciate the value of impartial advice anyway?’

As individual advisers, we do enjoy the luxury of being able to adopt that view. The FCA however, should be thinking bigger picture.

What will happen to these individuals? Does anyone suppose that they will simply say ‘Oh well, if I can’t get advice on my transfer without committing to a fee – whatever the outcome – I guess I’ll just hang onto this final salary pension then’

Of course not.

They are bedazzled by sums of money which, in many cases, they will never have seen the like of. It is tantalisingly close. They can almost smell the leather on the new sports car. Give up? Not a chance.

They will scour the internet until they find someone, anyone who will deliver what they want. If they are lucky, that will be an FCA authorised firm. However, if the FCA does take the step of outlawing contingent payments, then the field will be emptied of such firms. It will only be the unauthorised who will be left standing – and then it’s ‘au revoir retirement fund’.

It’s easy to say ‘contingent charging is an evil that risks adviser bias’ and maybe it is – but before scrapping it entirely some thought ought to be given to the law of unintended consequence.

Maybe instead of an outright ban we should consider that

• it’s down to us as responsible, ethical advisers to override that bias and always ensure that, where a conflict of interest arises, it is that of our client which always prevails.
• it’s down to the regulators to identify firms where that doesn’t happen and mete out appropriately firm punishment.
• and, perhaps most importantly of all, it’s down to everyone whose living touches this business – advisers, regulators, journalists, legislators and educators – to hammer home the message that what you should we willing to pay for is advice, rather than a product.

Time for Aviva to come clean on secret payments

https://www.moneymarketing.co.uk/property-funds-make-30m-cash-holdings/

Aviva stuffs around £280m of property fund assets into cash and then, when asked by reporters ‘so, how much are you making off of this’  Aviva ‘declined to comment”

In other words, we’re not telling.

I hope the regulators are asking the same questions of Aviva because it seems that this company has forgotten just whose money this really is.

This is clients investments and Aviva need to stop thinking of it like a plumply funded personal piggy-bank.

The six billion pound swindle

For years people like me have been small voices in the wilderness telling anyone who’d listen how the active fund management industry has been fleecing them bare.

I have gone as far as to state that active fund management is, in terms of money removed from client’s bank accounts for nothing in return, the biggest mis-selling scandal this country has ever seen. It dwarfs PPI and Pension mis-selling combined – partly because of the sums involved but mostly because of the length of time it has been allowed to continue.

Now, the FCA has released its Asset Management Market Study Interim Report and, while it’s too early to say the regulator has taken the bull by the horns, we may conclude that it has at least gone through the gate into the bull’s field.

This report makes a number of damning observations about the shameful performance of the UK investment management business but, for the purpose of this blog I am going to open with this graph.

This is showing is the effect of the charges on a specified investment return over 20 years.
The red and yellow lines (so close together they are practically the same) are what you might expect from a low cost passive fund. The purple line is the return based on the charges of a typical actively managed fund – well, the charges they tell you about anyway. Add in the ones they don’t mention and now you’re looking at the blue line as a return. As the FCA report estimates, the passive investor is looking at 44.4% more.

Of course, that’s all very well if the investment returns of the passive and active funds were identical but, as we all know, two funds will deliver different returns. So by paying a bit extra, I get the benefit of the fund manager’s expertise and that will give me better performance and outweigh those higher charges, right?

Well, not according to the FCA. To quote their report: “Overall, our evidence suggests that actively managed investments do not outperform their benchmark after costs. Funds which are available to retail investors underperform their benchmarks after costs”.

So, there you are – pay more, get less.

But Ivor, you cry, surely you have over-egged the pudding with your fallacious remarks about ‘biggest mis-selling scandal EVER’. Well, stay with me and I’ll explain why I say that.

The FCA report cites these statistics:

• the UK asset management industry is managing over one TRILLION pounds of retail investors money
• 23% of those assets are invested passively
• the average active fund annual charge is 0.90% and for passives it’s 0.15%

So, calculators out then. That’s £770,000,000,000 of money which is paying, on average, 0.75% more than it needs to – or, put another way £5,775,000,000. Now if, as the FCA suggest, actively managed funds are not giving retail investors better performance, that’s their pockets being picked to the tune of nearly six billion pounds – EVERY SINGLE YEAR!

The FCA report is only an interim report. We have to wait until next year for the final document but, already it is talking about some interesting ‘remedial measures’ that it might consider.

It remains to be seen whether they carry this through (or whether lobbying from a multi-trillion pound industry sees them halted in their tracks) but, if nothing else, it’s a start.

ps
If you want to see the full report (or if you just think I’ve made some of this up) you can find it here:
https://www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf

 

Boycott pensions at your peril

Nic Cicutti: The pensions boycott is well founded

No, it’s no ‘well-founded’ at all Nic.
It is, in fact, based on ridiculous notions of fear and ignorance (stoked handsomely by journalists, I might add). Let’s consider:

“Numbers of individuals contributing to a personal pension reached a high point of 7.6 million in 2007/08, it dropped to 5.3 million by 2011/12“.

 When you effectively slash the income of the people that were selling them (which is what Stakeholder pensions did) what would you expect? Well, if you were Blair and Brown, the answer is you’d expect people to rush out and buy pensions of their own volition because they have now been made such good value. Well, that turned out okay boys, didn’t it

 “investing in something they understand and feel they have some control over, regardless of the risks“

 The key word in that passage is ‘feel’. People feel they have control when they are driving their car. That’s why car travel is perceived to be less worrying than air travel – where you have no control (because you have ceded it to an actual professional). We all know which mode of transport actually IS the safer though.

 “Until advisers and providers start to offer safer, easy-to-understand products with low charges, the consumer boycott of personal pensions will continue“.

 Pensions ARE safe (certainly compared to paintings). Charges are now obtainable that ARE (almost unbelievably) low. As for the complexity, that’s the fault of regulators and legislators – not providers or advisers.

 If consumers ‘boycott’ pensions, more fool them.

 I have no sympathy for people whose foolishness is of such a magnitude that they would choose to listen to sloppy, lazy journalists (Step up Channel 4 – you know what you did) than qualified professionals. As far as I am concerned, these consumers are no better than the idiots who eschew their GPs advice in favour of some wacky ‘alternative’ medicine. Those people will stay ill and these people will retire poor.