Assumptions for financial planning. Robert Lockie FIFP CFP CM

Transcription

1 Assumptions for financial planning Robert Lockie FIFP CFP CM

2 You don t need assumptions if you can reliably and consistently predict the future

3 General considerations Real or nominal? Forward-looking Pre- or post-tax? Pre- or post-costs? Spurious precision Test the sensitivity Regular reviews

4

5 Inflation Purpose RPI or CPI? Expenditure Earnings is your client average?

6 Inflation data 10% 9% 8% 7% 6% 5% CPI annual rate RPI annual rate CPI annualised rate RPI annualised rate 4% 3% 2% 1% 0% Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 Jan-98 Jan-97 Jan-96 Jan-95 Jan-94 Jan-93 Jan-92 Jan-91 Jan-90 Jan-89

7 Impact 1,000, , , , , % inflation 2.5% inflation 3.0% inflation 3.5% inflation 4.0% inflation 4.5% inflation 5.0% inflation 500, , , , ,000 - Start

8 Education costs Is your child s school average? University costs? 10% 9% 8% 7% 6% 5% 4% 9.6% School fees escalation RPI change 7.5% 7.0% 6.7% 6.3% 5.7% 5.8% 5.9% 5.7% 5.9% 4.5% 4.6% 4.5% 4.0% 3% 2% 1% 0%

9 Long term care costs Current average c.3.5% ahead of inflation Look behind the figures Average may not be what your client pays

10 Average age at death Mortality Life expectancy Assumed life expectancy Males Females Age now

11 Annuity rates Determining factors Long bond yields Mortality expectations Frequency and timing of payments Costs Other factors Use current rates or actuarial principles? Have a default basis?

12 Investment returns Asset class or wrapper-based? Which is the main driver? Where do the differences in returns arise?

13 Cash & bonds Cash Government bonds Nominal Index-linked Corporate bonds

14 Cash & bond risk factors Cypriot bank deposits More risk, more return Default risk Less risk, less return Short gilts Long gilts Maturity risk

15 Why own long bonds? 12% 10% 8% Risk and return from bonds Annualised compound return Annualised standard deviation 6% 4% 2% 0% 1 month 6 months 1 year 5 years 20 years Maturity

16 Cash & bond returns Inflation + Maturity premium + Default premium

17 Equity returns UK, US, EU, Japan, Pacific, emerging? OR Global thematic? OR Market, value, small?

18 Small capitalisation companies INCREASED EXPECTED RETURN Growth companies (low BtM) Market portfolio of all equities REDUCED EXPECTED RETURN Value and small cap effects cancel out along purple line Large capitalisation companies Value companies (high BtM)

19 Asset class returns 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Inflation Equity market Equity value Risk-free Equity small cap 2% 1% 2% 1% 4% 4% 4% 4% 2% 2% 2% 2% 2% 2.5% 2.5% 2.5% 2.5% 2.5% Risk-free Equity market Small cap Value Small cap value

20 compositions 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Global property Emerging markets equity International market equity UK market equity Index-linked bonds Global short bonds Cash 0%

21 Derived portfolio returns 9.00% 8.00% 7.00% Diversified growth Defensive 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%

22 Costs Underlying asset costs (TER) Third party management costs Advice & planning costs Custody & wrapper costs turnover costs Hidden costs Taxes

23 Impact of costs 2.5% 2.0% 1.5% 1.0% annual cost comparison (before tax) 0.52% 0.20% 0.47% 0.00% 1.08% 0.5% 0.0% 1.04% Existing portfolio Underlying assets Custody 0.52% Recommended portfolio Management Transactions (assumed)

24 A cautionary tale for spreadsheet users Year Fees Fund at Fund at Growth start of year end of year , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,364 96, ,049 96,692 99,593 78, ,522 78,545 80,901 58, ,098 58,379 60,130 36, ,785 36,032 37,113 11, ,590 11,327 11,667-15,923 Fees assumed to increase at 6%pa assumed to increase at 4%pa 200, , ,000 50, ,000 Fees Fund at end of year

25 A better approach Year Fees Fund at Fund at Growth start of year end of year , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,209 99, ,329 99, ,051 81, ,609 81,722 84,990 62, ,966 62,381 64,877 40,911 Fees increases 6% growth 4% 200, , , , , ,000 80,000 60,000 40,000 20,000 - Fees Fund at end of year

26 So how did we do? 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Assumption Actual 03/ /2013 Index-linked gilts MSCI Emerging Markets FTSE World ex-uk FTSE All Share Cash Earnings (to 12/2012) CPI RPI

27 What about the experts?

28 What about the experts?

29 It is tough to make predictions, especially about the future. Yogi Berra

30 At the end of the day.. expect all your assumptions to be wrong and tell your clients that you do

31 and expect the unexpected

32 Disclaimer This document is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence of it without consulting a suitably qualified and regulated person. It does not constitute financial advice under the terms of the Financial Services and Markets Act It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. Interested parties are advised to contact the entity with which they deal, or the entity that provided this document to them, if they desire further information. Past performance is not a reliable indicator of future results. The information in this document has been obtained or derived from sources believed by Bloomsbury to be reliable, but Bloomsbury does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of Bloomsbury at this time, and are subject to change without notice. BLOOMSBURY is a registered trade mark used under an exclusive sub-licence from Raymond James Investment Services Limited (Raymond James). Raymond James is a member of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales Registered Office 77 Cornhill, London EC3V 3QQ Bloomsbury