Carl Rich a Chartered Financial Planner, explores the difference between financial planning and financial advice, plus why passive investments work for his clients. Provocative stuff!
Listen to his podcast in full here Financial Planning and passive investments
Neil Foley: Well, good morning everybody. Its Neil Foley from the Business Growth Club here today. And we’re really fortunate today to have an old friend of mine, Carl Rich, of goals-based financial planning who is a Chartered Financial Planner. How are you, Carl?
Carl Rich: I’m very well, thank you, Neil, and yourself?
Neil Foley: Yeah, very well, thank you. We’re at the Centrum, which is part of the Norwich Business Park, so we’re in the cafeteria area, so there’s a bit of background noise, but hopefully you can hear us. What we’re going to explore over the next half hour or so is the difference between financial advice in the generic term and financial planning, which Carl specialises in, and also the difference between active and passive fund management. Does that sound like a reasonable deal?
Carl Rich: Yeah, absolutely.
Neil Foley: Let’s kick off with an easy one. What’s the difference, then, between financial advice and financial planning, Carl?
Carl Rich: I suppose it really comes down to what you’re paying the financial advisor or the financial planner to do. Financial advice is: You’re paying somebody to look after a pot of money, which could be in a pension; it could in an ISA, but you’re paying them in isolation to look after this particular chunk of money, whereas financial planning is a much broader definition of what you’re paying the financial planner to do, so it’s going to cover a whole host of things. Really, it boils down to being a more holistic approach, which basically means looking at everything.
It’s making sure the clients can achieve their financial objectives rather than making a pot of money slightly bigger this year than it was last year.
Neil Foley: I suppose the cynic in me has tended to be that financial advice tends to be if you’ve got some money that I’m interested in.
Carl Rich: Yeah, from the financial advisor’s perspective, and this comes back to the cultural financial advice and the financial services industry, not just in the UK but internationally, the more money you have, the more interested a financial advisor is in talking to you. The more money you have, the more interested a financial advisor is in talking to you, basically, because they’ll get paid more for more-or-less doing the same amount of work.
Neil Foley: One definition could be that it’s about selling a product. That’s the end game is that one way or another, I want to sell you a product from a product provider rather than this holistic view of what your finances are, because it might be that you don’t actually need to invest any money.
Carl Rich: Again, in my history of financial services, there’s been instances where a client investing money, even though they wanted to, has not been the right decision to make, where you’re up against what’s in the best interest of the client vs getting paid, sometimes that conversation doesn’t go in the best interest of the client, because financial advisors don’t get paid to look after cash. They don’t get paid to look after moneys that aren’t invested.
Neil Foley: The move by the regulator to effectively ban commissions so that everything’s on a fee basis, hasn’t removed that bias?
Carl Rich: I wouldn’t say so, no, and again, I’ve had direct conversations with the SEA about this just recently. I think that, predominantly, what’s happened is a lot of financial advice practises have done a search and replace, simply. They have gone through their paperwork; they have lifted out the word commission and replaced it with the word fee. It is, therefore, technically, more transparent because it’s now referred to as a fee, but actually, the charging structure that they had before, which was always percentage-based, has remained exactly the same, so rather than referring to it as a 3% of a 5% commission, it’s now being referred to as a 3 or a 5% fee, and so that’s what happened.
Neil Foley: Not a lot’s changed, then.
Carl Rich: No, in most instances, most of the time, I would say not a great deal has changed.
Neil Foley: It’s an odd system, isn’t it? I can understand it from a financial advisor’s viewpoint to a degree, but you wouldn’t instruct any other professional based on the percentage of what you’re investing or what you’re talking about. The only time I suppose that would be different might be probate, but even then, people prefer a fixed price. “I want a price for doing the job.”
Carl Rich: And I agree with you, and that’s one of the principles behind goals-based financial planning, but I think, as far as the industry is concerned, it’s not just financial advisors. It is pervasive across the financial services industry where percentages are being charged to clients everywhere, so it doesn’t matter whether we’re talking about the financial advisor who gives the financial advice or we’re talking about the fund manager who looks after the money and actually makes the investment decisions, or whether we then talk about things like product providers like platform providers. Right across the board, the all charge percentages without exception. Finding somebody that can do something on a fixed fee or an hourly rate or whatever basis that’s not percentage-driven, is very, very rare.
Neil Foley: What’s the logic, then? I can see the logic from their viewpoint because it’s actually presumably more profitable.
Carl Rich: Yes, and that’s the logic behind it.
Neil Foley: That’s it?
Carl Rich: That’s it. I cannot see any other reason why it’s done than for that. It’s very, very profitable. It’s also a very easy way … if you’re sitting there talking to a client about investing a million pounds, and you tell … What sounds more expensive? This is only going to cost you 3% as a charge, or it’s going to cost you £30,0000. Those two things are exactly the same.
Neil Foley: 30,000 makes you think more.
Carl Rich: Those two things are exactly the same, but if you dress it up as a percentage, it makes it more palatable.
Neil Foley: But that would be extraordinary for the financial services to industry to fudge things, goodness me. It’s a bit like capital units and accumulation units. Do you remember those days? Do you still come across policies like that?
Carl Rich: There’s one particularly large product provider who has what’s called a bid office spread, so the difference between buying price and selling price, and that can range to … normally, it’s around about 5%, so that means that the client goes into the investment and instantly loses 5% of the value of their investment, and how they’re able to get away with it, I don’t know. It might have something to do with the fact that they’ve got approximately 80 billion pounds worth of money under management and they’re obviously chatting to the FCA at an entirely different level to the conversation I would have with the FCA.
Neil Foley: It does seem extraordinary, doesn’t it?
Carl Rich: Yeah, I don’t know how they’re able to do it, but they’ve been getting away with it for a very long time and they continue to get away with it now. I think this is the problem with my industry. It’s not just large companies. It’s small companies. It’s the mentality of, “This is what we’ve always done and this is what we’re going to continue to do,” and nobody is making a concerted effort at any level within the financial services industry to change this.
Neil Foley: I suppose vested interest comes to play, doesn’t it?
Carl Rich: I’ve had conversations with the FCA about this, about looking at the pricing structure, but they’ve got so much on their plate, and they’re, quite frankly, under resourced, and with everything that’s currently going on with final salary scheme, transfers and all the hooha that’s going on there, they’ve got, frankly, enough to be getting on with. Having spoken to the FCA, I know it’s on their agenda, but it’s not very high.
Neil Foley: And it’ll probably never get to the top, will it?
Carl Rich: No, because, frankly, clients don’t really understand the damaging impact that taking a percentage of your funds can have, and therefore, people aren’t really making complaints about that as a particular issue, and because clients don’t understand it, the financial service industry are happy with it, the regulator is happy with it.
Neil Foley: It’s all quite cosy, isn’t it? I suppose the magic, as you said about it, is the magic of compound interest, but in reverse, the compound charges—isn’t it—is over the lifetime of a particular investment or whatever can be huge, can’t it?
Carl Rich: Now that you brought that up-
Neil Foley: I knew this would be on your agenda.
Carl Rich: Here’s something I prepared earlier. I suppose the first test of dealing with any kind of financial advisor is: Do they understand what compound interest is and how it can actually work in your favour? Compound interest is, very simply, you put your money into something and then over time, it grows by X percentage, and the longer you leave it there, the better it will do. That’s pretty much compound interest. The actual equation is: The future value of money is equal to the present value of money plus 1+R to the power of X.
Neil Foley: I’m glad you explained that.
Carl Rich: I’m sure that’ll be perfectly clear for anybody that’s-
Neil Foley: Yeah, absolutely, crystal clear.
Carl Rich: But basically, what it means is, the higher percentage you can get, and the longer the time you have, the better the return you’ll have at the end.
Neil Foley: You’re earning interest on interest?
Carl Rich: Effectively, yeah, and what it means is, the money you put in at the beginning actually works the hardest because it’s there the longest, and studies have repeatedly shown that market timing, I.E., nipping in/nipping out doesn’t work. It is time in the market that is the most effective investment strategy, and I think, again, the problem with the financial services industry, selling the concept of buy and hold, which is, “Put your money in now, sit on your hands. Markets go up. Markets go down. Markets go sideways, but over the longterm, they will continue to go up,” is not as sexy, and it’s not as enthralling as, “We’ll ninja in here. We’ll ninja out there. We’ll dance around this. We’ve got these indicators. We’ve got this system. We’ve got this supercomputer whirring away in the background,” to complete the narrative that the industry loves, which is: we’ll get out you at the very top and we will put you pack in at the very bottom.
There is zero evidence. I’ve spent two years looking for something to support this, to counter my opinions and the research that I’ve done on this, but I’ve found nothing over the last two years to support that any kind of active training actually works. Coming back to the compound interest side of things: If you’ve got a market. We’ll refer to it as, say, the FTSE 100 index, and over the next 15 years, that will return, on average, 7% per annum. If you put £100,000 in today, that would be worth £275,903 after 15 years, so that’s your interest on your interest on your interest over 15 years. It turns your hundred thousand into 275, which is not a bad rate of return over that period of time.
Neil Foley: It’s fabulous, yeah.
Carl Rich: Now, if you were to give that money to an active fund manager, who is then going to make those buy and sell decisions on your behalf over that 15 year period, so you’re not just going to track the market, you’re going to give that money to somebody and they’re going to one day buy Shell, the next day sell BP, whatever the scenario is, they’re going to charge you for their services, and again, those charges are based on a percentage, so they will probably charge you somewhere in the region of .8 to .18.
Neil Foley: That sounds … doesn’t sound too high.
Carl Rich: Which doesn’t sound too high, so if we kind of go middle of the road: The average fund price that I’ve been able to establish in the UK is about 1.1%, so we know that our maximum rate of return is going to be 7%. You’re not getting 7% because you’re paying the fund manager 1.1% and therefore you’re going to be getting 5.9% parallel. Again, doesn’t sound like a loss, but what it does mean is that your rate of return is going to be £236,286.
Neil Foley: But I thought it was 270-
Carl Rich: This is the gross return you could have achieved.
Neil Foley: When you think of it in pounds, shilling and pence-
Carl Rich: It soon multiplies up.
Neil Foley: That’s a lot of money.
Carl Rich: So, the difference … well, it is. It’s £35,774 over that 15-year window.
Neil Foley: But presumably, I’ve got to pay to be in the market, and this is where your passive argument would come in, so instead of 1.1, it’d be a much lower figure.
Carl Rich: You can access the FTSE 100 as an index at 0.1%.
Neil Foley: 1% cheaper? Not 1% cheaper.
Carl Rich: A whole 1%, yeah. Well, actually, it works out to 91% cheaper.
Neil Foley: Yeah, I was going to say, that’s a better way of putting it.
Carl Rich: That’s just how it works, so that means that you’re not going to be able to access the market for free. There are going to be transaction costs somewhere along the line and an ongoing charge, whether it’s a passive or an active. There’s a marked difference in the cost. Because it’s 91% cheaper, you get to keep more of the growth that you’ve achieved.
Neil Foley: If I play Devil’s advocate for a second, in that, on the face of it, active would make more sense, because these are people, they understand the market. They’ve got analysts. They’ve got big teams and they’re trying to look for, they would argue, undervalued companies or the next star player. Isn’t that what you’re paying active for, is that, in theory, instead of 7%, you’ve got a chance of getting a better return?
Carl Rich: That’s the narrative, and the narrative is very compelling, and for the vast majority of my financial services career, the narrative was so compelling, I never questioned it, because-
Neil Foley: Even the terms managed funds makes you think, “I want somebody managing my money.”
Carl Rich: Absolutely. The whole premise is if somebody’s looking after my money, looking after it day-after-day, hour-after-hour, making sure that if the credit crunch happens, they will get my money out before it gets too bad, so actually if you then go back and look at the credit crunch, and look at managers that are operating within the FTSE 100 index, and so they’re buying and selling shares within that. If you look at the level of exposure that they have to the stock market … if you look at 2008, they are, the vast majority of them, almost of all of them are exposed almost 100% to the market.
We then fast-forward to 2009 when the stock market crashes happened, and those levels of cash in their portfolios they look after have risen dramatically. Some of them are carrying 10 or 15% cash, so what’s happened is they’ve sold off at the bottom of the market, and so the narrative they’re portrayed is, “We’ll get out at the top and put you back in at the bottom,” whereas the lay person will probably go in at the top and then come out at the bottom, so you’re paying these professionals an astronomical sum of money and then making the same mistakes that lay people are making. And again, if you go back and look at the stats for as long as we’ve had things like mutual funds, and Oeics, and unitrusts in the UK, that pattern has repeated itself again and again and again, and actually, you are guaranteeing under-performance. There is certainly none that I’ve been able to find, no research anywhere that shows that active fund management will outperform.
Neil Foley: It sounds counterintuitive, doesn’t it? I’ve met … I’m the same as you have. I’ve met a number of fund managers, seen them talk, and some of them, they’re quite raconteur, and larger-than-life characters, some of the really big players, and it all makes perfect sense, until you look at the stats, doesn’t it? And that’s the bit, isn’t it?
Carl Rich: But the thing is, when you have that conversation with somebody, what is easier to sell? What is easier to sell?
Neil Foley: Well, that 1.1.
Carl Rich: “I will get you out at the top, and I will get you back in at the bottom. Don’t worry about the costs, because we’ll do a good job of looking after you,” or, “The market is what the market is. You take it or leave it, but we’ll get you in there as cheaply as possible.”
Neil Foley: Are there sectors, then? I could get that on the FTSE, to think, there can’t be any inside information, not legally, so everybody’s looking at the same stuff.
Carl Rich: You can’t have enough insider information, consistently enough over a long enough period of time to A, not be found out, B, for it to make any difference over the long term.
Neil Foley: Are there sectors where you could say, or maybe the small cap sector where you think, actually, because there’s not that many analysts in it and the rest of it?
Carl Rich: No. It doesn’t really matter what sector you look at. It doesn’t matter whether it’s emerging markets, small cap, medium cap, large cap. It doesn’t matter whether it’s an established or developed market, whether it’s an emerging market, those numbers play out again and again and again. Emerging markets always seem to be the most logical one for you to have active fund management, but the stats just don’t stack up against the narrative.
Neil Foley: Of course, I know there’s been some criticism of some of the CEOs and chairpeople of some of the really big companies, because actually, what they’re really good at is selling a story, innit they?
Carl Rich: Yes, and that’s what you’re buying. You’re buying this narrative.
Neil Foley: You’re buying the narrative, aren’t you, as you said?
Carl Rich: But is then understanding what they actually do with that higher percentage, so part of the narrative is that the reason they can get these better returns than can be delivered by the market is they spend an astronomical amount of money on research and vetting this and interviewing CEOs and company directors and the whole nine yards that goes along with it, and I’m not saying that they don’t do that, because that work definitely goes on. Billions of pounds get spent on that every year, but what they don’t tell you is how much gets spent on promotion and how much gets spent on advertising, and that, from the numbers that I’ve been able to determine, is somewhere between 40 to 60% of their AMC. That annual management charge of 1%, let’s say half of that is being spent on advertising. For whose benefit is that advertising, because it’s not for you the client who’s giving the fund manager a 500 million pound advertising budget. It’s so that they can then attract more funds.
Neil Foley: We’ve still got a very opaque situation, haven’t we?
Carl Rich: Yes.
Neil Foley: I remember in talking to Threadneedle at some stage about a commercial property fund, which they were very good at property and I knew some of the managers there and they were very, very good, but you could never understand the pricing because there wasn’t a bid offer spread, but then you’re thinking, “Yeah, but there’s a 6% or 5% stamp duty charge, so how can there not be this huge chunk of money disappearing somewhere quite legitimately, and you end up … Actually, I never got an answer, or never an answer I understood to say, “How does the price, the unit price actually work?” So it is that opaque thing again, because I know this charge is in there, but you can’t identify it.
Carl Rich: No, commercial properties is kind of on a slight tangent to what we’re talking about in that it’s immensely complicated and you’re talking … it’s very, very specialist, and then you’ve got huge, huge buildings that cost hundreds of millions, billions of pounds that very rarely change hands.
Neil Foley: And the market all knows each other and it’s very close job.
Carl Rich: Absolutely, but with the stock market, it’s much more liquid. Things happen much quicker. Anybody can actively trade and they can have a whole host of buying strategies, of selling strategies. There are buying and sell in May and go away, and all of the different kind of rhetoric that comes from the stock market, but actually, again, if you go back and you look at the statistical significance of any of the patterns that people think are in the stock market, they don’t work, and they are not consistent.
Neil Foley: If we follow the US, which we tend to do in lots of things, would I be right in saying that passive is far more accepted and the norm in the US with the likes of Vanguard, than over here?
Carl Rich: I’d say that there’s more of an appetite in the US for people to manage their own money. This information about passive vs active is more readily available over there. I think they still have this same issue in that something of the region of about 80% of funds that go into the market are still going into active funds.
Neil Foley: Really, even in the US?
Carl Rich: These are US figures that I’ve seen recently, so that percentage of passive funds, that 20% percentage, has increased massively, and they are-
Neil Foley: But it’s still a long way to go.
Carl Rich: It’s still a very, very long way to go because this issue around cost and chatting about cost and pushing that conversation is not in the financial service’s best interest-
Neil Foley: No, the status quo is what’s in the interest.
Carl Rich: Fundamentally, the financial service industry has not done anything that’s not in their best interest. Even now, they are not doing what’s in their clients’ best interest. They are continuing to do what’s in their best interest.
Neil Foley: And I’ve come across a few advisors who would accept the passive argument, but what they do is have passive at the core, and then have active round the outside, so they semi-accept it, if you like, and that’s not an uncommon scenario, is it, to say, “We’ll follow or track the FTSE or the SMP or whatever, but we’ll have some active around the core,” but in your research and the rest of it, that doesn’t stack up, does it?
Carl Rich: It doesn’t stack up, so, which bits of core do you then decide, “Ah, this is the best route to go with passive,” and then with the satellite stuff, “Which one is the best route to go through?” Then, I would imagine that those types of financial advisors are going to then start putting clients into things like hedge funds because of the argument around extra diversification and correlation of investment, but again, you look under the bonnet, you look at the stats, the correlation of hedge funds is very highly correlated to what the market’s doing anyway.
Neil Foley: We saw that in the credit crunch, didn’t we, where diversification, there was none.
Carl Rich: Pretty non existent. You can’t get more diversification by putting money into a hedge fund. The correlation is too high. It’s like saying, “I’ll put money in the UK market but I won’t put it … or I’ll put it in the US market,” but actually, most of the time, the returns are comparable.
Neil Foley: Thinks of goals-based, then: if you’re fundamentally doing things differently, saying there’s a … explain to me what the difference is with goals-based compared to a traditional practise.
Carl Rich: I think one of the first key things is then understanding: because this is how the market wants to work, and as much as I rail against it, the financial services industry is not going to change. Percentages are going to be pervasive within the advice that I give. It’s then identifying product providers where there are cost orientated. We will only look at passive investments that are-
Neil Foley: Your strategy is passive full-stop.
Carl Rich: But what that means is that because I don’t spend lots of time worrying about what the FTSE 100 index is doing, I have no interest in what the Standard & Poor 500 is doing, Nikkei 225, I couldn’t tell you where it is or what it’s doing, it means that I’m no longer a financial advisor. I’m not interested in pots of money. What I am interested in, is where a client is currently and where they want to get to. And then, when you can understand where they are and what they want to achieve, I can then start mapping out for them the path that they need to take. That, then, basically, it means we can refer all of the points of financial planning back to what the client is looking to achieve.
So, when I have a review meeting with a client, I can go in and have a chat with a client, and the two questions that any client will want to ask me during a review meeting is, “Are we on track?” And if the answer to that is yes, then we’ll talk about whatever other things they’ve got on their agenda. If the answer is no, because I know where they are, and I know where they want to get to, I can then go through, “These are the corrective steps that we need to take.” It means that we can have a conversation with the client that’s more focused on them and what they want rather than what China is currently doing because frankly, from five minutes, one five minutes to the next, it doesn’t make any difference what China is doing.
Neil Foley: Your investment philosophy of passive and investing for the long term means that you’re not worried about where the industries are or what’s happening or what Trump’s done today to influence the markets. If I’m interpreted this right, Carl, what you’re saying is: You know financially where they are, where they want to be at different stages in the next two, three, five years in life, kids getting married or retirement or whatever. Do you calculate a return that they need? Is that what financial planning, in your mind, is?
Carl Rich: Yeah, we can look at-
Neil Foley: It might be that you just stay in cash.
Carl Rich: Sometimes that’s the case. We will have scenarios where we will look at what the client’s looking to achieve, and over the timescales that they’re looking to achieve it, and we will then have a conversation around what their appetite for investment risk is.
Neil Foley: That’s a tricky one, actually, isn’t it, because everybody ends up in the middle, don’t they?
Carl Rich: Yes and no. Everybody likes to be in the middle because that’s what they think everybody else is doing. They don’t mind not doing better, but they don’t want to do any worse than what everybody else is doing, which is why you get this concentration, this clump in the middle, but by having a conversation with a client, the two parts of it are, are their appetite for risk: How prepared are they to suffer a downturn in the market?
Neil Foley: The fear of loss.
Carl Rich: It’s the fear of loss. There’s a psychological factor to it, but the flip side to that is also then their capacity for loss. That is hugely important and that is a calculation. That is, “This client can afford to lose 5, 10, 15, 20% of their fund and still achieve their objective.” That is, again, something that I have to applaud the FCA for. That’s what they’re pushing financial advisors to do. They want the capacity for loss to be calculated by the financial planner, by the financial advisor, to say that “You can afford to lose this much and still maintain what you want to do,” but once we’ve established a client’s risk profile, we can then work out what the client’s asset allocation is going to be.
Asset allocation, broadly speaking, is how much they have in stocks and shares and how much they have in bonds. There’s other fluffy stuff that you can put around the outside, but that’s to keep it nice and simple. The higher somebody’s risk profile, the more stocks and shares they will have. The lower somebody’s risk profile, the more bonds they will have as a percentage. If somebody comes out middle of the road—we’ll call it 50/50—then, using long term data, we can work out what the average growth rate has been doing back to, say, 1900, and in financial services, there is this term which is very rarely used called reversion to the mean, which means that, basically, if your long term average return is, say, 7%, and this year you get 14%, next year, statistically, you’re basically looking at getting no growth. It doesn’t strictly work like that, and you have better years and you have worse years but you get this long term trend.
Neil Foley: But if you understand that as a client, you can relax a little bit more, can’t you. You have a great year and think-
Carl Rich: I’m going to have to pay some of that back further down the line.
Neil Foley: You don’t worry about … because of your invest-and-hold strategy … people talk about the bond bubble because bonds have done exceptionally well, historically, haven’t they? You don’t worry about that at all in terms of saying, “Actually, this is going to revert to the mean at some point?”
Carl Rich: No, again, because you’re not buying a particular bond, so you don’t have to worry about that one bond popping in the same way that when we put clients’ funds into the equity market, we’re not putting them into an equity. We’re putting them into a basket of equities that’s going to contain … the funds we’ll typically use will bundle all of these together, and you’ll have somewhere in the region of 4 and a half to 5,000 holdings under the bonnet.
Neil Foley: So, you’ve got great diversity and that’s-
Carl Rich: Massive amounts of diversification, so that means that if one company, for instance, Carrillion, goes bust, “OK, it will have a negative impact on your portfolio, but if the rest of the FTSE 100 or the American market or the Japanese market or whatever goes up, it completely wipes any negativity out, Carrillion holding has completely disappeared or will completely disappear, so it means that we can have a conversation about averages, because what clients really want me to do is tell them what rate of return they’re going to get. They want me to be able to predict the future for them so that they know they will be better off tomorrow than they will be today, and actually, you just can’t do that. It’s not possible. There are too many variables in the FTSE 100 index in isolation less alone the global economy.
Neil Foley: Never mind globally and politically and everything else.
Carl Rich: To be able to establish what’s exactly going to happen.
Neil Foley: Because in essence, what clients really want is, “I just don’t want to run out of money before I peg it or before I give money to the children or whatever it is, isn’t it? That’s essentially it, isn’t it?
Carl Rich: Yeah, so we can use a list of assumptions: growth rate, which is then tied back to-
Neil Foley: What they actually need.
Carl Rich: Yeah, and then what we can do is we can say, “You will run out of money at this point in time,” so if we’re talking about our retirement case, somebody will be in the accumulation phase so they’re building up their pot now, ready for retirement. “This is how much you need to put in, and then if you suddenly go from working to not working, which is less of an occurrence now, you’re going to retire at 65. You’ll have this pot of money, and if you carry on spending at your current rate, it will run out at, say, 85. If you then, cut your spending by 50%, it won’t run out at all,” so you can then have a conversation with the client about what their retirement is going to look like, what do they want to achieve, and if you’ve got enough time, you can do something about it. If you haven’t got enough time to do something about it, the client is then going to have to modify their lifestyle.
Neil Foley: They’ve got a choice then, haven’t they?
Carl Rich: Absolutely, but what it means is that we can stress test the current planning that they’re doing, and again, I’ve had instances where I’ve gone back to clients and said, “You don’t need me. You have enough money to leave it in a bank account, and if it generates no interest whatsoever, you can live on that. We’ve stress tested it, and it’s gone up to say 120 years, so that means that that pot of money will not run out until they get to 120.” I still work with those clients because there’s fine tuning we can do.
Neil Foley: And they need the comfort of knowing the assumptions are still right.
Carl Rich: We may still invest money; we may not, but it’s also, then, the mechanics of moving pots of money around. It’s using the various allowances that everybody is entitled to, so we use things like ICR allowances, pension allowances, VCTs, EISs, a whole list of acronyms I’ve got in my toolbox that we can use from one day to the next to enhance what the client is doing.
Neil Foley: Is that … we started at the beginning saying, “What’s the difference between financial advice and financial planning?” That’s what financial planning is, isn’t it, is saying, actually, rather than you thinking I’ve got to sell a product to earn a living, what you’re doing is providing holistic advice about saying, “How much money do you need? By when? What returns do we need? And then looking at the tax wrappers.”
Carl Rich: Making it as tax efficient as possible.
Neil Foley: To making it work. How are you earning your money, then? If you’re different from the majority who are making it in terms of under management? Are you a charity? Have I misunderstood this conversation?
Carl Rich: I’m afraid I’m not a charity, no. We will charge fees for what we do and those fees are time constituted. What will happen is, if we were to be introduced to a new client, we’d have an initial conversation with them to see whether they are the right client for us, whether we’re the right financial advisor.
Neil Foley: Do you charge for that initial conversation?
Carl Rich: No, there’s no charge for that conversation. We’re happy to kind of meet, have a chat about what it is they’re looking to do, and when they’re looking to do it, and if I’m honest, because of the size of the business at the minute, we don’t work with people we don’t like. So if we don’t get on, then we’ll shake hands and we’ll go our separate ways. After that meeting … That meeting might stretch over one, two, three, sometimes four meetings so that we can really get to know one another. There’s also: We would then agree with the client, the steps that they want to take, the objectives they want to achieve, the resources that they currently have at their disposal, and the resources that they want to have at their disposal and when they went them.
When we’ve established all of that, we will then have, effectively, a shopping list of things the client wants to achieve. We will, then, also, take things like letters of authority. A letter of authority would allow me to contact a product provider for specific information, so things like charges, web funds are invested anyway.
Neil Foley: Have you, at this stage, costed it from your viewpoint so I know, as the client, what I’m getting involved in?
Carl Rich: We won’t send off the letters of authority and we will send them back a summary of what they’ve told us they want to achieve, and we have a rough idea of, basically, it’s this number of objectives and it’s over this timeframe and we have this much money to work with.
Neil Foley: You know what’s it’s going to cost you time-wise.
Carl Rich: Roughly speaking, I know how long it’s going to cost me time-wise to be able to prepare the initial report, so that’s when we say to the client, “Look, this is what we expect the initial report to be,” and then we’ll send that to them, and then if the client then says, “Thanks, but no thanks,” then we go our separate ways.
If the client, then, is happy to engage beyond that point, we will then prepare the report. We will go and collect all the information. We will compare what they’ve told us vs what they have. We will also compare what they have vs what they want and what they’re going to need in the future, and then we will prepare that report, which is complex most of the time because of the amount of information that we have to disclose, but effectively, what we’ll do, is we’ll put a list of the objectives at the front, and then underneath that, a list of the executive … an executive summary that says, “This is how we’re going to achieve the objectives,” and then all the details in the background and clients will pay a fee to see the report, so we’ll send the report to them a few days in advance of having a meeting to discuss the report, so that they can have a look through it and the fine print that’s in there away from me walking them through it, and then we’ll have a very clear indication of what it will then mean to implement that plan.
Neil Foley: Sure, so there’s a separate fee for implementation, which makes perfect sense, and the fee on the implementation is based on time rather than dictated to by the volume of money?
Carl Rich: Yeah, so we’ve had instances where we have invested a very small sum of money, but it’s been complex and there’s been lots of objectives, and the fee has been large, and we’ve had instances where we’ve had a large pot of money, but it’s relatively straightforward and therefore it takes less time.
Neil Foley: It seems a very logical, fair way of doing.
Carl Rich: We will then have an ongoing relationship with our clients.
Neil Foley: Which you again agree with them in terms of cost?
Carl Rich: Yeah, and again, broadly speaking, it’s time cost, so the more variables, the more objectives somebody has, the more their retainer is going to be, so we particularly like to work with the directors of limited companies, predominantly because we can then charge their limited companies for the advice that we give, because a lot of the work that we do is pension orientated, and it’s then about cash extraction out of the business, which means that the business, then, gets tax relief on our charges.
Neil Foley: That would be a fascinating another podcast rather than now in terms of some examples of cash extraction from companies, because that’d be really interesting, wouldn’t it, for the people that you and I mix with, to say, “How are you going to do it?”
Carl Rich: I won’t go into all the fine print, but I’ve just prepared a report for somebody, and we’re going to put £173,000 dent in their corporation tax bill as long as they can find the money that they need to do something about that.
Neil Foley: Proves what you can do. That sounds like true financial planning.
Carl Rich: What it means is that business will actually technically make a loss this year, so they’ll even be able to reclaim corporation tax that they paid last year.
Neil Foley: We’ll have to set a date before we go today to do that. That’d be really interesting, Carl, and finally, Carl, because I’m conscious of time, I’ll spring this question on you. I know you’re a bit of an old bugger, aren’t you, now?
Carl Rich: 36.
Neil Foley: 36? I mean, geez. Ancient.
Carl Rich: Getting on in years. I actually have got more grey hair than you’ve got.
Neil Foley: You don’t know what product I use. If you were to take yourself back to a young man, say, just before you left university, what would you tell yourself as a young man, knowing what you know now, as this old bugger of 36?
Carl Rich: As this old bugger of 36, I suppose it’s a bit of a platitude, but just go for it. What’s the worst that can happen? Just crack on. Whatever it is you feel that you want to do, go and try it, and then if it works out, great. If it doesn’t work out, you’ll have learned a lot. There is no … I’ve spent a huge proportion of my personal and professional life being very fearful of failure. Actually, I read a book called Black Box Thinking, which subsequently lead to a whole bunch of other books and someone called Carol Dweck, who is a professor at Stanford University, and actually, failure is the process that you go through to learn, and it is the most effective teacher, and you try something, and if it doesn’t work out, you try it, but you do something slightly different, and you just keep going. You keep plugging away at it, and actually, you should not have a fear of failure. Just embrace it.
Neil Foley: Another way of working. It’s science isn’t it, based on that? You don’t blame the data. You think, “Actually, that didn’t work. I need to try a different way.”
Carl Rich: No, you understand what doesn’t work and then you try something different.
Neil Foley: That’s really fascinating. Have you got a … I know you’re a bit website adverse.
Carl Rich: No, we have a website. I’m not adverse to websites; I just don’t use social media for anything.
Neil Foley: What’s the website? If people wanted to get in touch with you, how do they do that, Carl?
Carl Rich: They can get in touch on the website. There’s a form on there they can fill in, but it’s goalsbased.co.uk.
Neil Foley: Goalsbased.co.uk?
Carl Rich: Yeah, G-o-a-l-s-b-a-s-e-d.co.uk.
Neil Foley: Brilliant. Well, thank you very much indeed for your time, Carl. I hope people find that of interest, and I’ve known Carl for a number of years so I would urge you, have a conversation; there’s no cost or obligation. I know what sort of fellow he is. Thanks very much for listening and until next time, goodbye.