AFH-Consolidation in Financial Advice

Dear Friend

As well as the political situation here at home which defies comment to some extent, it’s a funny world in which we live at the moment, economically too.  We have 30% of the world’s government debt instruments charging you money to hold them, Jyske Bank in Denmark paying you 0.5%pa to take a mortgage from them for ten years, colossal swathes of cash circling us (which is why the interest rates are as they are in reality – supply and demand), cries of ‘austerity’ here at home despite the State overspending to the tune of £1trillion in the last eleven years (how can overspending ever be cuts…) and well.  Several companies have also been able to raise debt where you pay it money to hold your funds – unbelievable.  Mark my words though, this artificial situation will not and cannot persist forever and there are colossal investment risks which at this moment are not recognised nor indeed understood by those who own these things.  In life, the biggest risks of all are those we either do not see or those where we are so complacent about them in that we do not think they could ever come to pass.

Then we have the colossal uncertainty caused by Brexit.  No, we can’t ‘blame’ Brexit and the vote as the reason for ‘not doing it’ or ‘for doing it’ but the change, large or small, will create disruption to the previous path, even if that path was leading to the wrong conclusions.  Staying on it or stepping-off are not solutions simply to avoid the uncertainty if the decision people have taken is the right one.

The consequences?  Inevitable I suppose – a flaccid UK stock market as investors have great excuses for procrastinating and deferring decisions and selling something which may be affected by the outcome – in their view.  Then there is irrationality and we have that by the bucket-load and that suppresses prices even more.  Of course we shall still be able to treat our sick, eat food and travel, amongst other things labelled by some as about to end.  How long will it take, I wonder, before we look back at the charts of time and see the ‘event’ as a minor blip – and I suppose a colossal opportunity (from change of any form) as long as we grasp it, which I am sure the resolve of the British people will.

In the meantime, Sterling languishes at a thirty-five year comparative low against the US Dollar and ‘value’ stocks are trading even lower in relative terms against ‘growth’ stocks than they have at any point in the last forty-four years, fuelled in part by the naïve enthusiasm for ‘passive’ index-tracking funds as these are ‘cheap’ in fees….  The US stockmarket, likewise fuelled by passives, is at a fifty‑year high relative to the output of the US economy and that is a scary level for them despite all the cash (though curiously the aggregate ‘value’ of the stockmarket has remained relatively static as stock has been bought-in and cancelled at a colossal rate, pushing-up prices of the remainder (and the value of executive options) as debt to fund that has rocketed as it is so cheap and indeed, the numbers of companies quoted have been shrinking too – especially here at home.


Have you a deferred final-salary pension?  Apparently transfer values have hit all-time highs as yields on government bonds have plumbed all-time lows… if you haven’t reviewed yours, maybe it is time you did. This is even if the advice to you after review is to stay put as yes, sometimes (quite often in fact) we do indeed say that.


This is an interesting dynamic.  AFH is a ‘consolidator’ which has bought-up many financial advisory businesses to consolidate them into its own platform and processes.  Here in North Devon two large players have gone this way, at least.  However, what happens to the clients with ‘consolidated’ firms?  There are other consolidations or sales of client banks and often it means distant relationships and clients being ‘forced’ to adhere to new rules and requirements – and the original advisers (if they stay) too.  Granted, sometimes that is helpful and good – economies of scale, better protections and so on but do the selling advisory firms lose that zest and interest once they have taken their final payments and are these entrepreneurs seen as mavericks who won’t conform to the parent company’s processes etc?  What happens then to the clients who are more likely to feel isolated and ignored and sure enough, yes, we have seen an uptick in enquiries from individuals who have been ‘sold’ to some other remote firm as they don’t feel the same level of service exists.  Indeed, AFH has just published an interesting survey and we have to say that the results do not ring true for our Firm at all.  Any firm where client loyalty is as low as 7% has some problems – including not communicating what service and benefits it provides to those it calls its real clients.   If 75% of its clients are happy to switch on cost conscience grounds then something is severely wrong with that business model if the firm is not demonstrating the value of what they have done and continue to do.  What do you think?

We should add that the one attribute the survey noted was that clients valued ‘adviser honesty’ the most.  That is disturbing if those same individuals do not seem to be able to feel they are enjoying that from their present relationships which is why so many of them want to leave!  (As a footnote, there used to be hordes of unqualified charlatans out there and many selling stuff for the biggest commission regardless of how inappropriate something was for the client.  There are still too many rogues out there dressed as wolves in sheep’s clothing and disguising ‘fees’ for ‘commissions’ so you do need to watch-out but thankfully the advent of professional qualifications and proper regulations has helped tremendously – as well as commissions being banned on most things since 2013.  We stopped taking ‘commissions’ on subscriptions to our discretionarily managed investment strategies in 1996 in fact – well ahead of the field.)


Ex-Organic clients will recognise that we have been relatively ‘passive’ with decisions on the inherited assets so far, partly because so much was tied-up in the suspended two Funds in Dublin.  This ‘active non-management’ has been very successful so far as we have ridden the trends that in reality I should not have chosen in the first place.  Well, with Sterling plunging to its lowest levels for thirty-four years, I decided enough was enough and so I have taken money off the table where the exchange rates for Dollars and Euros are so strong.  We shall be reallocating most of that here at home, so banking the exceptional currency profit – let alone the increases in the underlying assets especially from the US which is toppy in our view.  We have not sold everything but a goodly chunk as there are some choice home assets which are at extremely attractive levels whilst this political uncertainty continues to fester and to buy what we think is ‘cheap’ you have to raise some cash from something you think is ‘dear’.

Sadly for some tens of clients who had direct pension assets in Cape Verde Hotel rooms owned and run by The Resort Group Plc (a Gibraltar company) through a complicated ‘SSAS’ arrangement it is not good news in that the latest rental payments are not being made to many.  The whole thing does make us really angry – it was never a good idea for anyone to be sold such an asset and then to ‘squeeze’ it into their pension which was often the only or biggest asset these investors had and often coming from a final salary scheme too which had been transferred with impunity.  I hope that their complaints will bear fruit as they should be put in the position they were in before they were sold these pups.  Indeed, several of the unmarketable bonds and loans in the remaining suspended Organic Funds were directly or indirectly loans to TRG in some form or another so let us hope that there is some light at the end of that tunnel at least but again, in our view these things should never have been bought in the first place or not in the quantities that they were.


I have touched on this before and am often pilloried by the zealots who live solely in that arena!  That is despite my contest that we use anything – whatever we think will help us to fulfil the optimum outcome for our clients.  However, at the moment the best value we see generally is in ‘value’ and that is found in the ‘active’ space, not indices which I fear have some serious and growing problems primarily by wont of their size and popularity.  Oh yes, they can be cheap on fees because there is no management… but if you lose more than a fund that is more expensive… then remember the adage of it being ‘only a fool who knows the price of everything and the value of nothing’.  I have noted previously that all standard passive funds under-perform the index they track (because they have to charge fees).  I have also noted how index-selection is, er, selective – no-one selected the Nikkei Dow index in 1989 despite it being the world’s biggest market then and the fact that it is still down by over 40% some thirty years later or the TMT bubble in 1999 when these stocks counted for 40% of the value of all world stocks and then what happened… or even the FTSE100 which at time of writing is still below the level it saw in 1999 as well – twenty years ago (and yes of course these figures ignore income and fees).  So, if you start deselecting things because it is convenient to do so and you only pick certain indices to track, you are no longer being passive are you and when do you actively change those weightings too?

Well, Dr Michael Burry, famous for ‘The Big Short’ (you may have seen the film too – it is very good and he is played well by Christian Bale) has joined the growing list of investment gurus pointing to the fears for passives, following me I guess…

I remember too the wise man who said ‘when everyone buys passives it is time to buy actives and when everyone is buying actives, it is time to buy passives.’  That may be sheer superstition in one sense but the implosion of Neil Woodford (albeit for ‘other reasons’ perhaps too…) and the serious under-valuation of ‘Value’ investment which appears to stand so low compared to its popular ‘growth’ trendy holdings, might suggest it is time to review things.  We don’t need to do that as we have so few ‘passives’ at the moment and in esoteric market places only for now.  We have no axe to grind at all and are actively managing our strategy and oversight – all the time!


Things continue to unravel/ravel….  It is easy to criticise after the event but to some extent there must also be criticism of others who have so rapidly changed their tunes.  For example, St James’s Place was promoting the link as their most successful manager for twenty years (a ringing endorsement to encourage clients to invest) and yet, rumour has it that when they decided to cancel the investment management engagement of his services for their bespoke funds, a rather short period of notice or so was granted…  if you want to know how much – perhaps you should ask.  I have since noted how foolish a ceremonial ‘dumping’ of stocks would be too when prices are already depressed because of the toxicity of the name but there we are.  The cynic suspects the funds will be closed and new ones rising from the ashes like a phoenix.  I think my point, more than anything, is ‘is that the sort of behaviour you would expect from your investment manager’ – my view is ‘no’.  How you act in the eye of the storm is the characteristic you need to trust – not sheep-like tendencies which remind me of the saying attributed to Barton Biggs of Morgan Stanley (or was it Warren Buffett first…)   – ‘You only know who’s swimming naked when the tide goes out’.  Remember though, even the best have hard times sometimes… but it would be nice for a little impartiality to be shown regarding Neil Woodford and sensible and rational direction to investors as to what they should do (when they can do it too of course).

A couple of write-downs have been needed on Woodford’s unquoted assets, especially in the Investment Trust (which the suspended unitised holdings maintain too).  This was not unexpected but what the poor chap needs now is a special positive to prove the fair-weather merchants wrong… a flotation at a serious premium to the listed values and which could transform everyone’s prospects maybe.  With the style of assets held, it would neither be unusual nor unexpected in fact and on the Investment Trust at 45p when the present ‘reduced’ quoted asset value is still at 75p, there is plenty of scope but even if that doesn’t happen, the value differential has plenty of upside through normal behaviour anyway.  The next hurdle to the Investment Trust is to renew the loan it has and on terms which are not so rigid and unfavourable and to have the cash to meet any further development capital required by one or two of the project investments.

Mr Woodford has also sold his holding in quoted Prothena which had been hoped to be one of his stars.   It was at a considerable loss though as soon as the sale concluded, the shares rocketed by 30% as the uncertainty surrounding these potentially loose shares passed.  The group has been liquidating considerable assets to raise the cash funds to meet redemptions.  Again, to some extent and rather simplistically it would have been better if he had not had to sell these and then the unit holders would have enjoyed the 30% increase for themselves – such impetuousness forced upon him.   That would have been the same for many of the big lines of stocks he had sold.  It is a great shame and travesty really and all so unnecessary but the toxicity has given advisers, other managers (both of whom should know better) and also financial journalists who may well have once supported and promoted the group’s prowess… the fuel to abuse the situation I guess.


What is worse about the PPI scandal has been the claim exercise itself and the parasitic claims management companies who have taken billions of compensation from people entitled to receive it.  I was never a supporter of PPI as an integral part of loans and credit cards, etc but for millions, it provided a form of cover against ill health, death or redundancy and was great protection to clear the debt if something befell the individual.  Yes, it was expensive, lucrative to the selling lender and its agents and ignored any other independent cover which the individuals may have had or provided cover they could never enjoy (eg self-employed and redundancy cover).  However, millions knew what they were signing and paid for it for peace of mind.  Many even claimed on it and yet have still made claims for miss-selling… and the banks have been churning-out the tens of billions that, at the end of the day, we all end-up paying.  Yes, it has boosted the economy by estimates of as much as 2%pa as recipients have bought new cars, holidays or whatever.  I just hope the data on the amounts has fed itself into the State system so that those on means-tested benefits who have had windfalls above the de minimis limits have been taken into account before they spent the lolly.

The Claims Management industry is the real scandal however.  Estimates of as much as £10-15billion has gone into their coffers when the FOS would have done the work for you for free (though some have claimed money that recipients otherwise may not have known existed, granted).  Did their initial paperwork say that – no, of course not – all in the small print.  Still, one of the biggest sharks, EMCAS, from being lauded by the regional press as a business and employment success itself, went bust in April.

And do you really know what the worst scandal has been over the recent decades?  The miss-selling of endowment policies linked to mortgages.  However, very few claims have ever been made as a consequence of that.  The idea is good financial planning – don’t repay your debt when the interest rate is so low but use the money in another way instead for better effect (in theory it is easy to secure a return above the interest rate when rates are really low) – and life insurance covered for you too.  The most endowment policies ever were being sold in 1989 when interest rates were at all-time highs.  I could say why they were so poor and there are myriad reasons they were totally wrong but it won’t change anything.  We stopped considering them at all in 1984 when the bonus on your premia you used to receive was taken away (and there were few alternatives anyway).  Now the best way of providing for your mortgage capital repayment is by using a Pension Fund because effectively you can then secure as much as 82% off your mortgage capital repayments (for the highest rate taxpayers).  Even Basic Rate Taxpayers receive a 25% bonus on the money going into their pension pot.   You use some of the much bigger tax-free lump sum to clear the mortgage if you have not made other provision meantime.  Guess what – in 1989 most mortgages were interest only when interest rates the highest. Now rates are the lowest ever in history – the highest proportion of capital repayment mortgages ever and even ‘foolish’ public sector employees with fantastic and unbeatable pensions are opting out of membership instead (often to repay the capital on their mortgages…)…  I shall also add to that the miss-selling of ‘With Profit Bonds’ where the commission and expenses were astronomical and they were sold as ‘low risk’ till poor investors discovered in inclement times that if they wanted their money there were significant early encashment penalties and ‘market value adjustments’ which basically clobbered values against what the companies would only pay-out on death…

However, the biggest scandal of all, really, is that the financial services industry is pilloried as untrustworthy as a consequence of all these things.  This means that the masses see alternatives to the ‘Building Society’ and ‘Cash ISAs’ and Premium Bonds’ etc as dodgy or high risk and so they don’t do wise things nor seek the advice from which they could benefit so much.  We try our bit but so often it is hard work and even then, as advisers we have to consider our own vulnerability in the advice we give (if it works as expected everyone is happy but if, woe betide, something went wrong and totally unexpectedly, there is an expectancy that the adviser will pay compensation.  That also means that too many advisers don’t give the ‘right’ advice at all – they play it ‘safe’ to avoid that vulnerability and do their clients the biggest disservice possible).


So Marks and Spencer’s is being relegated from the FTSE100 list to the FTSE250.  This happens effectively because the value of the company (shares in issue multiplied by the current share price) means it is no longer amongst the biggest 100.  That’s sad but will it come back?  It does often happen – Hikma Pharmaceuticals (one we own) dropped-out and has regained good value and is going back in again (and time we took profits thank you very much!).


Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.

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My best wishes