Plan for the worst!

Hope for the best but plan for the worst! Most folk like just enough uncertainty to keep life interesting but not so much as to make them over-anxious. Unfortunately, the current environment puts many people in the second camp.

We are currently facing a ‘flu pandemic and whilst most of us logically know that the chances of it affecting us very badly are relatively slim, we still hate the suspense of waiting our turn at the snuffles. This feeling is exacerbated by the Press, especially when they splash all over the newspapers that yet another apparently healthy individual has (sadly) died from swine ‘flu.

In the wider world the economic and stockmarket uncertainty is also corrosive. Unemployment is rising fast and has a long way to go yet, public sector, corporate and private debt levels are testing and house repossessions and bankruptcies are likely to continue heading northwards. A prime example is the news emanating from Lloyds TSB, which is releasing all its bad employment news incrementally (hoping we won’t notice the big picture). Its recent announcement, which takes target group redundancies above the 8,000 mark, is unlikely to be its last.

And again, the Daily Mail recently reported that senior Tories are now privately admitting that the aspiration to raise the inheritance tax threshold to £1 million and scrap stamp duty for first-time buyers on homes worth up to £250,000 may be delayed because of the recession. One could say that Ken Clarke had already let that particular cat out of the bag in March but it was vehemently denied by the Cameron camp at the time. Personally, I am old enough to know that very few new governments fulfil their manifesto promises made whilst in opposition – and quite understandably so, since they construct their manifestos on grand assumptions which are often far from the subsequently discovered truth (once they actually see the books)!

This leaves investors very poorly served, especially those more elderly and wealthy individuals who should be tackling their Inheritance Tax (IHT) situation sooner rather than later. As one of my oldest and longest-standing friends likes to say: “Hope for the best but plan for the worst.” This is what I would recommend to all those taxpayers who are worrying about whether they should take action to avoid or reduce IHT.

Yes, you should take action. Take all the various steps you need to reduce your potential tax, including getting the 7 year clock ticking now and/or lending financial assets to specialist trusts at currently depressed values. If it subsequently transpires that the planning is not needed then any carefully considered planning can be effectively unwound. Using the right vehicles will incur little extra costs beyond the standard costs associated with establishing any other kind of investment strategy. This warning may sound alarmist but the uncertainty over IHT will be with us for at least another year – until the next General Election – and even then the news is likely to be negative for many years to come. And especially so at a time when there will have to be massive cuts in public services and across the board tax increases to re-balance the nation’s books.

The bigger uncertainty at the moment for most people is the state of the UK economy. Recent stockmarket rises would seem to imply that the recession is all but a thing of the past. And yet many serious pundits are warning of much worse to come. Logic does appear to suggest that the combination of sky-high debt levels across the public, corporate and personal sectors and the delayed effects of the economic slump have not fully worked through the system. With banks still re-building their balance sheets (and likely to continue to do so for some time), lending is not going to improve any time soon. Whilst many individuals and companies have been able to manage their deficits over the last year one can imagine that a continuation of the current credit and earnings drought will eventually take its toll.

My own view is that this cycle will, just as with every previous cycle, pass and we will see recovery. The uncertainty for everyone is when that is likely to happen. With the banks apparently terrified to lend to property buyers, entrepreneurs or even established companies; with southern and eastern Europe all on the verge of bankruptcy; with UK unemployment likely to sail through the 3 million mark leading to more distressed debt and property repossessions; with most stockmarket companies likely to slash dividend rates over the coming months and with the threat of a return of inflation just around the corner, the uncertainty will continue until at least the autumn and probably a great deal longer.

It seems appropriate to end by reminding you again of my friend’s apt catchphrase: “Hope for the best but plan for the worst!” And to reiterate what I’ve already said elsewhere, that this is what I would recommend to all those taxpayers who are worrying about whether they should take action to avoid or reduce IHT. In fact, I would only add one rider to all of the above: “- and do it now!”

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 28th August, 2009 | Tags: Financial Planning |
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Short-termism or Short-sightedness?

On a recent trip to Devon, I stayed in a small and rather delightful hotel run by its proprietor, an ex-City currency trader. One increasingly comes across ex-City or ex-financial services folk who have left the industry for one reason or another.

Over the last year this trend has been accelerated by firms ‘letting people go’ in droves. In many cases redundancies have been across the board and highly-skilled and experienced people have been forced out of longstanding and necessary jobs. This is particularly true in the areas of sales and client servicing which, in many companies, have been left decimated.

Unlike many other sectors of industry and commerce one of the main assets within financial services companies is the skilled biped. It is these creatures which create and retain the other main asset, funds under management.

I find this distasteful British redundancy cult more than strange because as we come out of recession it is precisely those front line staff which were recently ‘let go’ that will be most important to financial services companies in the upturn.

I would go further and suggest that even before any recovery – in other words whilst still in this major and damaging equity/investment recession – investors and their advisers need as much help and support, if not more, than at any other time. And yet at the slightest whiff of a downturn companies get the knives out and slash away at sales and client support teams. This was happening as early as last Spring before the recession had really started – no doubt by companies wanting to correctly second guess the market and be seen by shareholders and the stockmarket to be doing the right thing.

One has to ask why companies do this because it seems that in most cases it is superficial and short term whilst being extremely damaging over the longer term. Being at the helm of a company which is 12 years old I would be very loathe to lose a brilliant team that has taken more than a decade to put together and assimilate into our particular culture.

I remember coming out of the 2000-2003 bear market with a full complement within sales and client servicing (the senior member of which we recruited in the middle of the downturn). This allowed us to steal a march on most of our direct competition which emerged blinking into the sunlight in the Spring of 2003 quite unprepared and without adequate resources to capitalise on the ensuing recovery.

I am pleased to say that our shareholders remain committed to our long term growth and sustainability – playing the long game – and are prepared to sit out the short term vagaries that have plagued stockmarkets over the last decade.

This time I have been and remain of the opinion that the recession will be V-shaped rather than has often been the case, U-shaped. This is even more incentive to maintain optimal service levels and retain the talented staffing which is required to make the most of the prospective market recovery.

This attempt by slash and burn management to appease both existing shareholders and the stockmarket by trying to maintain profitability when revenues fall is generally at best ill-conceived and at worst downright dangerous. Unfortunately, almost regardless of these irrational and short term measures, and any impact they might have on their P&L, their share price will generally fall with the sector anyway!
Surely the better option is to plan for the long term benefit of the company, the shareholders and the share price?

Volatility as a result of a fickle market should not distract management from their long term goals and planning. We are constantly warning investors to think in the long term and so should we.

Most highly successful and longstanding companies have not grown by adopting such short term ’stop-go’ strategies. Of course, we all try to cut unnecessary costs during a recession but we should not cause ourselves lasting damage by permanently removing vital assets – our best people.

One of the most challenging aspects of contemporary life is the constantly increasing rapidity with which everything happens. This is largely the result of advances in speed and reach of the media as well as the continuing IT revolution. The irony is that with everything occurring at increasingly rapid speed there is little point in ’short-termism’ because the landscape will have changed by the time the ’short term’ measure has taken effect.

Unfortunately, we seem to be caught up in this senseless pursuit of instant but superficial gains. One of the most recent examples is the Government’s movements on higher rate Income Tax and the removal of the personal allowance for high earners.

This measure is destined to raise nothing for the country’s broken coffers in the short term, but will cause immeasurable damage to the economy in the longer term by removing the desirability of the UK as a place to do and locate business.

Looking around at the behaviour of most of the major financial companies over the last year I am at a loss to understand why they have put so many people through so much redundancy heartbreak when in very short shrift they will be recruiting once more as the markets take off.
In my view short-termism is generally better described as short-sightedness.

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 26th June, 2009 | Tags: Economy |
Comments: One Comment