Podcast No.58 – Why you need to check your will / How to work out your investing risk profile / Robo Advice problems

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Transcript: MoneytotheMasses.com podcast No.58

Here are your hosts, Damien Fahy and Andy Leeks.

Andy: Hello, and welcome to Episode 58 of the Money To The Masses podcast with your resident expert, as always, Damien Fahy, and me, Andy Leeks. Damien, we're here, we're in the same room. Welcome back.

Damien: We are in the same room. It's good to be in the same room. It was funny, on the way to this podcast I had a trip down memory lane. Because when we first started the podcast, I used to drive down to here, Andy's house, and we used to do them around his dining room table.

Andy: Yeah.

Damien: Now we're in the same room, have you seen my branded Mac Book?

Andy: I did. I think it's beautiful. We mentioned it last week in the podcast. And, I tell you what, I'm gonna have to get one myself. Not one exactly the same.

Damien: Well, the reason I bring it up is because I'm gonna be in and out of London a lot. I'm always up and down there working around central London and the City. So I really want to make a thing of it that if people see a guy with a MoneyToTh Masses branded laptop who's working, it's me. Come and say hello if you're a podcast listener.

Andy: To give listeners a clue, it's like a deep blue with a red and white MoneyToTheMasses logo or placard.

Damien: It's a placard. Look at the site, you'll see the logo. It's that but on the my Macbook.

Andy: So, what's on this week's show?

Damien: This week I'm gonna talk about wills and an important change that people need to look out for, to do with inheritance tax. We're not going to do so much on investing this week, but what I am going to talk about is how to work out your risk profile? We always hear people say, or I even say to people, "It depends on your risk profile, or your tolerance to risk" when considering investments. And how do you work that out? So I'm gonna give people a steer on that. Then we're gonna probably do a little bit on something called, "Robo Advice."

Andy: Robo Advice, wow. That sounds very manly.

Damien: Yeah, futuristic even, but before we go onto that, I have to say I was gonna ask you what you've been up to this week, Andy? I want to bring this up because I know one of the things you've been up to. Andy shared a brilliant video. Where were you? In a children's playground. This isn't a bad thing, this is a...

Andy: Yeah, kind of. It was a place called Drusillas, which is like a mini theme park for children in Kent. Well, East Sussex, actually.

Damien: You can probably pick up that I'm grinning while I'm telling you this, because we're going share it on the MoneyToTheMasses Facebook page. Go and look at the Facebook page for MoneyToTheMasses, and there is ow a brilliant example of a dad with his young daughter and a you've been framed moment where Andy attempts to...

Andy: I don't know what I was attempting. If you look at the video, if you can try and tell me what I was trying to do, then extra points for you.

Damien: I won't spoil it for people, but it's Andy's cry of shock as he goes head over heels, which is so funny...

Andy: And plummets to the Earth with a big splat as I hit the ground.

Damien: Yeah. So go and watch, and I guarantee you that you will laugh. Because I probably watched the video about 100 times. It's the fact your daughter even screams and warns you of the impending danger and stupidity of your actions. Go and look at it, it's the highlight of my week. And as a podcast listener, you obviously know me and Andy very well by now, but you've got to see Andy. You will chuckle.

Andy: If it hasn't gone viral already, which I suspect it almost has, looking at the number of views. But it certainly will now. So how will they get to see that?

Damien: Go to the MoneyToTheMasses Facebook page.

Andy: So good, apart from embarrassing me, should we get on with the show and talk money?

Why you need to check your will now!

Damien: Let's do it, Andy. The first piece we're going to do this week is about inheritance tax and wills. Now, if you've listened to the previous episode of this podcast...do you remember, Andy, I don't know how many episodes ago, we talked about  new inheritance tax rules that were coming in related to property. It was headline grabbing news. You will soon be able to pass on a million pounds of property without paying inheritance tax. Do you remember that?

Andy: Yeah, I do.

Damien: At the moment you can pass on £325,000 of assets without paying any inheritance tax. Inheritance tax is charged at 40% on anything that's over that threshold. So, of course, if you are a couple, you can actually have double the allowance. You have an allowance each. Now they've introduced a new allowance. So each person will have an additional £175,000, which they can apply to property that's passed on to children.

Andy: Okay.

Damien: If you wrap all that up together, just to make it nice and neat, it can mean if you are a married couple, theoretically, you can pass on assets including a home valued at up to a £1million pounds without paying any inheritance tax. Now, I say you can, you can't do it now. That new extra allowance related to property is being staggered in over the coming years by small amounts. Increments of £25,000 a year. So by the time you get to 2020, which might seem a long way off now, you will have that full potential £100,000 to play with. Now, the reason I want to bring it up today, because, like all these great ideas, there comes with it a detail where somebody hasn't quite thought through the implications for people who already have wills. So what I want to do is just highlight that there are people who might need to re-do their wills or look at them at some point in the future if they want to benefit from the new IHT rules. Now, I don't know if you have ever heard of discretionary will trusts.

Andy: Possibly, but you're gonna have to remind me.

Damien: I've got to remind people anyway, because they're not used as frequently as they once were. At the moment, let's just say my wife and I, we have a £325,000 inheritance tax allowance each. If I die, my wife automatically inherits my unused allowance. So let's just keep it simple. That means that that £325,000 goes up to £650,000. That make sense?

Andy: Yes.

Damien: Well, up until a few years ago, that wasn't the case. You didn't inherit your partner's or your spouse's allowance when they died.

Andy: So it would just be removed and lost?

Damien: It would have been gone, lost. And so what happened, the rules changed. Before that what people used to do to ensure that they didn't lose their spouse's inheritance tax allowance was to write their wills using something called a discretionary trust. So the whole thing would be called a discretionary will trust. In very simple terms, what it did is if, in my example, if my wife and I had had assets of more than 325,000, we would have written part of our will so my assets, if I died first, would go into this trust. And then the trustees of that would have a discretion of over who it got paid to. The idea would be it could actually bypass my wife if we wanted it to. So if you had children, it was a mechanism where you could potentially pass on things to your children. So I could pass something onto my daughter and use my allowance, and then my wife would still have certain rights over the money in the trust with it. But then she could pass on her own assets when she died, and use her allowance. Does that make sense?

Andy: Got it, yeah.

Damien: So, when the rules changed to, they decided, "Let's revamp it, make it easier for people so they can pass on their IHT allowance when they die." because more and more people started to have property and assets that were starting to attract inheritance tax. If we fast forward to today, with this new inheritance tax allowance on property it states that the property has to pass on to descendant,s like your children, directly. What that means is that if somebody who had previously paid to create discretionary will trusts dies, their will will pass the property on to their children under the terms of the trust. However, there would a break in the link, it won't have gone directly to the children, instead passing via the discretionary trust. That would actually mean that they wouldn't receive the new IHT allowance on property. This will result in more inheritance tax being due on the estate.

Andy: Okay.

Damien: So, what this short segment is about is saying to people, if you've used these discretionary will trusts then in the next year or so, when the new IHT property allowance comes in, you need to review your wills. The new IHT rule doesn't actually come in until April 2017. This is just a good example of how you should always review your will if you get divorced or a big life event happens. In this case legislation has changed, it's always a good idea to review your will every so often, have a look at it and see if it's still relevant.

Andy: What's brilliant about this, is will writers are earning double bubble. Because they're earning money on the first clever bit of will writing they've had to do to get around it, and now they're having to undo all that good work that they did in order to get people back on track.

Damien: Yes exactly. But you know what, this just proves how we do this podcast on the fly. You just reminded me, if you're listening to this podcast and you're of a certain age, you can actually get a will written for free and updated. There's a scheme going on which is something called Will Aid. In November every year, some solicitors offer their services for free or for a charitable donation. If you Google Will Aid you will see it. And what happens is, they effectively do wills for free, or they'll update wills, for a donation to charities. What they end up doing is they suggest a donation level of about £100 pound for a pair of wills. There's a whole host of charities that Will Aid supports. Things like, from the top of my head, the NSPCC, that sort of stuff. Really good charities. So have a look, Google 'Will Aid' if you're thinking about it and if you're worried about how much it will cost. You can actually get wills done at a pretty decent rate.

Andy: Good. So what have we got coming up next?

The best attitude to investment risk tool

Damien: Attitude to risk.

Andy: Okay.

Damien: Every time I talk about investing or you read somewhere online about investing, there's always the caveat, "It depends on your attitude to risk," or, "Find out what your attitude to risk is." Now, what that actually means is if you're the kind of person who can swallow having your investments drop 5%, 10%, 20%, or if you're adventurous and you really want to go gung-ho, and lots of people out there go, "Oh, yeah. I really want to go for it. I'm keen, I'm a high risk person." But then when you actually dig a bit deeper, you find out no they're not really, They'll suddenly say "No, I'm not happy about losing 10% or 20% of my money at any one go." Then you find out the real answer. The problem is, is that when you go to a lot of financial advisers, what they tend to do is just ask you, "What's your attitude to risk?" Just as I highlighted there are lots of people who don't really have any idea of what their attitude to risk is or what that even means. Then, sometimes, even the financial advisers will just say, "Well, which of these statements best describe you?" And so, it's not particularly scientific.

Andy: It's very broad, isn't it?

Damien: Yeah, it's very broad and given that it's such a crucial part of picking the right investment for you, if you decide, "I'm a high risk person," or medium, or low, or somewhere in between then that dictates how much you invest in each risk area. So if you're a low risk person you're pretty much not going to be investing in high risk shares like emerging markets and stuff like that. So that's why it's always important to try and accurately work out what your attitude to risk is. Now, what I want to do today is highlight a great website that can actually do this for you.

Andy: And it can more scientifically work out what your attitude to risk is.

Damien: Yeah.

Andy: Okay.

Damien: Now, there's a company called FinaMetrica. Don't worry about the name, because they are the people who make this product. They are an Australian company, and what they do is ask you to complete a quite intense questionnaire. It has about 25 questions, which should take you about 10 minutes to answer. Then it chucks out some detailed analysis of the kind of person and investor you are. It is one of the tools that financial advisers use but it hasn't been widely available to consumers directly. Well, now they have actually launched a website that allows consumers to use the risk profiling questionnaire themselves, for a small. The website is called, myrisktolerance.com and if you go on there, it will tell you exactly how it works. Like I say, it's about 25 questions and it's an industry-wide questionnaire that's used, that's respected. It's actually very good. If it's good enough for people who are earning a million pound a year to use. then it's good enough for the rest of us when we're running our own finances.

Andy: So it's a service that we end consumers can pay a fee for. Is it like a psychometric type test? Is it a lot of money? How does it work?

Damien: Yeah, exactly that, it's a psychometric test. Previously it was only offered to financial advisers but because of the whole DIY investing movement, people are realising there's a massive direct to consumer market. So some companies who only offered services through the industry are now offering services direct to the consumer. It costs £30 pounds to take the test and obtain the report. Now, given it's such a central point of your finances, you could argue whether that's expensive or not. I don't think it's that bad. But actually, at the moment they're running offers on it. So you can actually pay £3 to do it. So for £3 I think that's a good value. So if you go on there now when you listen to this podcast, the offer is running until the end of October 2015. I know that dates the podcast and we try not to do that, but that means that for the next month and a half, you can get it for £3 on myrisktolerance.com. And you can get the best analysis that I've seen about your risk profile and you're not going to find anyone else who does it better than these guys. So try it.

Andy: Is there any other caveats to that £3 special offer, or is that just a really good one? Do you have to sign up for other stuff or?

Damien: When you read it, it looks like it's just a one-off £3 because it's not the sort of service you would use more than once. But always read the small print and make sure they're not signing you up to anything. But at, £3 it is a bargain.

Andy: And if you listen to this after October, and you think, "Ah, I've missed it." Well, we've still given you some great advice there, and £30 is still good value. To be fair, if you've got an IFA you've probably paid that £30. It's been hidden in their fees.

Damien: Exactly. I'm giving you a kind of lifting the lid on the industry, telling you this is how you could start doing it yourself, which is exactly what this podcast is about.

Robo-Advice - the future and the problems

Andy: Okay. Robo Advice, what is Robo Advice? Are you gonna tell me?

Damien: Robo Advice is all about creating an online automated service that provides financial advice without you generally having to speak to anybody. So a commoditised product rather than you pay £250 an hour or more for an adviser's advice. With Robo Advice you could pay much less and get a complete financial plan and recommendations.

Andy: Remind me of those things when you've got an illness or you're worried about your child or something like that. You can go on a website and you can click yes, no, yes, no, have you got this, have you got this, and it will say at the end whether your seriously ill and whether you need to consult a doctor. It's kind of a similar sort of program.

Damien: That is a good analogy, because BBC Money Box, rang me on Wednesday this week and were asking me about what I think about Robo Advice. So I talked through where the industry is going and why it is moving in this direction. Your example is one that I gave to them. People who always talk about Robo Advice say 'is it coming, is it good?' Yes it's coming, as there's a demand there from people. If you think about it, people check the internet for everything. It's why MoneyToTheMasses exists. Five and a half years ago, maybe six years ago now, when I started the whole journey, I put the information out there for FREE. It was because there was nothing that was out there that was written by somebody who knows what they're talking about or had any expertise in finance and investing. Everything else out there was a bit like the blind leading the blind with all the misinformation.

Andy: It's so frustrating, when you're Googling things on a computer and you come across Yahoo! answers or something like that, and it's just rubbish. You need an expert, somebody who knows what they're talking about, who's written something that's relevant, something that's fairly recent, and something that you can actually act upon. That explains what you're all about.

Damien: Yeah, exactly. So, Robo Advice was always going to come around. But could Robo Advice completely replace a financial adviser? Are computers taking over the whole of the financial industry? I made the point to Radio 4 that that's not likely to happen. Because what a lot of people will use Robo Advice for is to get a second opinion.

Andy: Back their decision, yeah.

Damien: So if you imagine, if you go to see an adviser, he's going to charge you a few thousand pounds to give you advice. You're thinking, "Well, do I really want to do this?" How would you know? You have to go and find someone else to give you advice as well. Whereas if you could perhaps pay £100 or whatever to get a generic financial plan or advice from a machine, you might do it. So this idea that Robo Advice is going to destroy the financial services industry is rubbish. But what it will do is to make it better. At the moment, by no means does everybody need to go and speak to a financial adviser, because there is a lot that you can do yourself. I say to people that if you really are unsure, then always seek financial advice and ask to be charged a fee. Don't get caught up in being charged a percentage of what you invest. If you invest £100,000 or £10,000, the amount of work is not going to be much different between the two. Yet if you're charged a percentage fee, you're going to be charged 10 times the amount for the larger sum.

Andy: One thing you shouldn't do is speak to your parents and trust whatever they say. Working in the protection industry, you get people on the phone saying, "Oh, I was speaking to my dad." But don't forget, your dad, or mum or dad, were doing this 30 years ago and times have moved on. Speak to an expert, not your parents. Although they are experts in other areas, speak to an expert.

 

Damien: Going off topic slightly, this was an idea I had when people asked me, "How do you educate the nation about money? How do you do it?" They all come up with this personal finance stuff, in terms of going in to schools and giving financial education. I think that's a nice idea, but it won't work in my view. I think what you actually need is education at the point of decision. People don't want to talk about mortgages when they're not picking one or buying one. At the point that they're going to make a decision is when you need to give that advice, that's where Robo Advice could potentially come in. The other thing is, leading on to your point, or leading on from your point, is if we educated parents rather than children it would have a bigger impact. Everyone's natural instinct is to say, "Dad, what do you think," or, "Mum, what do you think?" The most trusted people and disseminators of information, other than the internet, are people's parents. So if they became more informed we would no longer cast old people onto the scrap heap but tap into their expertise.

Now, here's a tip for people out there. An idea of mine would be go and educate parents and grandparents. If you educate them, they will do the work for you, pass on the information to their families. It's something I've toyed with, and I've gone completely off topic but I do think that it's something that the industry doesn't have quite enough joined up thinking about. I really do think we could do some good stuff if we educated older people. Plus it would help them avoid fraudster and scammers.

Andy: That's a really interesting concept as well. Because often, and I'm not trying to pigeon hole people here or say everyone's the same, but often, older generations have a bit more time on their hands. They're looking for something to get their teeth into and replace whatever they're doing. I think it's a great idea. It may even work.

Damien: Actually, do you know what? This shows how off the cuff this all is. At the moment I write everything on MoneyToTheMasses.com, okay. We have other people that might pitch in. One of the key things, I don't let just anybody write on the website, because the they have to be be people who are experts. We now plan to reach out to people to write for MoneyToTheMasses.com We want who are retired, people from financial backgrounds, maybe an IFA who's retired, or someone who works in the industry who's a mum or a dad on maternity leave or paternity leave. People who have a knowledge that can really make a difference and want to contribute and be involved in something like MoneyToTheMasses...

Andy: That have got the time to do it.

Damien: They've got the time to do it.

Andy: Inclination to want to do it.

Damien: Yes. And get in touch, because this is something that I'm going to try and work on that we're going to drive this forward. Because I've got a real thing about, there is a whole wealth of experience and talent that is being disregarded or doesn't have an outlet.

Anyway, back to Robo Advice. So where is Robo Advice going? I think what's going to happen, is that we are going to get to a world where we pay maybe a couple hundred pounds for advice if you have, let's say, less than £100,000 to invest. If you have a bit more you might have a telephone contact you can ring up. So that's where we're going. I think it's a good thing that it's happening. It's definitely coming. If you look to America and the US, there are companies out there, one of them's called LearnVest. They're already doing this, America is way ahead of the UK because of looser compliance and regulation, and just because of the innovation that's going on over there. If you look over in America, you can see where our industry is going to go in the future.

There's another company called Vanguard, I don't know if you've ever heard. They're a massive entity, and they make all the really cheap tracker funds, the things that track the FTSE 100 and stuff like that. They are now getting into giving Robo Advice. So you go on a computer enter your details and it spits out a financial plan for you. So it is coming, I think it will be good. At the moment, some people are listening to this and thinking, "Well, I want a bit of Robo Advice." well, you could put 80-20 Investor in that bracket. 80-20 Investor is not going to just spit out an answer. It empowers people to learn how to invest and educates them, and gives them the ability to make money. Now, there are people out there, for example, Hargreaves Lansdown, FinaMetrica who I've mentioned, who are now starting to launch products that are going direct to consumers to try and give automated advice. The one thing I worry about, is what happens if you have a computer program that sits there and says, "All these people are going to answer these questions end up in this box and this is what they get." Then who checks if what that is doing is correct, or where it goes wrong? That is my question.

Andy: What if someone programs a bit of code that's incorrect?

Damien: Yeah, and it's a valid point, because if you look at the gaming industry, the gaming industry has the equivalent issue with fruit machines. Fruit machines are actually checked by the gaming commission, to make sure that when you go to a fruit machine it does what it promises to do, i.e. pays out at the right frequency...

Andy: It pays out that 72% that you see on the sticker in the corner of the machine. Not that I've got a mis-spent youth.

Damien: But it's exactly that. Also, what happens if one person complains on a Robo Advice product? Does that mean that everybody who went through that channel now has a complaint? Are we gonna have a PPI scandal all over again, that kind of scale? How would the Ombudsman cope with that? So all interesting questions I'm just chucking out there, because I know there are people in the industry who listen to our podcast. But that's the future of advice, Andy. Robo advice, we'll talk about it more as we go forward, but keep an eye.

Andy: Good. Anything else this week?

Damien: Yeah, the final one.

Andy: Okay.

Damien: Competition winner.

Andy: Oh.

Damien: The competition winner. We said that there's been a competition we've run. It's a 80-20 Investor, which is going from strength to strength. We got people to write on Twitter and Facebook to say they want to be an 80-20 Investor. So we can finally announce the winner, who I will get in touch with. I'm going to let them hear it on the podcast first and then I will get in touch and give them their free annual subscription, which is worth £204.

Andy: So the winner is, Damien?

Damien: It's John Catto, it's C-A-T-T-O. I'm going to allow him to hear it on the podcast first and then I will get in contact with him and tell him, give him his login details and everything. So well done, John and thanks to everybody else who entered.

Andy: Good stuff, okay. I love giving away prizes. That's good. We'll do it again soon.

Damien: We will try and do some more prizes and get some more things because people like it. Also, keep sharing the podcast and everything, and do leave a review. Because we've got quite a few reviews, haven't we?

Andy: We have.

Damien: But, we know how many listeners, roughly, and we know you all haven't given a review by a long, long way. So if not, it will only take two seconds. Just leave a review on the podcast, even if it's just a few words, and put five stars on there and me and Andy will be happy.

Andy: Yeah, also speak to your friends and family, get them to download it too, because it really does help spread the word. Also, we haven't done anything about this and I'm just doing it on the cuff as we do, we need to do a live episode at some point, and I still think we should put that in for our 100th episode.

Damien: We should. Perhaps we should do, I'd love to get some people who are listening, if you wouldn't mind being involved in a live episode, then contact the podcast. You know how to get hold of us, email me at podcast@moneytothemasses.com or tweet me at @money2themasses.

Andy: Another reminder, if you want to get involved with helping to write content for the site, Damien's reaching out to all of those that have got a wealth of knowledge that would like to get involved and who have got the time to do so. So again, contact Damien via the same email address.

Damien: Well, that's it, Andy. We're done. Done and dusted.

Andy: Good. Enjoyed it. Loved being in your company again this week, Damien. And let's not leave this so long.

Damien: Okay.

Andy: See you later.

Damien: Bye.

Don't forget to claim your free copy of Damien's best selling book, the 30 day money plan. Sort your finances in just 5 minutes a day. Worth 4.99. Just go to moneytothemasses.com/podcast to find out how.