Wealth Management

Wealth Management - Importance of Diversified Portfolio and Tax Wrappers.

In the 1950s academics such as Harry Markowitz and Bill Sharpe proved that using a diversified portfolio for different types of investments would greatly reduce risk, often with little or no reduction in investment performance. Whilst some of their other conclusions that using mathematical formula to predict returns and the absolute relationship between risk and return are still debated within investment and academic circles, the use of a diversified portfolio to reduce risk and maximise returns is almost universally accepted, if not universally practiced.

As we describe on other pages we try to take the best from the Academic and Investment world and use them in practical solution to assist in managing your money.

Where we take on a full Wealth Management role not only do we consider the spread of different asset classes and indeed what investments but also the question of the tax wrappers that may be used and ongoing management.

Examples of Investment wrappers

Pension funds are still highly tax efficient but cannot hold all types of investment.

For holding small companies shares (i.e. those that are not quoted on main exchanges), if they remain available venture capital trusts or enterprise investment schemes are highly tax efficient. Even if these vehicles are not continued by the Chancellor, holding unquoted shares directly does give inheritance tax litigation and capital gains tax reductions over holding such funds by collective investment.

For money that needs to be rolled up in the long term and possibly gifted to future generations, offshore wrappers such as investment bonds can be useful although these need to be carefully chosen to obtain the best investment choice at reasonable charges.

We consider all the different wrappers judging their taxation, cost and administration effects to find the most appropriate.

Ongoing Management

If a portfolio is not rebalanced periodically, its risk profile would change often with detrimental results. For example, the portfolio is constructed for a client whose chosen risk profile indicates that 50% should be invested in shares. After a three years of strong stock market performance the proportion of the portfolio in shares is now over 60% - and then if the stock market were to fall by over 20% the result is the client’s portfolio has been exposed too much greater risk and has fallen more than it should have done.

So ideally on a regular basis, for instance, annually, consideration should be given to rebalancing a portfolio taking into account any changes in the investment and then the client’s financial position requirements and risk profile. This could be a very difficult job even to value all of the components of a portfolio, let alone reassessing and re-balancing it for a wealthy investor with a mixture of direct investments in property, shares, and cash as well as pensions and collectives.

This is where our wealth management service can be an ideal option for the sophisticated investor.

There is also technology that is appearing to help investors and their advisors keep track of large portfolios and the distribution of the underlying assets. Wrap accounts are computer based programs that hold data on the underlying assets including those within collective investments. They usually offer the ability to view a portfolio online and compare performance to a range of benchmarks. They facilitate switching investments and can provide consolidated picture across different tax wrappers e.g. ISAs, PEP, pensions, bonds etc. Esoteric investments and direct property still require manual inputs but for most investments the processing management is made much easier.

These accounts cost in the region of 0.2%-0.5% of portfolio value but costs are offset by reduced charges on many funds. Our own costs will depend on the level of service needed and the degree of manual inputs needed – please contact us for details.