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Kat Kuczynska discusses top tips when using an IFA with Lynn Hart

Lynn:
Hello and welcome to the Female Entrepreneur Show with me, Lynn Hart, on KWIB radio. Today we’re joined by Kat Kuczynska founder and owner of InvestedMe and we’ll be talking about financial advisers. Hello Kat!

Kat:
Hello and thank you for having me!

Lynn:
Now when Kat was last on, we discussed taking control of your finances and how our listeners could manage their own investments. We know that some of our listeners would prefer to use a professional financial adviser so, today, we’re discussing all the things you should consider when engaging an IFA.

Kat, can we start by clearing up what an Independent Financial Adviser (IFA) is.

Kat:
So, we’ve got really two different types of financial advisers: there’s the independent financial advisers. What that means is that this type of adviser has got access to products across the whole market. Even if they are employed by a particular company or work with a particular financial company, they have access to, and can, recommend products outside of that company. Some advisers who are employed by a particular company don’t have ‘independent’ in front of ‘financial adviser’. These guys have limited options for products that they can recommend to people. Certainly if you are working with financial advisers, having someone who has access to all products out there is beneficial, simply because you’ve got more products to compare and hence you will have a better chance that the product you select would have better rates – not necessarily – but it just means you have better access to more choices.

Lynn:
Okay. So are IFAs regulated in any way and should I be looking for membership of any bodies or associations?

Kat:
Yes, so the Financial Conduct Authority regulates anything to do with banking and finances. Within financial planning, the planners and advisers have to have the Level 4 qualification – the diploma in financial planning or the advanced diploma in financial planning. Most of the time when you do work with the financial planning advisers, their accreditation and qualification will usually be proudly announced somewhere within their business – on their business card for example – so it’s not something that you need to work hard to check. You just need to be sure that they have Level 4 or above. I guess as well that it depends on the complexity of the type of advice that you want because lower levels will probably be sufficient for something very simple, like setting up a simple pension or simple investment fund but if you are looking at more complicated products such as annuities, that’s something that you definitely would need someone more experienced to help you navigate through the more complex products out there. Certainly there are some simple products out there but certainly there are many products which are very complicated. Whether you need it personally in your own wealth management is a very, very personal thing but not something that can be advised on. Certainly if you have less than £1million of assets under management, a reasonably simple set up will probably be enough. If you have more than £1million, it’s probably at that point that you really need to start looking at tax efficiencies and all that, just to make sure that you are not paying more than you need to be paying.

Lynn:
Thank you. So let’s say an IFA is right for me, how do I pay for their services?

Kat:
Historically there were two ways financial advisers were paid. After a certain point, they could have taken the management fee of the assets they were managing and advising you on every single year. That changed in 2012 if I remember rightly. Now, the financial advisers can only be paid an advisory fee. You pay them a fee for their advice and then they will then select a product which is suited to your requirement or situation. I would like to use the word “suited” carefully because what is suited to one person, might not be for another. So, the way that the financial products are sometimes matched is in quite a simple way. I believe there is more that could be done as a whole by the industry to actually match people to products that will perhaps be a little more suited to them than our standard approach.

Lynn:
How do I know if an IFA will not take unnecessary risks with my hard-earned money?

Kat:
I guess this is where things start to get a bit muddy. We need to define ‘unnecessary risk’. We have all got a completely different approach to what is risky and also the way we assess risk in financial product is not necessarily as risk-proof as we would like.

There is a rating system of the financial product, like warning stars, for example, where you are awarded stars depending on how safe the investment is believed to be. However certain companies that went bust in 2008, like Lehman Brothers, were classed as a very, very safe investment, yet they were not really. So, every single investment strategy that you will do is risky – by definition because all investment strategies depend on the economy, the status of the company and how well the economy is doing, the state of the crops and things like that if you are investing in commodities. These are not the type of things that you can estimate very well. Also what I think needs to be appreciated is that the financial advisers are not actually managing your money. What they are doing is that they are allocating your assets towards funds and those funds are then being managed by other managers. So they are not directly responsible for your assets as such and they just choose the products that your assets are then invested in.

Each of these funds have got some underlying fees and many of those fees are hidden and it’s difficult to add up what those fees are. In terms of the risk – yes, you can select less risky strategies. By definition less risky strategies will mean less return than perhaps more adventurous strategies out there, but they are not bulletproof. There isn’t a bulletproof very, very safe strategy – certainly not over a short period of time. So I think that when we are looking at risk in any type of investing, you need to be looking at your assets over a long period of time. We are talking ten years really. If you are getting closer to your retirement age, or to the point where you are thinking of withdrawing your money, then certainly you need to start thinking of protecting your assets. Risk – you can’t invest without it and there is way more of it than our rating star system is assuming. The safest thing for people to do is to know exactly where their money is being invested which then places a question mark over mutual funds which is where most of our assets are invested. In my opinion, you need to know what assets your money is invested in and you can actually make a decision as to whether you are happy with the level of risk that those assets are invested in.

The only way you can take control of it is by knowing exactly where it is being invested. It’s not easy or straightforward when your financial adviser might split your investment over 10 different financial products and they have each got a different percentage of where they are being invested. It becomes very difficult to track.

Lynn:
So how do you track it then?

Kat:
You do it yourself!

Lynn:
And this is where you come in?

Kat:
This is something I’m a big fan of. I use independent financial advisers very, very carefully. I’m a big fan of them – but not for managing my money. I use financial advisers as my advisers, not as my managers.

There is a difference in definition. If, for example, you want to access part of your pension to invest in property, you can set up an account which is called SAS. Yes, you can do it yourself and it’s going to take you about three to four weeks faffing around, trying to fill in the very complicated paperwork which you then might forget to tick something. It will then come back and it will take forever. In that case, for example, speaking to a financial adviser who can do it for you and perhaps point you in the right direction for some of the more tax efficient ways of doing things, then that’s the way I think financial advisers should be used. What I’m not a big fan of is us just letting a third party manage our money for us and hoping for the best. That’s not taking the responsibility; we don’t really know what’s happening with this money and, at the end of the day, it’s not the cheapest way of doing it. The financial industry isn’t subsidised by anyone – the government doesn’t pay the financial industry to exist. The financial industry is essentially a middle man between ‘normal people’ and the stock markets. If you think about where the financial industry lives, it tends to be the top locations in London for example, and rent in Canary Wharf isn’t cheap. No-one is renting the offices to the financial institutions out of the goodness of their heart. They make enough money just by the way the financial industry is organised to be able to afford those massive premiums for the money managers and so on. If you think about the financial industry as a market place and there are millions of transactions taking place every day. If you think about Facebook and the value of the company. Facebook stock will be traded thousands of times a day but that trade doesn’t really change the underlying value of Facebook stock. What is happening is that every time Facebook stock is traded, one financial company or the other is going to make money on it. As an aggregate, investors are not better off by the chaotic and very intensive trading that is going on every single day but the amount of transaction fees and various fees that are hidden in these funds are adding up to the point where something as little as 2-3% of annual management fee in this fund essentially means that 30 years later on that 50% of your wealth is eroded because of the fees.

Now, how successful mutual funds are is another thing that is very rarely advertised because those companies will advertise the funds that are currently doing well and people will think that they will continue to do well but it is not what research actually shows. Out of just short of 300 mutual funds that were in existence 30 year ago, there are only 2 that are currently still there. It makes you think what happened to the other mutual funds? They eventually just don’t make any money but the financial companies just start another fund to try to make money. It’s all very complicated but overall the underlying products that your financial adviser is investing in are quite expensive. You can invest in those products yourself with quite basic knowledge without the expenses. Then you can use the advice of the adviser to help guide you with you doing it yourself rather than just outsourcing the whole thing to someone else. 

Lynn:
So is that how the name of your company came about – InvestedMe?

Kat:
Yes. I wanted to come up with something that had this flavour of investing in yourself, not only from the monetary point of view. I’m quite big on – or I believe really in – taking responsibility for what we are doing with our own lives. That involves what we are doing with money, what we are doing with our careers, and the bigger impact of what we are doing on the planet. So, me giving power to a third party to manage my money was the thing that got me almost bankrupt. I’m quite sceptical of how successful long-term just outsourcing your money management to someone is going to be. At the end of the day, nobody is going to look after your wealth as well as you will simply because it’s just not the same. I had this analogy that it’s for exactly the same reason that we don’t outsource bringing up our children to third parties even though if you think about it, with every single reason and understanding to new parents, but most of the time, they don’t have a clue what they are doing. They are too tired, the don’t have any experience and by any standards of science and reason, we would be better off giving our kids to professionals who know what they are doing. But we are not doing that. Why is that? Because deep down we know that no-one is going to give a damn about our kids as much as we do. It’s exactly the same when it comes to money. Or I believe it should be the same when it comes to money.

Lynn:
It’s about taking responsibility…

Kat:
Nobody out there will care about your future as much as you do.

Lynn:
You’re absolutely right.

Kat:
I think that our way of approaching finances should change. There should certainly be more education earlier on. Not even about investing – just about managing money because just because a product is regulated, it doesn’t mean it is good for you – credit cards is one of those. The banks know very well what they need to do to curb our spending on credit cards but they don’t do it because there is big business on credit cards. Yet credit cards are an authorised and regulated industry so you would think that, because it’s regulated, that it’s good for you. Well if you want an example of an industry which is regulated, operates within the law but is bad for you, then you don’t need to look any further than credit cards and our personal debt of £1.6trillion in the UK…

Lynn:
So do you think we should just live without credit cards then?

Kat:
I definitely think that you should be able to introduce your own caps on credit cards and I certainly think that there shouldn’t be so much allowance. To give you an example, a friend of mine was consolidating her debt so she applied for £4,000 on a credit card. The credit card company gave her a limit of £6,000. She only needed and only asked for £4,000 but they gave her £6,000. The companies know exactly what they are doing; borrowing is a very good business model. We rely on it and the fact that we don’t see this transaction from the behavioural economics point of view – like our rational thought that goes into money. We are very distant from the actual exchange that used to happen. It is very easy for us from the behavioural economics point of view to tap a card on a payment machine as if it just wasn’t there. It’s very easy to essentially get it wrong and if you would like to look in and see just how wrong we are getting it when It comes to personal debt, the research is there from the money charity: our personal debit is going up and up, year-on-year. So we are certainly not doing it well.

Lynn:
Do you think that going contactless has made a difference then?

Kat:
Oh absolutely! We pay a price for convenience and it’s not something we think about because, at the end of the day, it’s convenient. The more stages or the more steps you take yourself away from the actual physical exchange of money, then the more surreal and easier it is to spend to the point that nowadays, schools are encouraging parents to show kids cash. Kids think that that money just comes out of thin air.

Lynn:
Gosh, that is shocking!

Kat:
It is from the Government point of view because the Government can pump more into the economy virtually out of thin air but kids don’t have the concept of money. So if you don’t have any concept of money, then it’s very easy to overspend. Obviously our society is still based on chasing that next big car, instant gratification and it’s only that pin number away.

Lynn:
It’s not even a pin number away – it’s a tap away!

Kat:
Yes, just a tap away! Our whole culture is set and build around things that we can get easily. You want a date – go on Tinder, swipe right/left and you have a date that same night! Purchases and everything is made easy. Yes, you can call it convenient but it’s getting to the point that spending is too easy. Any types of stops that would help are not being introduced in the regulated product so then you don’t need to look far for an example of a regulated product that is legal but not good for you. Those two things need to be separated and we need to have the understanding that just because it’s there and it’s regulated, it doesn’t mean that it is your best option.

Lynn:
That’s good advice. Going back to IFA that I’ve found and I think understands me and my needs, what questions do I need to ask him or her before I sign on the dotted line?

Kat:
Okay, there are a few questions really to ask. The first one is to ask whether receive any type of commission or other type of incentive for recommending a particular type of product over another one. There is obviously a question of whether they are actually an independent financial adviser. Another good question to ask as, in the UK it is a little easier than in certain pockets of the industry, which is “have you got a legal obligation to act in my best interest at all times?” Especially in the US for example, they need to be asking that question first as independent doesn’t mean that they need to act in your best interest, but that’s another story!

Another question is what are the fees and charges that are being deducted from your assets? You need to be very stubborn in order to get all of the information, especially for those that are not at the top of the fund. With funds, fees are very easily hidden because you have essentially got a basket of funds and each one has a different fee and you need to have comprehensive overview of each and every fee you are paying which is being deducted from your assets. Certainly asking about what is the percentage of the changeover of your assets. So, for example, if your assets are invested in this set up for this year, what is the percentage of the set up that will be the same next year as this year? Because if it is only 20%, then you know that your assets have been traded very, very heavily. Every single time you trade your assets, that triggers a fee. With the transaction fee, there is also a tax. Again, the way the tax is calculated is very complicated and not something I can explain here. The one thing you need to know is, especially in your pension, is that the taxes do matter in every transaction. Every single time you trade a fund and you’ve got a profit there, then that profit is taxable. Just because, for example, your mutual fund might deliver 8% or 10% returns, but 40% of it is taken for tax and another 2% for the management fee, there isn’t a huge amount left but it looks like the fund is doing well. So, you need to understand the fees and charges and, if you need to understand one thing, then this is the one thing that you really need to understand with an OCD-like approach and intensity. How will they invest your money and where will it be invested? What will be the split – ie how much of it will be in real estate? How much will be in commodities? Why are they investing the way they are investing? This then goes into what is their investment philosophy? What do they believe that the funds should be managed at because, at the end of the day, if you have got a financial manager or adviser that is very happy to take risks but it’s not something that you personally are comfortable with, then you need to know that very early on.

How will you consider the parts of my assets that you are not managing such as property and other investments held elsewhere? For example, if you hold any properties, they do form part of your assets but your financial manager or adviser is not really managing those properties, they still need to have the understanding that you’ve got other assets that are not really in the fund so that they take them into account of their plan for you and the bigger picture – what happens if you die? Not a chirpy subject to be talking about but, nevertheless, it is very important and essential to get it sorted early.

How often will we talk or meet? Again, you need to an understanding of how often they will check your portfolio. How often will there be interventions – more often than not, these are trades which are expensive and you need to know that. Where will my money be held? These are the big servers of the financial companies as they give you the platforms which you can use, even yourself, to manage your money. It’s very helpful to know which platform is being used, whether you have access to it. How will you manage the taxes – especially with some products like pensions where you do pay tax on them – so you have to take precautions so that your money is not being managed in a way that might maximise the amount of tax that you are paying. That will erode the wealth you will be left with in the end.

A very important question to ask is, when you’ve got these check-ins with the financial adviser managing your assets, you need to be checking how other index funds are performing. By index funds I mean there are passive index funds like S&P500 (the 500 biggest companies in the States). You’ve got Total World Index Fund which basically looks at all the world’s companies. How has that fund performed on its own and what did your funds perform like? You need to have an understanding of what has happened in the world of passive funds that are very cheap and essentially run automatically and what is your financial adviser delivering? Because if S&P500, Total World Index and if the FT and SE 250 (the 250 biggest companies in the UK), all delivered returns of around 8-10% and your fund delivered only 4% after fees and charges, then you need to be asking questions as to why. The returns you should be asking for are not the returns before any taxes and fees; you need to look at the figures presented to you with taxes and fees in mind at all times. These two things are the two wealth erasers that tend to sneak up people when funds are managed by third parties.

If you can keep your eye on these two things with someone else managing your money then absolutely minimise any fees and taxes at any time. If you pay more than 1%, then you are overpaying. If you are paying more than 1%, then you need to have double digit returns every single year to make it worth your while. If not, I would be questioning if you would be better off with just a passive fund that is very cheap to run.

Lynn:
Gosh, that’s quite a checklist isn’t it?!

Kat:
It essentially all boils down to fees and taxes and the amount of transactions being made. There are certainly are good financial advisers out there. I don’t want to portray a picture that they are all just hungry for money and there aren’t any good professionals out there. At the end of the day, these are not people who are managing your money; they just distribute it in funds. The more people you add into the chain of where your money is actually sitting, the more elusive the taxes become and the more difficult they are to track. We know that many of these mutual funds are underperforming although from the outside, they may look like they are delivering good results. But, by the time you take tax and fees into account, they really aren’t. You need to make sure the funds you are investing in are not in this basket of funds that aren’t delivering.

Lynn:
Thank you very much Kat. That’s a lot to think about. Is that the kind of advice that your company, InvestedMe, gives?

Kat:
I can’t give financial advice. What I try to do with everything I do is to really encourage people to learn about the information they need to make the decision for themselves. It might be that after working with me, they will decide that they want to work with the adviser but in a certain way. They need to know what it is they are looking at and they also need to have the understanding of how to manage your money. All these investments and all that, there are many complex products out there that most people really don’t need. With regards to what you actually need to start, there is less than you think to it.

Lynn:
So it’s not as complex as people think?

Kat:
It’s definitely less complex and I believe that everyone out there, whether they have strong maths or not, can manage their own money. They can then use the financial advisers when it makes sense for them and the fees that they would need to pay to then deliver better results. That little bit of education is definitely going to pay dividends in the long-term when you look at the types of returns and savings that you can make.

Lynn:
Fantastic. Thank you very much indeed Kat. We very much appreciate your time with us again.

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