The current challenging economic environment does not, in my opinion, diminish the need for financial advice. It’s just that what is likely to be at the front of mind for many will be different. In good times securing a return on capital, and seizing opportunities, will take centre stage. In tougher times concern is likely to switch to securing a “return of capital”, risk management and protection. All represent important opportunities for financial advisers to engage and deepen relationships with their clients.

Whatever the economic climate, proactivity is what underpins most successful businesses. In other words, taking the initiative and, in so doing, seeking to really understand what concerns clients. Proactivity based on provoking the client, creating justifiable anxiety and having a flexible range of solutions for potentially revealed challenges is what will mark out successful businesses in this current economic climate.

Perhaps the most obvious initiative that advisers can take nowadays is a fundamental review of their clients’ affairs in the light of the financial shocks of the past year or so. Central to this should be a restatement of their financial and life aims; and a “no holds barred” look at current finances and the likely barriers to achieving the restated financial objectives. For many, there will be a gap between what they want to achieve and what they are likely to achieve given their current and anticipated future financial path. For some it may even be impossible to plot an achievable path to their stated goals. For these, some recalibration will be necessary.

The reduction in value of almost all asset classes may also make necessary the recalibration of estate planning strategies. Some may need greater access to capital than before. Some may be less able to give and some more. Some may feel that a (reduced) inheritance tax liability is now manageable. One thing is sure, no-one will be any wiser without facing up to the facts on asset values and what they mean for estate planners. This represents a clear opportunity for advisers to engage.

For the diminished number of long-term investors the case for reinvested dividends to drive returns over the long run has once again been supported by the Credit Suisse Global Investment Yearbook. And if yield is important, minimising the tax on reinvested dividends is also important to contribute towards net return. For example, £100,000 invested yielding 5% pa reinvested after 25% tax year-on-year grows to about £144,000 after 10 years. The same investment with the same yield but with no tax deducted amounts to about £162,000. That’s just over 40% more growth. Who said tax planning wasn’t important? This is especially so when it is even harder to secure return. In such circumstances, keeping as much of your hard earned return is critically important.

And for business owners a liability audit (taking account of debt owed to banks and the business owners themselves) can reveal some “must cover” protection opportunities. If eventual business sale to provide future financial security is an objective then the current lack of available capital and buyers should be used to make business owners aware of the risk that this undiversified strategy causes. Not only that, the amount that you will keep from any sale that does take place could well drop in the future. Most would agree with Yaz in respect of future tax rates – the only way is up!

Tony Wickenden
Technical Connection