When you compare the financial planning landscape we had in the 1990s to what we have today, a decade into the 21st Century, the amount and extent of the changes is staggering.
In the 1990s stockmarkets appeared to be heading ever upwards and everyone wanted a piece of the action. The Bank of England base rate ranged between 5% and 14%.
Sterling exchange rates versus the euro were strong for UK expatriates holding sterling. Banks were considered a safe place for your money. It was easy to hide money away offshore and escape having to pay any tax on it.
Since then of course we have endured two bear markets, the credit crunch and ensuing economic downturn.
Long established banks collapsed and in some cases savers lost money (it had never occurred to most people to question the depositor compensation schemes offered by offshore centres).
We had some high profile financial frauds.
Bank interest rates plummeted to record lows.
Exchange rates have become less favourable for expatriates from the UK and more volatile.
All of these changes create an imperative for greater emphasis on wealth preservation and an increasing understanding of the need for diversification within any investment portfolio.
Many investors today are less interested in chasing the highest possible returns and instead are mainly concerned with maintaining the value of their money over the long term and enjoying realistic, consistent, sustainable income and growth. This is especially important for those who are investing to finance their retirement or who have already retired.
With interest rates remaining low for some time yet, leaving all your money in the bank is not an option. Its value will be eroded by inflation over time.
On the other hand, investing all your capital in equities leaves it vulnerable to market volatility. It is therefore very important not to randomly pick shares or equity funds and instead, with the help of a wealth manager, devise a strategy across your savings and investment portfolio that employs asset allocation and diversification to lower risk within a tax efficient framework.
This strategy should be based on your specific investment objectives. For example, if you will need the capital in the short term, then you should not be overweight in equities even if markets are rising at the time. Or if you need income, then you should include assets which produce a natural income so that you do not need to strip out capital.
Your wealth manager should then review your portfolio periodically to ensure that it is still in line with your objectives and to take account of any changes to your circumstances.
If the changes in the investment landscape were not enough to contend with, we have also had to endure a global crackdown on offshore banking. Banking secrecy is fast being consigned to history.
In 2005 the EU Savings Tax Directive shook up the offshore tax planning world. Suddenly, offshore savings began being taxed whether they were declared or not – and at a tax rate that increases to 35% next year.
Globally, the Organisation for Economic Co-Operation and Development (OECD) initiatives, backed by the G20, have made it possible for authorities to investigate tax evasion across country borders.
The situation is only going to get worse as governments are now in more desperate need for tax revenue – the financial woes of countries like Greece and Spain, for example, are being partly blamed on the tax evasion carried out by their citizens.
In mid-February, determined to bring a swift end to the era of banking secrecy, the European Parliament in Strasbourg adopted a non-binding resolution that will strive towards making the automatic and multilateral exchange of information a global standard.
The Isle of Man has already announced that it will end banking secrecy for EU residents from July 2011, when it will start to report on every bank account to the owner's country of residence.
And to make matters worse, taxes are now on the rise across Europe as governments try to repair their deficits.
Considering that returns are lower than they were in the 1990s, the impact of taxation on savings income and investment growth has become a bigger issue. What matters, after all, are after-tax returns.
In view of all these changes and the complex world we find ourselves in today, wealth management advice is more important than ever before.
A wealth manager will review your current financial planning and advise you on how to protect and grow your wealth; to legitimately mitigate the amount of tax that you pay and control when and where you pay it; to protect your investments from institutional failure and to ensure your wealth will be distributed on your death according to your wishes and with as little inheritance tax as possible.
One wealth management solution that can form an integral part of the solutions to the above is life assurance (assurance vie).
A life assurance bond can be used as a protective “tax wrapper” around your choice of investment assets, allowing you to combine your investment and tax planning in one arrangement.
These bonds are well established tax saving devices in France. In some cases similar arrangements domiciled outside of France can bring substantial additional benefits.
Other new opportunities have recently become available through a recent change in UK legislation regarding the use of pension scheme type trusts to avoid tax and hold investment assets.
You need to ensure that your financial planning and wealth management is moving with the times and not still camped in the last decade.
