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Should I use a Financial Adviser?
By Peter Brooke
This article is published on: 24th May 2014
24.05.14
Creating a financial plan is NOT a complicated thing to do; it is an audit of where you are today, financially, and where you want to be at different stage of your life. This requires creating a list of what you have, earn, own and owe and agree with yourself to put something aside to cover different goals for the future.
If we don’t have goals in life there is probably little point in getting up in the mornings; unfortunately most things cost money and so having financial goals is also an important part of life. Money doesn’t buy happiness, as we all know, but it does buy some choice and, to some extent, some freedom. I have met yacht crew who have worked for 20 years without implementing a financial plan and want to leave yachting; as they have no pensions and minimal savings or investments they are left with a simple choice… live on very little or keep on working… I see this as a loss of freedom, and so do they.
So we can agree that having a financial plan, however simple, is a very important thing to have but why have (and pay) someone to help you bring this together?
The process – though doing a plan is quite simple a financial adviser will ensure that all areas are discussed and re-examined so nothing is left out. All of the horrible ‘what if’ questions should be covered:
Implementation – a good adviser will have access to thousands of products from to use with different clients who have different needs. The more choice available the more assistance you will need in choosing the best ones, but also the more independent the advice will be. A small advisory firm is likely to have only a few products to choose from and so will display less independence.
Professionalism – if we are ill we go to a doctor; they have qualifications to diagnose our problems and help to put together a plan to make us better. Likewise with a lawyer. A financial adviser should also have qualifications in his or her trade too. Some advisers also specialise in certain areas, like investment or protection etc.
Regulation – like a Doctor or lawyer a financial adviser will be regulated by a government body and will have to display a certain competency and have insurance in order to practice.
Knowledge – qualifications don’t guarantee knowledge, a good adviser should continually improve their knowledge and should be able to prove this through their ability to explain complex issues.
Humanity and perspective – most importantly you need to trust your adviser, this person or firm should be your trusted adviser for most of your life; they need to be able to empathise with the different situations you will find yourself in over the years. They should be able to draw on experience from other clients to help solve issues you face too; they should be able to offer perspective on the decisions you make.
This last point is the hardest to prove and is probably best achieved through a combination of your own ‘gut instinct’ and referrals from friends and colleagues. Do your own research on the all of the above factors, ask around and keep asking around until you have a short list of advisers to meet… then follow your own feelings as to whether you can trust them; the relationship should be a long term one and you will end up telling them a lot of very personal information over time.
This article is for information only and should not be considered as advice.
This article appeared on the FEIFA website. The Spectrum IFA Group is a member of FEIFA. (The European Federation of Financial Advisers and Financial Intermediaries)
Buying Property in France
By Peter Brooke
This article is published on: 23rd May 2014
23.05.14
Buying property is one of the most major investments we make in our lives. For yacht crew, it’s rarely for a primary residence, which makes the considerations for buying a little different.
Location will always come first, but when using property as an investment, yield should be a very close second. This is the net annual rental income (after all costs) divided by the value. One of the biggest reasons why property is considered the best investment is because it’s possible to leverage, or borrow, to buy it, especially when interest rates are low. For example, if you buy property for €200,000, and it gives a rental income of €8,000 per year, a four-percent yield is realized. If you only invested €40,000 and borrowed the remainder at three percent interest, then you immediately double your yield to eight percent. This is a compelling reason not to invest all your capital into a property. Even if interest rates are higher, it may still make sense, as it’s often possible to offset the interest against rental profits to reduce income tax.
Buying property in France is very popular amongst yacht crew, especially near the yachting centers of the Côte d’Azur. This is because the property can be a great escape in the winter when the yacht is in port or the yard, and also gives a great seasonal rental yield in the summer, the time when crew are hard at work.
These areas also are very sought after and selling a property is rarely difficult. The costs of buying in France are quite high; government taxes and notary (legal) fees total approximately 7.5 percent of the purchase price, and agent fees (when you sell) can be five or six percent. This means 13 percent growth on the property is necessary to make any capital profit, which is why property should be seen as a long-term investment and why rental yield is important. Annual taxes also apply and vary depending on where the property is located and its size. Borrowing in France is still possible for yacht crew, although it’s getting a little harder as banks tighten their rules. Generally, crew can borrow 75 (sometimes 80) percent of the purchase price. This means you need approximately 32.5 percent deposit (including notary fees) to start your property portfolio.
French lending laws allow you to be up to one-third of your income in debt, so if you earn €3,000 per month, you cannot spend more than €1,000 on your debt repayments. Over 20 years at three percent, €1,000 per month equates to a loan around €185,000. For tax-resident yacht crew (in France or any other country), the loan-to-value can often be higher as tax documents make banks feel more comfortable about lending. Any rental income is taxable in France, whether you are resident or not, and capital gains tax and inheritance tax will be initially liable in France, too.
There are many considerations when buying property, so seek good, qualified advice especially if it’s part of an overall plan; a mortgage broker should be able to find the best terms for you, often at no cost.
Producing Income from Your Investments
By Peter Brooke
This article is published on: 13th April 2014
13.04.14
If you’ve managed to put aside money for your retirement, good job — no one else has been saving for you. But how do you change the balance of your assets to be able to draw an income to supplement a smaller, land-based income or to pay for your lifestyle into retirement?
* Restructure your investments before you need the money. This gives you time to ride out any difficult market years before you retire or move ashore. Crises in stock markets always affect stocks in pre-retirement worse, so protect the value of your funds in the few years running up to taking an income, but keep one eye on inflation as this will reduce the buying power of the “pot” of money you’ve built up.
* Consider the total value of your retirement assets — shares, pensions, funds, investment properties, cash and bonds — as one entity. Then ask yourself, “If I had all of this as cash today, what assets would I buy to give me the income I need?” This question helps you reassess all your assets and bypass any loyalty to a certain asset type, such as property. If Dave bought an apartment nine years ago for €180,000, rented it out and paid off the mortgage, and the apartment is now worth €280,000 with rent at €1,000 per month, after management charges, this works out as a 3.8 percent yield. Dave may do better using the money from the property elsewhere, perhaps by reinvesting in bonds.
* Once the income starts, look at each asset class in terms of income stream and cash flow rather than capital appreciation. It’s important to try and grow the “pot” to beat inflation, but the income is paramount. Yields on equities today are outstripping most government bonds; the capital may fluctuate but the income will remain. To draw an income of €3,500 per month, you need an asset pot of approximately €900,000. With €42,000 per year, a proportion of the cash can be put in longerterm assets (property, equities, etc.) to help grow and replace the funds you withdraw.
Many yacht crew have a large proportion of their assets inside insurance bonds, as they offer tax-advantageous growth and income. However, some don’t offer a way to take a “natural income,” as the funds are all accumulating-type funds. The income that you draw down by cashing in fund units affects the underlying balance and needs to be rebalanced with a steady internal income stream.
Delaying Savings
By Peter Brooke
This article is published on: 12th April 2014
12.04.14
No one wakes up in the morning and thinks, “I must start my pension planning today.”a “I must start my pension planning today.” I’ve not even done that, and it’s my job! Perhaps if someone had pointed out to me 15 years ago what the impact this thought process may have had on my own financial future, I may have listened and (may have) done something about it.
Let’s consider the rather simple examples of two people who joined the yachting industry at the same time, with similar careers, but different saving scenarios.
Scenario 1: James took his first job as a deckhand at the age of 23, earning €2,000 per month. His income went up by a healthy five percent each year, every year until he left yachting at 45 with a final salary of €7,300 per month.
From the very start of his career, James invested 25 percent of his salary every year. This means that by the end of his yachting career, he had earned a total income of €1.25 million and had put aside €310,000. He had managed to achieve an average annual growth rate of five percent on his invested money, which meant his savings pot was now worth €495,000. If he leaves this to grow for another 15 years before using it as a pension scheme, he will retire at 60 with a fund of just over €1 million — a very healthy fund.
Scenario 2: John had a very similar career, but only started saving 25 percent of his salary after being in the industry for 10 years. Even though he still had earned €1.25 million over his career, he only had put away €225,000, which, with the same growth as James, was now worth €290,000 due to the lesser amount of time to compound the growth. Leaving this amount to grow for another 15 years would give John a pension fund of €600,000 — quite a bit shy of James’s healthy fund.
In the real world, yachting salaries rarely grow in a straight line, but this simple example shows how delaying the start of a long-term savings program has a massive effect on your long term wealth and control. In order to retire with the same fund as James, John would have to save approximately €1,500 per month, every month from when he leaves yachting. If he is now working on shore, this could be difficult to achieve as costs normally not associated while aboard will now be added, such as rent, food and every day expenses.
It’s interesting to note that James still actually spent more than €930,000 over his 23 years in yachting, which is an average of €3,400 per month for that period. Are there many yacht crew who actually spend this much on living costs, and if not, could he have saved even more for his long-term future? The answer is obvious.
Should I use a Financial Adviser?
By Peter Brooke
This article is published on: 10th April 2014
10.04.14
Creating a financial plan is not complicated; it’s an audit of where you are today, financially, and where you want to be at different life stages. This requires creating a list of what you have, earn, own and owe and deciding to put something aside to cover different goals for the future.
I have met yacht crew who have worked for 20 years without implementing a financial plan, and when they want to leave yachting, they have no pensions and minimal savings or investments, leaving them with a simple choice: live on very little or keep on working.
We can agree that having a financial plan, however simple, is important, but why have (and pay) someone to help you bring this together?
The process: Although creating a plan is quite simple, a financial adviser will ensure that all areas are discussed and re-examined so nothing is left out. All of the horrible “what if” questions should be covered.
Implementation: A good adviser will have access to thousands of products for different clients with different needs. The more choice available, the more assistance you will need in choosing the best ones, but also, the more independent the advice will be. A small advisory firm is likely to have only a few products to choose from and will display less independence.
Professionalism: If we are ill, we go to a doctor — financial advisers have qualifications to diagnose our financial problems and help put together a plan to make us better. And as with a doctor, a financial adviser should have qualifications in his or her trade, even specializing in certain areas.
Regulation: A financial adviser will be regulated by a government body and will have to display a certain competency and have insurance in order to practice.
Knowledge: Qualifications don’t guarantee knowledge; good advisers should continually improve their knowledge and should be able to prove this through their ability to explain complex issues.
Humanity and perspective: Most importantly, you need to trust your adviser. This person or firm should be your trusted adviser for most of your life; they need to be able to empathize with the different situations in which you’ll find yourself over the years. They should be able to draw on experience from other clients to help solve issues you face; they should be able to offer perspective on the decisions you make.
This last point is the hardest to prove and is probably best achieved through a combination of your own gut instinct and referrals from friends and colleagues. Do your own research on all of the above factors, ask around, and keep asking around until you have a short list of advisers to meet. Then follow your own feelings about whether you can trust them; the relationship should be a long-term one, and you will end up telling them a lot of very personal information over time.
Looking at financial stability throughout your yachting career
By Peter Brooke
This article is published on: 5th February 2014
05.02.14
While I have discussed strategies for individual investments, banking and insurance, I wanted to present what I believe to be the “Basic Rules,” which, if followed throughout your yachting career, will maximize your chances of financial success.
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- Have a bank account in the same currency as your income.
- Have other currency bank accounts if you spend considerable time in other currency jurisdictions.
- Use a currency broker account to move money between accounts; this gives you control and saves money on the exchange rate and commissions.
- Clear debts as soon as you can, especially those with high interest rates.
- Check the medical cover available to you from the yacht; offer to pay a small supplement if it doesn’t cover you during holidays or when not on board.
- Conceptually plan out different financial “pots:”
* Emergency: at least three months’ salary in a bank account (preferably six months)
* Education: when and how much (is it for the next course?)
* Spending money: limit yourself to a set amount each month
* Property purchase money: how much will you need for a deposit, and when
* Long-term money: 25 percent of your salary
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- Understand your tax residency status: Keep an accurate diary of where you spend your time. The places where you are most likely to be considered resident are:
* Your country of citizenship
* Where you own real estate
* Where you spend the most time
* Where your “dependent family” is based (your home)
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- Save at least 25 percent of your income for the long term; you don’t pay any social security. If you worked on shore, your salary would be at least 25 percent less due to this.
- Invest time in your own financial education. Read my column in Dockwalk every month, look at investment websites, learn about inflation, property leverage, risk and compound returns.
- If in doubt, take advice. Understand your limitations and build a team of trusted advisers in different fields; speak to other crew about what they do with their money (but don’t follow just one).
When you get to the time when you want to leave yachting (be it after 5 years or 25) it is great to be able to do so because of the way you have managed your own resources… many people cannot leave the industry at the time they want to because they have not taken control of their futures.
Follow every one of these simple rules and you I am certain that you will get the most out of your yachting career…and will leave it feeling that it not only gave you great memories and friends but helped you look forward to a long and fruitful second career or retirement.
This article is for information only and should not be considered as advice.
A smart strategy borrowed from the Chinese – BBC.com
By Peter Brooke
This article is published on: 29th July 2013
29.07.13
Smart investment strategies borrowed from the Chinese. An article from BBC.com with comments from The Spectrum IFA Group
Peter Brook comments on an article from BBC.com
To read the full article please click here
What is risk? – Precious Metals…
By Peter Brooke
This article is published on: 16th July 2013
In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.
All that shines. There are many very attractive metals and jewels and most of them are pretty good investments. There are also many different ways to invest in these sorts of assets and each of these has their own risk factors. When buying into metals it is very important to decide whether you are buying as a pure investment or as a useable investment as this will affect performance and risk.
The main ways to buy into metal and jewel prices are:
Direct – bullion, coins, jewellery etc. Even within this sector there is a huge range of choice. If you want pure investment then buy as close to the raw materials as you can… there are many different mints of coins but some are as collectables and some as investment.
Indirect – this is an exposure to the price of the underlying metal. Many people buy into precious metals via Exchange Traded Funds (ETFs) but these are not ALL what they seem to be.
So what risks are you taking by investing in the shiny stuff?
Asset risk – as with all investable assets; if they are out of favour with the general market, then the price will fall and the value of your holding will too. Sometimes these movements are not based on the fundamentals of supply and demand and can be due to the global political or economic background (or normally both).
Theft/security risk – if you decide to buy directly then you must consider the security of your coins or bullion. This will normally come at a cost which must be taken into account from a cash flow and overall performance point of view. You probably don’t want to have $3000 worth of gold coins under your mattress (especially if you are living on a yacht).
Liquidity Risk – selling directly held coins can take time, normally if they are highly traded newly minted then liquidity should be good but collectable coins could take time to find a buyer, or suffer a price fall.
Fashion risk – collectable coins and jewelry come in out of fashion, which is not directly linked to the price of the material they are made from – be careful when selecting these sorts of investments, as they normally trade at a big discount or premium to the underlying material. #
ETF – real or synthetic – some ETFs actually buy the underlying commodity and hold it in trust for the investors in the ETF. If you sell your holding, generally, the ETF will sell the actual metal. Other ETFs use rolling forward contracts or other derivatives on the underlying commodity via an investment bank. This means that most of the time the price will move with the underlying metal price but not always and can over react big movements in the price. This was seen recently with the ‘paper’ gold price falling dramatically but the real gold price continued to trade above the paper price.
Counterparty risk – synthetic ETFs are collateralized by an investment bank, if this collateral is of low quality (and as we have seen this is very possible) then you may be taking risk that the bank cannot return your money if something goes wrong.
On the whole precious metals either directly held or indirectly (through a real ETF) are excellent additions to a portfolio for a small proportion. We have seen huge volatility in prices in the last couple of years and so it is important not to be over exposed to metals and to be aware of the above risks. Also, like all investments, have a strict profit taking discipline when the values look good.
This article is for information only and should not be considered as advice.
What is risk? – Equities
By Peter Brooke
This article is published on: 12th June 2013
In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.
What are equities? – known as stocks or shares they are a ‘share’ in a company. As a part owner of that company we must therefore SHARE in its profits (and losses). If the company goes bust we cannot expect not to share in this and lose (normally) everything we put in! Likewise if it is very profitable then we would hope to be rewarded as owners should be (by dividend or share price growth… or both); the performance of shares is well documented and on average they outperform most other assets over the long term but do we really understand all of the different types of RISK we take as investors in shares?
Asset risk – if equities themselves, as an asset class, are out of favour then they tend to all fall together if concerns about future growth (and therefore profits) are prevalent, this can be irrelevant of the market or sector you are looking at, which may have robust fundamental reasons to invest in it but is still knocked by the market selling off all equities.
Market or Correlation risk – many major stock markets are very highly correlated, so even if you have a diverse portfolio of European, US and UK stocks, for example, you can lose on all of them if they are highly correlated.
Sector Risk – companies all do different things, provide different services and make different goods, but sometimes a whole sector will be out of favour so losing value in what is a good company may still happen if the sector it is in is not loved.
Company specific risk – this is primarily down to the quality of the board of the company and the vast majority of company directors want their companies to do well; but their share price can also be affected by regulatory changes, legal actions, competitors, patents etc. no matter how good a company may be it is not bullet proof and so different companies will perform better in different parts of the market cycle.
Liquidity Risk – if you decide to buy smaller companies which aren’t very well known then there may be a minimal ‘market’ for them… this means that if you can’t find a buyer then you either can’t sell them at all, or you accept a lower price. Most shares are traded on regulated stock exchanges and so liquidity of all but the smallest companies tends to be good.
‘Shares are the only things we don’t buy on sale’ so all of the above risks, like with most assets, can create buying opportunities. It is often best to access shares via funds as the daily choices and control are managed by a professional manager, you can then also access many different sectors and markets with relatively small portfolios.
It is vital to understand the different types of risk so your overall asset base is not over exposed to one type of risk. For example someone with a large property portfolio (liquidity risk) shouldn’t then invest in small companies but should have more money in cash (inflation risk), high quality bonds (interest rate risk) and ‘blue chip’ shares (market risk).
This article is for information only and should not be considered as advice.
What is risk? – Property
By Peter Brooke
This article is published on: 20th May 2013
In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.
We, as Anglo Saxon and Northern European types tend to have a bit of an obsession with owning property; it is an important part of our culture and we feel secure in the knowledge we own real estate.
It is very understandable, especially for an Englishman, why owning your own home is a very good idea (control of what it looks and feels like, feeling of “home”, long term outlook etc) but I believe that many people will tend not to look at ALL of the basic investment factors when selecting a property to buy (to live in or as a pure investment)… including risk.
Of course, location (location, location), price, quality, taxes and running maintenance costs are normally considered to some extent but for some reason many investors tend to believe that property is in some way risk free; . Like all investments we should “buy with our heads” and “sell with our hearts”, too many of us get this the wrong way round and ignore some of the issues that can really cost us dearly. Let’s look more closely at the property specific risks.
Liquidity Risk – the biggest single risk when buying property! Can you get your money out if you need it (or if something better comes along)? On the whole the answer is ‘no’ – or at least not quickly. If you find a buyer tomorrow you are unlikely to have your money back within 3 months; if you are looking for a quick sale then you can seriously damage your return by taking a low offer.
Interest rate risk – if you are borrowing to buy, as most people do (and probably should) then there is a risk that your cash flow will be affected and the total cost of your property over its life could go up dramatically, if interest rates move.
Market/Investment risk – as we saw in 2008 the price of property can fall as well as increase…. Again many investors feel that property is in some way a sure fire investment guaranteed to make money – like all other forms of investment asset this is only true if you buy the right property, in the right place at the right price. When property markets crash they tend to do so heavily and take a longer time to recover than more liquid markets.
Tax/Governmental Risk – one of the easiest assets to tax more in times of economic strife are properties, especially those owned by investors (as they tend to be easy political targets). Increases in local rates and taxes on property are easy to push through and raise a significant sum for government.
This article is for information only and should not be considered as advice. This article is written by Peter Brooke The Spectrum IFA Group
More on risk and investing in different assets
