July 2007

The value of advice

Tony Clements, Park Row Corporate and Private Clients

The Sunday papers often ask what is the "value" of a financial adviser.

On one page they publish opinion given by two or three of our selected colleagues, and on the other they pillory us, particularly for charging high fees or taking commission.

I have defended commission in previous articles, and providing the amount taken is clear, transparent and a fair price for the job I believe it has its place - as do reasonable professional fees.

I have also spoken about the Institute of Financial Planning and their holistic approach to financial planning. In taking on their qualification you not only sign up to a code of ethics, but among other things, you are tutored in producing a report for a client that shows - in pounds and pence - the benefit of some advice - a lot of which is not product driven.

I would like to draw your attention to some of these and the effect they can have.

I will take as my clients, Mr & Mrs Green, who are married, both 40 years of age, with two dependant children. Mr Green works for the Civil Service, earns £80,000 per annum, is a member of the Civil Service Pension Scheme. Mr Green contributes a further £500 per month to a PPP. Mrs Green has no earned income.

They own a house worth £750,000 in joint tenancy, with a mortgage of £250,000. They also own a small buy to let worth £200,000 which is unencumbered and is let at £10,000 per annum and have building society savings in joint names of £60,000. They have a will which was drafted when they bought their house 13 years ago which leaves everything to the surviving spouse and then the children.

In no particular order:

Step 1

Transferring the savings in to Mrs Green's name only will ensure that the interest received is assessed against her nil rate band and should effectively mean that it is paid gross. A saving at 5% interest of circa £600 per annum.

You should also consider using their cash ISA allowances each year to protect against future tax liabilities.

Step 2

Consider raising a mortgage against the buy-to-let and using the funds raised to reduce the mortgage on the main property. This will allow them to offset the interest due on the new mortgage (let us assume £150,000 is raised) against the rental income before tax is paid. If we assume the rate is 6% on both mortgages, the saving will be circa £3,600 per annum.

Step 3

Make sure that Mr Green is claiming his full tax relief for his contributions to his personal pension plan. He could be missing out on unclaimed relief of £1,384 per annum.

Step 4

Have the wills brought up to date to include a Nil Rate Band Trust and split the ownership of the house from joint tenancy to tenancy in common. This action could save at least £120,000 inheritance tax on second death based on today's nil rate band etc.

There are more actions that could be taken, none of which have involved the sale of a product. Those four steps highlighted above have saved £5,600+ per annum income tax and at least £120,000 inheritance tax.

Many advisers reading this today may feel that all of these steps are obvious and most of their clients will have taken these basic measures already. I can assure you that I have made these recommendations to clients in the last three months, and to individuals who you would have expected to "know better".

Checking that some of the basics, such as those highlighted above, have been put in place can easily demonstrate the value of good advice and of good holistic fact finding too.

Tony Clements
IFA
Park Row Corporate and Private Clients