John Humphreys: At times of uncertainty, go back to basics

In uncertain times, it can be easy to forget just how many certainties there are and yet, writes John Humphreys, those certainties are the foundations on which advisers can help clients and their families plan for their futures

At a point in history when there seems to be so little agreement on so much, perhaps a majority would at least agree these are turbulent times.

At some point, the daily news cycle seems to have been replaced by the hourly news cycle, or even the minute-by-minute news cycle. This constant stream of news, disagreement and uncertainty can be somewhat distracting, tending to bring our focus to the here and now. The amount of energy it consumes can leave us little time and energy to think about planning for the future.

Yet planning for the future remains as important as ever. Investment strategies need time to instigate and time to run. Now more than ever, it is important to focus on the certainties rather than the unknowns, because there are in fact plenty of certainties that need attention.

I was reminded of this recently by the case of a family who had, quite sensibly, set up a flexible reversionary trust – primarily to mitigate inheritance tax (IHT), but also to manage their family wealth inter-generationally. Due to recent stockmarket volatility, the clients were understandably nervous about investing and, at first, wanted to stay invested in cash. They knew they needed to plan ahead, and that understanding had driven them to set up the trust – but they were less confident about the timing of their investments.

It was time to go back to the beginning, and back to the basic principles of financial planning. As ever, the first question to ask was ‘why?’. Why had they set up a trust – what was it they were trying to achieve? The answer was to look after their money – today and for the future and for future generations.

The second question was: why did they feel that staying invested in cash was preferable to investing? The answer was because they feared the value of the money falling due to stockmarket volatility – money that they had worked hard to earn and were now seeking to protect.

These emotions are entirely reasonable and it is usually helpful to try and understand a person’s fears and motivations before trying to persuade them to believe something else. Their adviser spent time exploring their options, and concluded that a sensible course of action would be to recommend they invest in a medium-risk balanced portfolio, by drip-feeing their money from cash to the recommended investments to further avoid risk from market timing.

Despite the risks, despite the fears, their adviser could explain that remaining in cash was not shunning risk entirely either, because that is impossible, but they would be moving to a different set of risks that on balance would be likely to result in a better long-term outcome.

The adviser also discussed with them the certainties. The couple setting up the trust had an estate with assets that would be valued at more than their combined nil-rate and residence nil-rate bands, so their estates would be subject to IHT.

The clients were in their mid-60s, which meant their average life expectancy was significantly greater than seven years, which meant it was entirely reasonable to use the seven-year gifting rules to plan for IHT, with the high likelihood they would survive the inter-vivos period and have their nil-rate bands returned to conduct further IHT planning.

Simple reasons why

Given the client’s assessed risk-profile, their concerns regarding volatility, and their considerable average life expectancies, the adviser deemed a business relief investment was not suitable for their circumstances.

When the adviser was able to break down their concerns to those simple reasons why, it was possible to formulate a sensible plan to address them. Despite the uncertainties, the couple in question are now comfortable they have made prudent decisions in an uncertain world. A calm discussion based on facts and an understanding of risk certainly helped.

In the coming months and years, we may or may not experience various political changes, legislative changes, and changes to tax rules but, throughout such uncertainty, advisers will continue to serve their clients and help them plan for their future and their family’s future, based on the certainties of today. In uncertain times, it is easy to forget just how many certainties there are.

John Humphreys is inheritance tax specialist at WAY Investment Services