ETF risks, income tax and Hargreaves Lansdown - here's our weekly heads-up on the financial stories that may have caught your clients' attention over the weekend …
How would ETFs fare in a market downturn?
Exchange-traded funds (ETFs) may be cheap but, warns this Financial Times article, investors must be aware of the associated risks - particularly in the event of a market downturn. The piece alludes to concerns on whether ETFs are "distorting market valuations and feeding volatility", adding: "Some see an ETF bubble that is set to burst even though what is being invested in is more of an investment wrapper than an asset class in its own right."
Further worries stem from a belief ETFs have yet to be tested as a model. "When the dotcom bubble burst, ETFs were still the new kids on the block and even by the time of the financial crisis they were nowhere near their current scale," the article points out. "The end of the current bull market will partly play out through ETFs, and there is uncertainty about how they will withstand sudden shocks."
The report does conclude "the ETF is clearly here to stay and there are reasons to believe an accident is no more likely to befall this type of fund than any other" but adds "as with all investment decisions, it is worth reading the fine print". As the box that follows the piece - entitled "Check your ingredients" - makes clear, this would include counterparty risk, tracking error, liquidity risk, sampling, asymmetric information and asset exposure.
Why 800,000 people pay a higher tax rate than someone who earns £1m
More than three-quarters of a million people are paying tax rates well above the 45% that is supposed to be the highest rate of tax, according to this Telegraph article, which is based on research by Royal London. This, the piece goes on to explain, is because those affected lose tax, pension and child benefit allowances as their incomes rise.
The news comes as Chancellor of the Exchequer Philip Hammond prepares for next month's Budget while under "intense pressure" to please voters, writes the Telegraph, and as experts are calling for a simplification of the tax rules.
"Most people would agree that, as people earn more, they should pay a higher rate of tax," says Royal London director of policy Steve Webb. "A series of complex changes that have been bolted on to the tax system over recent years means this is no longer true. There are hundreds of thousands of people who pay more tax on each extra pound that they earn than a millionaire. This is not a sensible tax system."
An HM Revenue & Customs spokesperson tells the Telegraph: "The tax paid per pound has to reflect a wide range of personal circumstances - not only income. Increases to the personal allowance have taken four million out of income tax altogether over the last parliament alone."
Hargreaves Lansdown won't automatically switch you to lower-cost funds
Hargreaves Lansdown customers could be paying up to four times more than necessary for their funds, according to this Sunday Times article, which explains that while some 550 of the 2,070 funds sold by the UK's largest platform have cheaper versions, investors must ask to be switched to the lower-cost options.
The piece offers the example of someone with the Fidelity Multi Asset Allocator Adventurous fund who may pay an annual fee of 1.2% of the value of their investment, adding: "Yet it is possible to hold the same fund for just 0.25%."
The article explains that the situation has come about because fund providers launched different share classes of the same investments in response to the Retail Distribution Review. While the regulator's aim was to make fund charges more transparent, critics have argued the changes have only served to complicate matters.
As the majority of Hargreaves Lansdown's 954,000 customers are DIY investors, chartered financial planner Danny Cox argues it would be wrong for the group "to make unilateral investment decisions and execute transactions on our clients' behalf". The article is, however, quick to identify other platforms that have automatically switched clients to a cheaper deal.
