With parents apparently now equivalent to the UK's ninth largest mortgage bank, Darius McDermott suggests clients may need a whole separate strategy and portfolio to meet their 'bank of mum and dad' home-loan requirements
I am sure I won't be the only one who had the serenity of their morning cup of tea interrupted this week by news about the growing popularity of the ‘bank of mum and dad'.
According to research from Legal & General, families will contribute around £6.5bn in 2017 helping their children buy a home - or an average of £21,600 per property. Apparently, we - that is, the parents of Britain - are now on a par with the ninth largest mortgage bank in the country.
As a father of two children under the age of 10, this was certainly enough to make me pause over my breakfast. Never mind what that £21,600 may have risen to in 15 or 20 years, I also have to think about childcare, school costs, sporting costs, university fees and so on in the meantime. Not to mention my wife and I are trying to save for our retirement too - crazy though that idea may seem …
Of course, families have always juggled competing goals and financial pressures - these challenges are not new. But the rising cost of property in this country has created an extra dimension to securing your family's financial future. And the research suggests our current solutions are unsustainable.
According to Legal & General, by 2035, the average family contribution to a home will be around half the average household's net financial wealth (excluding property). At the same time, we are living longer and care costs for the elderly are rising, which means our retirement money has to go further still.
Leaving to one side potential options such as releasing equity in the family home - an area in which I will not pretend to have any particular expertise - what is becoming increasingly apparent is that clients may need a whole separate strategy and portfolio to meet their ‘bank of mum and dad' home loan requirements.
Thinking aloud, it occurs to me one way to do this could be to encourage clients to contribute into one of the new Lifetime ISA (LISA) accounts on behalf of their - adult - child. LISAs can be opened by 18 to 39-year-olds who are saving for their first home.
Many 20-somethings will struggle to meet the annual £4,000 savings limit, which means they will also miss out on the full government bonus of £1,000 per year. Yet think how much bigger a home loan deposit could be 10 years down the track with this extra boost. Parents really could make a meaningful difference.
Power of simple sums
With younger children, meanwhile, Junior ISAs are the obvious route and I would strongly recommend the power of a few simple sums to illustrate to parents and grandparents just how valuable it could be to open an account like this from day one.
It is all well and good harping on about ‘compounding' but getting out a pen and paper (or an online calculator, such as this one) and actually showing your clients - "if you invested £50 a month for 18 years and achieved annual returns of 7%, your child could have a pot of more than £21,000" - is bound to be more impactful.
Either way, the other important element for clients looking to maximise their savings is to get them comfortable with taking on some riskier growth investments over an appropriately longer time frame.
Funds I like for this purpose include Lazard Emerging Markets and Charlemagne Magna Emerging Markets Dividend, which both have very conscientious managers and well-defined investment processes. I also think some weighting specifically to Asia over the next decade is sensible, given it is likely to be the world's major growth engine - in that regard, JOHCM Asia Ex Japan provides diverse exposure.
In developed markets such as the UK and the US, meanwhile, small and medium-sized companies may offer the best growth potential. Unicorn UK Smaller Companies and Hermes US SMID Equity are among my favourites here.
Darius McDermott is managing director of FundCalibre
'Can help iron out rough edges'
How do mergers affect investors?
Our video series continues
Three advisers have their say…
Regulator's data bulletin