In this case study Simon Willoughby demonstrates the value of advice through different life stages.
The Retail Distribution Review (RDR) is now a thing of reality and not just a myth often discussed by advisers ironing out any kinks. They have realised they need to enhance their businesses to ensure their clients are offered the services they need and want.
A key component for any adviser business in the new RDR world is value; a need to demonstrate the initial value they can offer and the continued value they can add over a period of time.
Some clients may be looking to interact with an adviser on a transactional basis while others may be looking for a fuller holistic financial plan that considers the customers long-term planning needs. It takes into account their lifestyle and any changes in their situation, offering greater value over the long-term.
Let's consider the example of Nick and how his financial advice may change over a period of time.
Nick is a 56 year old babyboomer who graduated in computer science in the late 1970s. He was fortunate enough to benefit from the technology boom and became wealthy at a relatively young age. His financial adviser has been able to instruct him in a number of key moments in his life.
The early years
By 1986, Nick was married with his first child and made the decision with two colleagues to set up their own software business. Each of them put £50,000 into the business, dot.com, as an initial investment.
In 1999, with dot.com in full swing, a software giant bought out the business and Nick, at 42, found himself with no mortgage and £750,000 in the bank. Not knowing what to do with his new financial situation he sought out a financial adviser.
His basic income protection needs were taken care of by the adviser when Nick and his wife took out a decreasing term assurance policy to cover the mortgage in the early 80s, topped up with a whole of life plan when his first child came along and supplemented by the death in service scheme through work.
The assets he had accumulated went into the business, so for most of the 80s and 90s there were no ‘savings' accumulation, but by the end of the century he was both cash and asset rich.
As a higher rate tax payer Nick's adviser recommended a tax efficient offshore bond for £300,000 of the £750,000. This allowed him to defer any income tax liability on any policy gains until a later date, while facilitating the ability to take withdrawals up to 5% per annum, tax deferred, on £300,000 of the £750,000.
Using an offshore bond allowed for the added benefits of gross roll up and open-architecture fund selection, which is generally not available onshore.
In the noughties
As part of the buy-out, Nick and his colleagues were prevented from working in the software industry for the following three years. However, in 2002, Nick and his wife divorced meaning certain aspects of his lifestyle and outgoings had changed. He needed to review his current financial plan.
Nick was advised by his adviser to make a new will as a divorce does not automatically revoke former wills. Nick was keen to make sure that he made provisions in his will to ensure his children received his wealth should he die.
Following the separation, Nick wanted to start a savings scheme for his children. He was keen to make sure they could have enough money for a deposit on a house once they left university.
He decided to start saving into a stocks and shares ISA, which helped towards his objective up to the annual limit. While income and/or gains during his lifetime are free of income or capital gains tax the fund would be taxable on death. Nick had not considered the impact of the fund on his death and decided to cross that bridge at a later date.
Changes in his personal situation meant that at the start of 2003, Nick made the decision to go back into business again.
At age 46, Nick decided to seek advice about his pension funding. He settled on a self-invested personal pension (SIPP) making regular contributions which received tax relief at source. This also allowed him to invest in his own business by including his office property as an asset of the SIPP.
The twilight years approaching
Now aged 56, the last of his three children is graduating in the summer and the other two are settled and looking to buy houses. A recent health scare has prompted Nick to consider how he would like to spend his retirement and what arrangements he needs to make for his finances once he is gone.
Nick now has a new partner who has two grown-up children of her own. He wants to ensure that his children, his partner and her children are looked after, but that they don't inherit too much wealth.
Nick had previously decided to fund each of his children's university education by assigning, by way of gift, three of his policies under the offshore bond he purchased back in 1999.
Having previously made no withdrawals on the original £300,000 bond that was set up as 10 policy segments the healthy growth in the value of the bond allowed him to assign two segments to each of his three children.
These segments were used to fund their university living costs by utilising the 5% annual allowance to take withdrawals and/or surrendering the policies if their allowance is used and utilising their personal tax rates.
Following his health scare, Nick has started to give some thought to what will happen to his money once he is gone. His adviser has discussed gift and loan trusts with him as a way of reducing his potential inheritance tax liability.
At the moment Nick is thinking he may leave his main wealth transfer planning until his early 70s, when a discounted gift trust plan would give him to make a transfer of value but provide an immediate reduction in the amount of IHT potential chargeable should he not survive seven years.
Simon Willoughby is head of proposition at AXA Wealth International
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till