To learn about portfolio management in Canada, Finance Monthly hears from Constantine Lycos, the Founder and CEO of Lycos Asset Management Inc., a Vancouver-based firm offering investment management services to business owners and professionals. Constantine has over 20 years of experience as an investment professional, holds the Chartered Financial Analyst designation, as well as a Master’s degree from Oxford University in Mathematical Finance.

In what ways does Lycos Asset Management do things differently than other investment management companies?

I believe several factors differentiate us from other firms:

• We are a boutique firm and we look after a relatively small number of families’ investment portfolios and our clients really matter, they are not rounding errors as they can be for large firms managing billions of dollars.
• Our vision, which is to manage clients’ ‘serious money’ as a marathon, using a proven and consistent approach to grow and preserve clients’ wealth with a long-term investment objective. We believe that the centerpiece for success is a long-term plan that outlines the investment polices to follow, so that clients can reach their unique goals. Our experience is that asset mix decisions have the greatest impact on portfolio returns as well as portfolio risk and we pay a lot of attention to getting that right for each and every client. The foundation of investing ‘serious money’ requires patience, discipline and objectivity.
• We are committed to the success of our clients and to fostering long-lasting relationships and we tend to have a very low client turnover rate.
• We are independent and ‘fee-only’, only compensated by our clients.
• Our advice is objective and unbiased.
• Our counsel is without conflicts of interest.
• Our integrity of counsel is uppermost.
• We are fiduciaries, i.e. we are obligated by law to put our clients’ interests first, ahead of ours and do what’s in their best interests. While this is true of all portfolio managers in Canada, portfolio managers currently make up a very small percent of the investment professionals helping families invest and manage their wealth, so we operate at the highest level.
• Client portfolios subject to a minimum asset size are fully customizable allowing for special circumstances to be taken into consideration and for better tax efficiency.
• We have a value investment philosophy. We look for good investments where there is good inherent value in the investment. If the market takes such investment down in price unless the fundamentals have changed, we feel good buying more of such investment. While this is true for all asset classes it is especially true for public traded equites where market prices may fluctuate a lot more than the inherent intrinsic values of the investments. This not only makes us more comfortable navigating volatile markets, it also provides us with opportunities at times when other investors are running scared, realising losses and taking permanent hits to their portfolios.
• The biggest problem investors face is in our opinion a behavioral bias, specifically recency bias. Investors tend to give more weight to recent performance than they probably should, feel good when markets are down and commit more capital at higher prices, feel bad when markets are up and either sell or do not commit new capital at lower prices. Our investment philosophy helps us fight this in clients’ portfolios, forcing us to buy when prices are generally low and sell when prices are generally high. We also help educate clients of the huge importance of the correct investment behavior and how it can determine their financial success more so than picking any individual investment.
• Our investment philosophy also helps us avoid ‘benchmarkitis’, a disease that has plagued the investment management community, where investment managers construct client portfolios in such as way is to be very similar to market benchmarks. This is done unintentionally by over-diversification or intentionally by trying to avoid the risk of under-performing a benchmark by a wide margin. This behavior is usually not in the best interest of clients and allows for a dumb investments, usually in highly overvalued stocks, that can have devastating effects when markets go down.

When is the best time for a family office or business owner to take on a portfolio manager?

Immediately! Business owners and professionals with a minimum of $500K of investable assets that do not work with a team of investment professionals that are fiduciaries do themselves a huge dis-service. I will emphasise the word fiduciary again, as our industry has been very good at making things look very complicated when they don’t have to be. Fiduciaries have to do what’s in the clients’ best interest. Portfolio managers licensed to operate in Canada, in order to earn the right to be able to invest client money on a discretionary basis (i.e. the portfolio manager decides what investments make up the investment portfolio), have achieved the highest level of professional qualifications, experience and integrity and are obligated by law to act in the best interests of clients. Hiring a portfolio manager when a family’s nest egg has reached 500K is a no brainer, even if they are already working with a financial adviser, typically at a bank. Our fees are usually lower than the banks’, and perhaps more importantly - the opportunities for improvements in the family’s investment portfolio and tax efficiency are huge. If they are not working with an investment professional already, the opportunities are even bigger. Research has shown that investors working with an adviser have vastly outperformed, on average, investors investing on their own. A 2016 study by Dalbar concluded that the average investor grew 100K to 305K over the previous 30 years when over the same period, the stock market would have grown 100K to 2.3 million! Working with an investment professional, especially one that subscribes to a value investment philosophy, would likely have produced at least similar results to that of the stock market. My US stock picks over the last 17 years have outperformed the market by roughly 3.5% per year, with the market returning 202% total return and my picks returning (net of fees) 425%.

What can you advise for strengthening an investment strategy?

Typically, if there is room for improvement in an investment strategy, it comes from the risk management side, for example incorporating low cost hedging. Hedging is hopefully a drag in investment performance because it means that the main investment strategy is performing well, but is there just in case the strategy does not work.

For what reasons might a client’s portfolio need to be customised?

The two most common reasons are a family’s over exposure to specific stock or sector and tax efficiency. An Executive’s or Senior Manager’s stock options or holdings in a publicly traded stock can be dealt with by using a custom portfolio - part of which includes a hedge against that single stock risk and/or sector risk. Similarly, a business owner’s exposure to a particular sector or industry can be hedged or dealt with by using a custom portfolio approach. Additionally, every family’s tax situation is different - some carry unused capital losses for example and some don’t. Thus, different strategies can be employed depending on the circumstances of the individuals involved. Capital loss harvesting can be employed for some families but not necessarily for others. More flexibility allows for better efficiency.

What is your process for identifying the risks and opportunities?

We typically look after a family’s whole nest egg and the opportunities and risks can be on the investment side, the tax side, the estate side, etc. In order to help clients as best as we can, we need to (and do) get to know our clients very well. Then the risks and opportunities specific to them and their situation will reveal themselves.

On the investment side, the risks and opportunities are more investment specific rather than client specific. We typically find the best investment opportunities in equities. They typically carry with them the most risk. Our value investment philosophy of ‘buying good businesses at good prices’ helps both to identify good opportunities and mitigate risk through a margin of safety in our valuation process. Typically, we would prefer lower beta stocks to higher beta stocks (relative volatility to that of the market), if other stock attributes are similar. My best stock ideas are in the fund that I manage, the Lycos Value Fund.

We also find good investment opportunities in private equity, albeit with an even longer time horizon than publicly traded stocks. For private equity, we would rely on outside managers. The process here is more with identifying competent and honest outside managers that are also reasonable on fees, an approach every investor should be using in selecting investment managers.

Fixed income investments are challenging in this low-interest-rate environment and are going to be challenging for years to come as either rates stay low or go up, essentially devaluing the worth of longer dated debt. We are at this point underweighting high-grade corporate bonds as the additional yield these bonds offer over government bonds is not enough to compensate for the additional risk and reduced diversification benefits, due to the higher correlation to equities. At this point, we prefer shorter-term private debt financing growth companies in the US or commercial mortgages also in the US, as the yields are better and the US economy is doing well. We also obtain private debt exposure through outside managers, so the process here is similar. In addition to analysing the risks and opportunities inherent in the asset class, we try to identify competent, honest and low-fee outside managers to help us. We also use long dated US Treasuries and long dated provincial bonds that carry the so-called duration risk, i.e. that the value of our holdings will go down as yields go up, not because of the yield we are getting from there, but primarily because of their negative correlation to risky assets such as equities.

Finally, and most importantly of all - how do all the different pieces fit together? Getting the asset mix right is the most important decision for us. Our process there is that for any particular return target for a client portfolio - we optimise the allocation to the various asset classes so that the portfolio can have the highest expected Sharpe ratio, i.e. the highest expected return divided by the expected volatility of the portfolio. We have found that this method has worked quite well.

Of what importance are third-party custodians in the management process?

Having independent third-party custodians to hold client cash and securities is important to our clients. As managers, we make buy and sell decisions on clients’ behalf, but we do not have physical access to their money, cannot make withdrawals from their accounts and essentially, have trading authority only. This is a good standard, one that I believe should be a requirement for all investment funds and a standard that helps maintain a high integrity and trust in the markets. I believe that the Madoff scandal would have been avoided if this was a requirement then, as the custodian for Madoff’s funds was a related party, not an independent third party.

What are the signs of a good investment to buy into?

Equities tend to make the best investments over time so I’ll focus on this asset class. Shares of businesses (“stocks”) whether traded on a stock exchange or not, represent fractional ownership of the businesses. Investors sometimes lose track of that simple fact and think of stocks as things that go up and down based on random macro-economic events, geopolitical events, company news, investor phycology, etc. While all of these may be true at one time or another, they neglect the two most important factors: the quality of the underlying business and even more importantly the price/valuation of the business in question. A good way to bring these two important factors into focus would be to think that you owned the entire business, not just a fraction of it, and that you couldn’t sell for a very long time, if ever. With that in mind, good investments will tend to be shares of good businesses bought at a good price. What makes a business a good business? This is not a particularly hard question. Some signs are:

1. The business has a good track record of profitability, for example an average return on equity over the last 5 years of at least 10% per year;

2. Good future prospects: for example, analysts are expecting decent growth over the next 3%-5% years;

3. A strong balance sheet;

4. The business has some ability to control its own destiny, rather than rely on external
factors such as the price of commodities or energy; As far as price is concerned, traditional valuation metrics here work well: low price to book, low price to earnings, low price to sales, low price to cashflow. Additionally, else being equal, given two stocks with the same attributes, a stock with a lower price volatility would be preferable.Stocks that meet the above criteria tend to do really well over time and make great investments. I have made it my aim in my professional life to look for such investments! Examples of good investments like these today would be: Walgreens (WBA) with a 5 year average Return on Equity (ROE) of 16%, price to book (P/B) of 2.26 and price toearnings (P/E) of 10; Arrow Electronics (ARW), Toyota Motors (TM) and Goldman Sachs (GS) with similar attributes.

Is there anything else you would like to add? 

I would like to reiterate the most important takeaways for investors: 1. Work with an investment advisor if you do not already have one, research has shown that investors working with an advisor vastly outperform those that do not. 2. Work with a fiduciary if you have enough money to invest such a portfolio manager. A fiduciary has to by law put your interests first ahead of their own or other clients’. 3. Do not let emotions dictate when you invest money, invest money consistently: do not sell after markets are down just because they are down and do not add to investments after they’ve gone up in value because you feel good about them. Using an investment manager with a “value” investment philosophy will go a long way in helping with that.

Website: http://www.lycosasset.com/

Investors are voting with their feet and abandoning cash ISAs, according to the Q2 Investor Barometer from Assetz Capital.

The peer-to-peer lending platform canvasses the views of its investors every quarter, and while 52% of investors responding to the Investor Barometer had put money into cash ISAs in Q1, only 37% still do following the end of this year’s ‘ISA season’.

Q2’s data shows that 61% are making use of a Stocks and Shares ISA, 60% had an Innovative Finance ISA, while a small minority were invested in Lifetime or Help to Buy ISAs (4% and 3% respectively).

According to Defaqto, in March 2018 the average interest rate offered by a cash ISA was 0.70%. This is consistent with Bank of England interest data** on bank and building society general deposit accounts to March 2018, with sight deposits offering an average of 0.46% and time deposits an average of 0.90%. With inflation at 2.4% in April 2018, the rates currently offered by banks see consumers effectively losing money in real terms.

Stuart Law, CEO at Assetz Capital said: “Given our investors are familiar with peer-to-peer lending we’d expect to see more opt for an Innovative Finance ISA than the general public, but it is still notable to see this significant drop in cash ISA users.

“Our IFISA has grown steadily in popularity since launch. As of the end of May, almost £50m has been invested in our ISAs – over £12.5m of which has come from transfers. Around 75% of all investment in our ISA is new money on the platform and the average size of an ISA account is approaching £15,000, which is a lot higher than the industry average of £4,400.

“We believe much of this is driven by a movement away from cash ISAs and we expect this to continue as consumers look to make their money work harder for them. We also put this down to the secured nature of our peer-to-peer loans and our credible levels of net returns when compared to many of our competitors, according to AltFi Data market analysis, as well as our long track record in the industry.”

(Source: Assetz Capital)

Investors need to avoid complacency as Trump potentially marches off to a multiple front trade war, warns deVere Group’s boss.

The warning from Nigel Green, founder and CEO of deVere Group come as worries of a trade war between the US and China have further increased, causing markets to slide around the world. The fears intensified after it emerged that President Trump is preparing a new crackdown on Chinese investments in America.

Mr Green comments: “Up until now the markets have been remarkably nonchalant regarding the escalating tensions between the world’s two biggest economies over the last couple of months.

“However, as the Trump administration sets out increasingly aggressive restrictions on what they see as China’s unfair trade practices, and because Trump is on the trade offensive on many fronts, including against traditional U.S. allies, the worries are now becoming much more focused.”

He continues: “There really hasn’t been any major asset class or any part of the world Trump hasn’t spoken out against in recent weeks. As such, if investors are serious about growing and safeguarding their wealth, complacency should no longer be an option. Vigilance is crucial.

“Now is the time for investors to ensure that their portfolios are properly diversified.

“As history teaches us, diversification is the best way an investor can position themselves to mitigate risks - and also, importantly, to benefit from the buying opportunities that all bouts of market volatility present.”

Mr Green goes on to add: “It is likely that Mr Trump’s bombastic tactics are just negotiating strategies and he will not totally overhaul and/or disrupt trade patterns.

“However, due to the scope and depth of the potential fall out of a U.S.-led trade war on international trade and global growth, investors should be actively looking to review and, if necessary, rebalance their portfolios.”

The deVere CEO concludes: “Investors need to brace themselves for months of heightened posturing from the different parties, which is likely to increase market turbulence.

“And as Trump potentially marches off to a trade war, a good fund manager will help investors sidestep the risks and embrace potential opportunities.”

(Source: deVere Group)

Sometimes investing isn’t as straightforward as some make it out to be, and knowing the tricks behind stronger investment strategies can go a long way. This week Finance Monthly benefits from expert advice from Hannah Goldsmith DipPFS, Founder of Goldsmiths Financial Solutions and author of ‘Retire Faster’.

If you’d like your money to work harder, perhaps with a view to retiring sooner, here are five rules you need to follow. And they are probably not what you’re thinking:

1. Trust the markets

The global market is an effective information processing machine. Millions of participants worldwide buy and sell securities in the world markets every day. The real time information they bring to the market helps set the market price. With more than 98 million trades a day, the probability is miniscule that a committee, sitting in a board room and discussing where to invest your money, will spot a favourable discrepancy in a stock price. It is possible, but it is also highly improbable.

Instead, of buying retail funds selected by a fund manager, buy a diversified basket of global index tracker funds and let the markets work for you. A wide basket of stocks from around the world linked directly to market returns can reduce the risk of trying to outguess the markets or worse, paying somebody else to outguess the markets.

2. Diversification is key

Investment returns are random; they cannot be predicted with any certainty. Therefore, don’t limit your investments to a handful of stocks or one stock market. This is a concentrated strategy with high risk implications.

You cannot be certain which parts of the world will outperform others, if bonds will outperform equities, or if large stocks will outperform small stocks. So, don’t let your financial adviser visit you each year moving and changing your funds to justify their existence and their fees. They are wasting your money.

Instead, buy the global market using a diversified basket of index tracker funds and leave the speculation to the gamblers.

3. The Financial Services Industry does not have your best interest at heart

Conventional wealth management institutions are far happier when the status quo prevails; it’s more profitable for them and their shareholders. Why would they provide you with an opportunity to move your money to a competitor at their expense, even if it was in your best financial interest? These corporates are in business to maximise shareholder value – not your investment returns.

It is therefore essential to take back control of your money and ensure that the ‘hidden’ ongoing portfolio costs are kept to the bare minimum. Aim to keep the costs of managing your portfolio at under 1%. The industry average is in the region of 2.3%, so if you save yourself even 1% a year you will have made a substantial amount of money using compounding interest over the life of your portfolio.

For example; if you invested £100,000 with a traditional financial services company paying a total fee of 2.3%, and you received a 7% return on your money for 25 years, you will have a projected future value of £329,332. As £100,000 was yours to start with you will have made a £229,332 profit. The overall cost to you, to make that profit, will have been £109,912.

If you invested £100,000 in a low fee portfolio, paying a total fee of 1.11% and received a 7% return on your money for 25 years you will have a projected future value of £441,601. As £100,000 was yours to start with you will have made a £341,601 profit. The overall cost to you would be £63,718.

This additional £112,269 can be used by you and your family, rather than just giving it away to an industry that feeds the ‘fat cats’. Remember it’s your money … don’t give it away.

4. Think long term, not just about today

When there is a long slow decline in markets, investors want to jump ship and wait for the markets to recover before jumping back in. However, market timing cannot be predicted. Taking your money out in falling markets means you lose real money – thanks to fear. Most people don’t reinvest until they get their optimism back, which is often too late; by then the stocks have risen, you’ve missed out on the gains, and you still have your losses to make up.

Manage your emotions by investing in a risk portfolio that is correlated to your capacity for loss. Not one that is based purely on your search for the highest returns. Remember, investing is for the longer term. History shows that you will be rewarded for your bravery – and your patience.

5. Don’t lose money with the banks

Although the banks’ advertising agencies tell us how wonderful these institutions, I am still reminded of the chaos and misery they caused when they needed bailing out by the tax payer. This was due to what was described by the Financial Crisis Inquiry Commission, as a ‘systematic breakdown in accountability and ethics’.

Your capital deposited in a Bank is being eaten by inflation at 2-3% every year. Over the last 10 years, whilst the stock markets have gone up, the buying power of your bank deposited savings has decreased dramatically and will continue to do so for the immediate future.

My advice is to look at investing, rather than ‘saving’ with a bank; diversify your portfolio; let the markets work for you; and ensure you keep your management fees to around 1%. By following these rules you’ll increase your fund faster and the day you can retire (or splash the money on your dream) will arrive much sooner.

More and more institutional investors are starting to invest in cryptocurrencies. As they do, the issue of crypto custody and how it fits within their existing workflows and regulatory requirements becomes a bigger and bigger issue. While a range of approaches are currently being used, everyone wants a better solution. Below David Wills, Co-Founder and COO of Caspian , reveals more.

Since the beginning of last year, cryptocurrencies have surged in popularity, usability, and, most importantly, value. While crypto markets have historically been dominated by individual investors, institutional investors have only recently joined the fray. However, with two Chicago-based commodity exchanges, Cboe and CME, launching the first regulated Bitcoin futures contracts at the end of last year, this new wave of involvement is growing.

As it does, the issue of crypto custody, which is essentially how an investor’s digital assets are stored and ‘kept safe’, gains more attention. In traditional markets, years of regulation have meant that organisations and mature systems, such as the broker/dealer relationship or future commission merchants, have developed for this purpose. In the world of cryptocurrencies, such institutions are only just being imagined or established and they are doing so against the grey area of crypto regulation.

Which begs the question, what solutions are institutional investors using now and are any of them good enough to survive for the long term?

Crypto custody as it exists today

While specific solutions for institutional investors are appearing with greater frequency by the day, they are normally a combination of established crypto storage practices. After all, much of the risk associated with holding and trading cryptocurrencies come from the fact that they are digital assets, which are as vulnerable as an individual’s personal online security measures.

This means that individual institutions are dealing with the same issues of hot storage on exchanges, which enables speed of trading, and cold storage offline, which means increased security of the digital assets held. One option that combines the benefits of both approaches for institutional investors is vault storage. In this scenario, the risk of hot storage is reduced because an exchange creates a private key offline, making it easy to send purchased cryptocurrency to the public address but much less easy to move it from the account using the private key.

Such solutions are being utilised in order to find the right combination of security and efficiency that institutional investors need. For the most part, they are using a diversified combination of hot and cold storage in combination with multi signature wallets and monitored concentration limits to mitigate risk.

As one can imagine though, this is still not the ideal solution for experienced investors used to a mature toolkit that has been optimised to make regulatory compliant trading as quick and easy as possible within a regulated fiat environment.

Solutions for the future

Innovation and consolidation in the area of crypto custody are occurring in parallel, signalling what the future direction of the solution might look like.

As mentioned, crypto funds are already providing a variety of custody solutions for institutional investors, including insurance, and this consultative approach will continue.

In addition, established crypto players are developing their own custody offers to attract the more security conscious players entering the market, either through internal innovation or acquisition. BitGo’s recent acquisition of digital asset custodian Kingdom Trust, which holds more than $12 billion in assets, is a recent example of the latter and it would not be surprising to see crypto exchanges making similar purchases to boost their offer.

On the technological side, recent innovations like the Glacier Protocol suggest that the development of blockchain-focused solutions will also play their part. Although designed for personal, long-term storage itself, the development of similar protocols to solve the problems of institutional investors would not be a surprise.

FInally, the role of the regulator cannot be ignored here. Institutional investors utilise custody solutions in the traditional fiat world that have been designed around the frameworks laid out by regulators. We already know that the SEC has kicked off a consultation with over 100 crypto funds, during which custodianship will undoubtedly be covered.

While a single solution has not yet revealed itself, as more and more regulated institutions enter the crypto space, more regulatory frameworks will be established, more solutions to fit this need will appear and the picture will become much clearer.

In recent years a new way of investing has emerged, Peer to Peer (P2P) lending, and although this sector is growing fast, many people have yet to properly understand what it has to offer, how to participate and what risks are involved. This week Finance Monthly has heard from Relendex, a P2P commercial real estate lending platform on the myths surrounding P2P lending.

The first important thing to grasp is that Peer to Peer lending is a new way of investing and not an asset class in and of itself. It provides the opportunity to access investment returns that are not necessarily available elsewhere. The whole point of the structure is to bring together a number of people to meet a funding requirement via an online platform. The operating costs of the platforms are typically much lower than other types of Investment Company, this often provides a better deal for lenders and borrowers.

Though P2P is perceived in some quarters as “new”, the UK’s oldest P2P lender started business in 2005 and has now lent in excess of £2 billion. The Financial Conduct Authority (FCA) took over regulation of the sector in 2014 and most serious players are fully regulated through a rigorous process developed by the FCA to make sure that these businesses are regulated just as robustly as any other financial services business, in order to protect the interests of their customers. Since 2012, the UK Government has been supporting the P2P sector by lending large sums of public money through various platforms.

There are an increasing number of players in this market and they tend to focus on different types of proposition. It is important to remember that P2P platforms are as different as chalk and cheese. Some are fully-authorised by the FCA, reliable and professionally run with a good track record and reporting. Others are not. Platforms cover a wide range of asset classes. The most common areas are those lending to small to medium sized businesses (SME Lending) (mostly unsecured), consumer lending (unsecured) and property lending (usually secured). As we’ve said, P2P is an enabling structure not an asset class so it’s really important to understand where your money is being deployed. You will also find that some P2P platforms allow you to choose an individual opportunity and others will invest your money across a range.

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One of the fastest growing parts of the market is property lending, which grew by 88% from 2015-16. This part of the market has grown significantly as it seems the High Street banks, are unable to meet the demand from developers to deliver new and refurbished homes at a rate the current housing crisis demands.

Relendex was one of the first P2P lenders to enter this market and it allow individuals to select which projects they are attracted to and they choose how much money they want to invest – from as little as £1000. All of their loans are secured by a First Charge over property and they have returned an average of just over 8.5% per annum and although they will lend up to 65% of the value of a particular property, the average since they started business is actually below 60%.

As the established bricks and mortar banks pull out of many areas of lending, especially the making of development loans to SME house builders, Michael Lynn, Relendex's CEO, confidently predicts that if the UK is to have any chance of building the homes it desperately needs, the P2P sector must step into the financing gap. It seems that the future is bright for P2P financing with the prospect of continued dramatic growth over the next decade.

So a few tips on what to consider when looking at getting involved in P2P:

• Is the company FCA regulated? The Platform itself should be regulated. Be wary of platforms that cite a 3rd party's regulated status.
• Does it have a track record?
• Are the claims it is making for its rate of return evidence based?
• Does the management team have the expertise relevant to their sector, or are they relying on an algorithm untested in a downturn?
• Are the loans secured on assets?
• Are asset valuations and LTVs conservative?
• Does the platform offer an Innovative Finance ISA wrapper?
• How easy is it to withdraw funds and what, if any, are the costs?

To hear about defined benefit transfers and pensions in the UK, Finance Monthly connected with Chartered Financial Planner and Chartered Wealth Manager Pierre Coussey. With over 30 years of experience in financial services both within the largest providers in the UK and at the coal face within private practice, Pierre is also the current Chairman of the Personal Finance Society (Kent region) and is a past Examination panel member of the Chartered Institute of Securities and Investment (CISI).

What are the typical challenges that clients approach you and Bond Wealth with in relation to transferring their defined benefit pension?

Pension freedoms, which came into effect in the UK back in 2015, introduced the ability for those with defined contribution pension arrangements to access their pensions without the need to buy annuities and also pass their pension funds onto family. The biggest headline was probably giving them a choice to buy a Lamborghini if they choose to do so. This did not cater for the 5.1 million people in the UK who held old benefits in an ex-employer or closed defined benefit scheme (pensions that promised an income for life). One of the things we have seen is a massive demand for pension transfer advice and this is partly being driven by some of these factors, together with historically very high transfer values in terms of multiples of deferred pension promise (with 30 to 40 times being quite common).

The complexities of what is best for a client are amongst the most challenging and are often not fully understood by potential clients. Our general view is that for the majority of people, sticking with the defined benefits will be correct unless they can fully take into account wider factors and understand them. Thus, a starting question would be “why would they want to give up a guaranteed pension for life?”.

What would you change about defined pension schemes, if you could?

As a pension pot needs to meet a number of needs, it is frustrating that in the main partial transfers from the existing defined benefit schemes are not facilitated. If I could have a panacea, this would be available to all, so that a mixed approach could be customised specific to a client’s actual needs rather that the current all-or-nothing transfer choice. Unfortunately, I do not see this changing as existing schemes have no appetite to spend on this flexibility for past members and are inundated with transfer value requests.

What is your overall piece of advice for Finance Monthly’s readers in regards to defined benefit schemes?

My overall  piece of advice regarding defined benefit schemes is to start with the assumption that your existing pension arrangement will be best in providing for you and your family and then write down your three main reasons for considering or wishing to transfer and the three main drivers in your retirement planning. The bigger the lifestyle cost this needs to support, the bigger the value and risk transference you are putting into your own lifestyle bucket.

Additionally, talk to an experienced regulated adviser who can initially help you explore your real lifestyle needs. This should be followed by further working with them to explore your actual retirement needs that will fit with your lifestyle in the future. Ultimately, if they can save you from potential mistakes at either of these stages, the cost of good advice will be small compared to what would be at risk of getting it wrong. If you transfer out of a defined benefit scheme, you cannot reverse that decision and transfer back.

Ultimately, your chosen regulated adviser can take you through these initial steps at a relatively low cost. It is essential to bear in mind the merits or drawbacks that may appear with the transfer, but might not become clear until several years down the line. One example of this is that a client is probably not going to run out of money in the first year. The risk of this however could increase in the following 10-15 years, if they, for example, decide to spend all of their money on the aforementioned Lamborghini.

Contact details:

Telephone: 01892506891; 0203 096 3385

Email:  pc@bondwealth.co.uk

Diversifying any investment assets sounds like a likely success in the long term, but what are the risks when it comes to cryptocurrencies? Levi Meade, Investment Analyst at Columbus Capital, provides some insight for Finance Monthly.

Diversification and its benefits is an area that has been covered many times in prominent financial literature and is something that is both well understood and commonly practiced amongst the traditional investment committee. Therefore I will not seek to reiterate the theoretical advantages of a diversified investment strategy.

However, investing into crypto-assets, as an asset class up till now purely based on speculative value of experimental technology, is a discipline that can prove to be extremely dangerous over the long term without diversification; diversification as a risk reduction strategy is imperative when risk is so high that success of an individual asset is improbable.

Experimental Technology

Crypto-assets are early stage start-ups offering a product completely as open-source software utilising techniques, security models and incentive structures that are largely unproven and at best no more than ten years on the market. This provides two major sources of risk.

Firstly, start-ups mostly fail due to a number of reasons. In general at such an early stage there are an enormous amount of barriers that a founding team need to get past in order to remain in business which are usually disproportionately harder to overcome than problems at later stages of a businesses life cycle. For instance, gaining traction amongst a large enough customer base for survival, in a situation where customers may be reasonably satisfied with existing solutions, can be difficult when human nature tends to be resistant to change. A start-up has to contend with this friction, which is embedded into human behaviour with a significantly superior solution.

Secondly, crypto-assets are pieces of open-source software that harness a variety of concepts from different disciplines which at their intersection requires highly trained experts to build and understand the technology. This creates a much larger probability of there being unknown unknowns regarding the inherent risks of a piece of a technology and on its limitations.

Risk to Reward of a Diversified Crypto Strategy

How does creating a diversified portfolio across the asset class as opposed to a more concentrated portfolio affect the overall risk reward? What is of particular importance is that with such high risk investments come the potential for massively outsized returns. For example, since its inception on the market, Bitcoin has returned over 100,000%. When creating a diversified crypto portfolio, like a venture capitalist, the aim of the game is to increase the likelihood that you are exposed to such outsized gains experienced by the winners. Even in a landscape where the majority of assets experience unfavourable returns over the long term and perhaps go to zero, the outsized gains experienced by a good investment can still lead to above average investment returns.

Also, with regards to the technical risk and the ability for us as investors to assess this technical risk, diversification works as a financial engineering tool to mitigate the affects of unknown unknowns, which may be specific to individual assets. By taking smaller positions in a greater amount of assets you can limit your exposure to such technical risks, which may be difficult to identify or predict.

Why Diversification in Crypto Could Fail

Diversification however does not help to protect against technical risks that affect the entire asset class. Another aspect of investing into experimental technology are the potential risks regarding the foundation of the new technology which could directly affect the entire asset class. One particular risk, which the space is aware of, is the incoming threat of quantum computing. The majority of crypto-assets are secured by some cryptographic problems, which would require an insane amount of computing power to break, which is simply not economically viable given the current technological constraints. However breakthroughs in quantum computing could make it possible to break such cryptographic problems, and in the process rendering Bitcoin and other similar blockchains useless at that point unless they had developed quantum resistance before such an attack occurs. Diversification therefore change the risk profile of the portfolio such that investors are more exposed to broader investment themes or even the some key risks affecting the assets class as a whole in comparison to more asset specific risks.

Investors around the world choose commodities as a means of either advancing their trading strategies or hedging against investments in stocks, forex or cryptocurrencies. But which commodities are they choosing?

In this article Finance Monthly discusses five of the best, looking at the current market conditions and how things might change in the near future. But first we’ll discuss why you might want to trade commodities.

Why Choose Commodities?

Commodities usually reflect trends in the world at large, and so are a good vehicle for those with their finger on the pulse of international markets and political conditions. They are also generally inversely correlated to the stocks and shares market, making them a useful means of protection from risk in your other investments.

You could even use them to hedge against forex trades, provided you use a trading platform that gives you fast and reliable access to as many markets as possible.

And when it comes to choosing commodities to trade, these are the five that we believe you should know about in 2018:

1. Brent Crude

With tension continuing across the oil-producing world and growth predicated in emerging markets, this commodity is a good choice for the rest of this year. In fact, the Goldman Sachs Group Inc. has given Brent Crude an ‘overweight’ recommendation for the current period, meaning that they believe this is a commodity worth adding to a trading portfolio.

2. Natural Gas

High output in countries such as the US and Russia has continued to keep prices lower than they should be for natural gas, but this could change – especially towards the tail end of the year when the Northern Hemisphere moves into winter and demand increases. In fact, demand for natural gas is already outstripping supply in China, and this will surely have repercussions on the price of this commodity worldwide.

3. Copper

Disruptions in mining output, coupled with urgent demand from the electric car industry, have caused the prices of copper to soar recently. This trend may not continue with such force, but over the course of 2018 prices are expected to rise 9.7% from 2017 levels. In other words, copper is still a commodity you should definitely know about.

4. Palladium

This commodity is used in vehicle catalytic converters, and so enjoys demand from the automotive industry. As the trend of converting from diesel to unleaded petrol and hybrid electric continues, so too should the price of palladium rise. Palladium has even started to reach the price levels of platinum, giving just some indication of how in demand this commodity is.

5. Zinc

A top performer in 2016 and 2017, this base metal is beset with supply problems which could see it to another strong year in terms of price growth. Another factor is demand from the Chinese market, which looks set to continue its increase for Zinc and similar commodities.

Of course, there are other commodities to watch in 2018, but these five commodities should provide a good starting point for building a strong investment portfolio.

While he retains a strong voter base in the conservative heartlands of North America, the Presidency of Donald Trump continues to be defined by an excess of smoke and a seemingly endless hallway of mirrors. Nothing embodies this better than the former real estate mogul's comprehensive tax reform plans, which has been presented as legislation for low and middle-income earners in the US.

While Trump's estimates suggest that the typical American family will receive a tax cut of $1,182, however, it will also offer huge breaks to wealthier citizens and the largest corporations in the US.

In fact, Trump's decision to slash the base corporate tax rate from 35% to just 21% represents the focal point of his proposed reforms, while it has already created considerable opportunities for entrepreneurs and investors alike. Here's how.

How Does Trump's Tax Reform Work and Who are the Initial Winners?

As well as slashing the corporate tax rate in the US by 14%, President Trump has provided sweeping tax reductions for special interests while also lowering the top federal tax rate from 39.6% to 37%.

Interestingly, the commercial tax cuts are permanent and will be sustained for the entire duration of the Trump administration and beyond, until the President's successor proposes his own reforms in the future.

While this will benefit all businesses to some degree or another in the US, those currently paying an inflated level of corporation tax will be the biggest winners. So too will corporations that hold considerable amounts in overseas cash and investments, with both of these tax breaks offering natural advantages to some of the largest and highest earning companies in the world.

Take Apple, for example, who at the time of writing hold an estimated 94% of its $269 billion cash reserves in overseas balances. As a direct result of Trump's tax reform, the CFRA estimates that the technology brand will be ultimately repatriate as much as $200 billion of this capital back into the US, while using the proceeds to buy back stock and boost its bottom line even further.

The same principle can also be applied to companies such as Amazon and Facebook, while JP Morgan analyst Sterling Auty has stated that US-based software stocks will also emerge as the largest beneficiaries of the tax reform. This includes prominent brands such as Intuit and Aspen Technology, who tend to have the majority of their revenue domiciled in the US and boast exceptionally high profit margins.

How will this Influence Investors?

Traders may be looking to take advantage of those companies that have benefited from the reforms, of course, and fortunately Trump's legislation has provided clear and obvious benefits for corporations that meet certain criteria relating to their business model and infrastructure.

More specifically, there should be a clear focus on companies that boast significant cash holding overseas, as well as those that have naturally high profit margins.

This includes a large majority of businesses in the vast and diverse technology sector, with brands such as Apple able to leverage their infrastructure, international reach and inflated margins to benefit significantly from Trump's multi-layered tax reform.

We all know the cloud is leading the way in transforming operations across financial organisations, but while a significant enabler, it represents just one element of much wider digital investment. We hear from Steven Boyle, CEO of Integrated Cloud Group, who discusses how cloud technology is only the beginning of true digital transformation for financial institutions.

Cloud is pulling the strings, but household names such as HSBC, Barclays, Lloyds Banking Group, and the Royal Bank of Scotland are increasingly investing in a host of transformative, agility-enhancing technologies such as biometrics, robo-advisors and artificial intelligence as they pledge to keep abreast with customers’ demands for faster, simplified banking interactions.

I see traditional organisations looking more and more to FinTech startups to build and integrate new functionality and that will improve services, allowing them to focus more on customer needs.

Last year, HSBC launched biometric security for mobile banking in the UK, claiming that it was the biggest rollout of its kind. The bank says that this will enable more than 15 million customers to access accounts, using voice or fingerprint recognition biometric technologies. Lloyds – which is looking at Amazon Echo technology for voice recognition – also passionately believes that such notions have huge implications for Britain’s 360,000 blind or partially sighted, potentially opening up banking like never before.

Certainly, to my mind, it all represents a significant leap forward for biometrics technology being used in the UK banking industry for the secure authentication of account holders.

First off the blocks was Barclays which has been using voice authentication in its call centres since 2013, and in 2014 announced plans to introduce finger vein recognition technology for some.

However, all HSBC customers will have access to fingerprint authentication services using the fingerprint readers that are built into Apple iPhones, in tandem with HSBC’s mobile banking app. Like Barclays, HSBC is using Nuance Communications voice recognition, which analyses over 100 unique characteristics to identify a speaker. Furthermore, once HSBC and First Direct customers have registered their finger and voice prints, they will no longer need to remember security passwords or PIN details. It’s clear to me that such innovations hold the potential to absolutely transform customer interactions.

Then there’s the much-discussed and analysed rise of the robots. The likes of Lloyds Banking Group, Barclays and Santander UK are further innovating with the introduction of digital robo-advisors – essentially, computer-generated recommendations based on online financial questionnaires  – which, it is thought, could help to fill the ‘financial advice gap’ for those with small savings pots who need investment advice but can’t necessarily afford it.

In this instance, the bank suggests how much to invest into certain funds, and then transacts on a customer’s behalf in return for a fee. While not necessarily a solution, it seems to me an important recognition of consumer needs in the wake of the retail distribution review which scrutinised the mis-selling of investment products and made it uneconomical for banks to provide advice. Certainly, platforms like Wealthfront and Betterment have already proved hugely popular – and it’s no coincidence that Lloyds jointly hosted an event entitled, ‘Can I Trust a Robo-Advisor?’ at London’s FinTech Week.

RBS is also reportedly planning to utilise robo-advisors across its investment and protection divisions as part of a cost-saving strategy that is expected to reduce the need for face-to-face advice.

Nevertheless, it should be noted that others are following an alternative path; HSBC is set to unveil a division of investment advisors for all customers, while Santander UK is introducing 225 investment advisors across its branches.

Another parallel disruptor is the rise of artificial intelligence which is set to allow consumers to talk to a device and receive the information they are looking for. In fact, it’s already managing many banks.

A leading proponent of AI – predicated on the belief that data is king for the leveraging of informed decision-making and risk management – has been Barclays, which says that the notion of touching a device could soon be obsolete when it comes to executing transactions. The bank sees digital technology as being crucial to its future and believes that its customers could soon be talking to a robot computer system to perform simple transactions.

Lloyds Banking Group introduced the first networked ATM in 1973, and has continued to innovate, now employing Google analytics tools to analyse customer behavior, allowing it to better understand customer needs and meet them in real time.

Amid this unprecedented period of digital upheaval, the opportunities for the banking sector are effectively limitless – suddenly the walls have come down and there are extraordinary possibilities all around. Big banks are turning to technology for myriad reasons, but at the heart of the drive for transformation are significant economic benefits, matched by enhanced agility, less risk, and a better customer experience.

Those that think heightened technology means less of a customer relationship should, to my mind, consider the idea that it could in fact serve to free up time for banking staff that will actually facilitate, rather than, hinder relationship building. This will, in turn, allow more unique needs to be addressed while the more mundane tasks are quickly and automatically fulfilled.

As data security concerns are increasingly answered by better protection, it all makes for a fascinating road head for the banking sector as it embarks on the journey to new heights of speed, accuracy and efficiency.

Six out of 10 people with currently no exposure to cryptocurrencies would consider including cryptocurrencies like Bitcoin into their investment portfolios, reveals a new global poll.

Meanwhile, seven out of 10 people who do hold cryptocurrencies are planning to increase their exposure in the next 12 months.

In the survey carried out by deVere Group, 62% of those who do not have any cryptocurrency said ‘yes’, 26% ‘no’, and 12% ‘do not know’ when asked: “Would you consider, or are you considering, including at least one cryptocurrency into your investment portfolio?”

71% of investors who do currently have cryptocurrencies as part of their portfolio said that they are looking to increase this exposure over the next year, 25% said that they would not, and 4% cited that they did not know.

The 800-plus respondents of this poll are deVere clients who currently reside in the US, the UK, Australia, the UAE, Qatar, Switzerland, Hong Kong, Spain, France, Germany and South Africa.

Of the survey, deVere Group’s founder and CEO, Nigel Green, comments: “The fact that more than 60% of people with currently no exposure to cryptocurrencies would consider including them into their investment portfolios is striking.

“It underscores how, despite what many financial traditionalists have opined, that a majority of investors are now open to consider the opportunities that the likes of Bitcoin, Ethereum and Ripple could present.

“An increasing general awareness of cryptocurrencies and how they work, plus a growing sense that cryptocurrency regulation is now inevitable, are perhaps the main reasons why such a high percentage of people are now open to looking at the possibilities of crypto for their portfolios.”

He continues: “The survey also highlights that the majority of those who do currently hold some cryptocurrency as part of their investment portfolio believe that despite ongoing volatility, the potential rewards will outweigh the potential risks.

“It suggests that these investors expect good returns in 2018 from cryptocurrencies, view them as a good longer-term investment, and that the market will eventually stabilise.”

The deVere CEO concludes: “Cryptocurrencies remain a gamble – they are very much ‘unchartered waters’ assets and caution must be exercised.  However, that said, I do believe that in today’s digital world, there is a need for digital currencies.  One or two of the existing ones will succeed, whether it’s Bitcoin, Ethereum, Ripple, Litecoin, Dash, or any of the others, or not, of course remains to be seen.”

(Source: deVere Group)