I’m 32 with £15K to Invest

October 19, 2015

By Consulting Group

The brief for this blog was to imagine I was a 32 year old with £15k to invest, and write about where I would put it and why.  Given that, touch wood, my wife and I will complete on our first home purchase on Friday, the truthful answer is a leveraged property bet!  However, for the sake of a more interesting article, I will imagine a second pot of £15,000.  The first port of call would be to set £5k aside as a safety net – I now have a boiler and a roof to think about after all!

From next April, tax changes mean p2p lending might be an option, as the interest won’t require a tax return. Although interest rates for lending to individuals through companies like Ratesetter and Wellesley are lower than business loans through FundingCircle or Thin Cats, the process is easier and more secure; loans are aggregated so you are realistically not affected by an individual default, and these firms are much more focused on user experience. My personal preference, having used them before, would be Wellesley. However, despite all this, the reason why I would not use p2p lending for my safety net is that I might need to access it instantly. Even with early access functionality, instant availability is not guaranteed. For that reason I would use one of the high interest current accounts currently available, probably through Lloyds.

With a wedding, mortgage deposit and safety net behind me, I can think longer-term for the remaining £10k. The popular choice for this type of investment is a pension, and although I don’t currently pay higher-rate income tax, there’s a reasonable likelihood that I will in the future. There is no point in putting money into a pension now, tying it up until I’m 55, and receiving tax relief at 20%, when I can invest it now, retain access to it, then put it into a pension once my earnings have risen and get tax relief on it, plus the investment returns, at 40%.

I believe the best way to invest this money is through Bux; I can purchase non-leveraged CFDs, which receive dividends and pay no financing charges, in major indices from the UK, US and Europe, for 0.06%. Selling them incurs the same cost, and holding them costs absolutely nothing. I can buy and hold a portfolio with £2,500 in the FTSE 100, £1,000 each in the S&P 500 and the NASDAQ and £500 each in the French, German and Dutch main indices for £3.60.

BUX Combined

However, the ideal Bux customer would be a more active trader than described and, as a result, Bux has made a deliberate choice to gamify the trading process; friends I’ve spoken to are put off from investing by the interface and informal terminology.  Nonetheless, the app is attractive and easy to use and hopefully Bux and similar products can become the future of low-cost self-directed investment.

At the moment Bux only covers major stock markets, and I would like some exposure to small caps and emerging markets. This means I will also need an account with an execution only platform.  Hargreaves Lansdown not only gives me choice, they make it clear I have the choice. For these less developed markets I would consider actively managed funds as well as passive funds or ETFs, but I would like to have the option. I can visit the Hargreaves website without an account and see that I can buy small cap or emerging market ETFs from providers such as Vanguard or iShares. From other providers those ETFs are either not available, or there is no option to search for investments without opening an account. The Hargreaves site isn’t perfect, especially on mobile, and I’d rather not pay 0.45% for an ISA, but in the end I would, because it has what I need and makes it easy to find it..

The Perfect Storm

The current regulations around retail investment advice can be improved for everyone – government, customers and operators all have a clear incentive for change. The Government has a significant financial incentive to ensure people are better advised, prepared and secure for their retirement. Retail brokers, banks and advisers need to see a reduction in the regulatory burden and associated risks of advising customers and retail customers need an alternative to the current offerings. The last time such a perfect storm occurred was in late 2012, when the Government and the FCA came together with the crowdfunding industry to deliver an outcome that was favourable for everyone. Can the same thing happen again?

Current Situation

There are a lot of start-up ‘fintech’ companies looking to address the retail investing sector, such as Investyourway, Nutmeg and Swanest. They all have differing approaches, but in general these are products that people can choose once they know what they should be doing. They are not addressing the ‘Advice Gap’, though a provider such as Moneyontoast does offer both online advice and a resulting portfolio.

The current UK regulatory environment is not conducive to new entrants offering innovative approaches to guidance or advice but does suit established players applying for additional or variations of permission.  We welcome the fact that execution only broker TD Direct recently applied for and received a new FCA permission to provide ‘specific, non-personal online, advice’ on investments. This advice is not deemed to be a personal recommendation and the lower regulatory obligations make it a more viable service for certain operators to offer.

The Role of Social

What we like most about the HM Treasury announcement is the statement ‘consider ways to encourage people to seek financial advice’.  This means they clearly have to be thinking beyond the existing unregulated ‘Money Advice Service’ provided by the Government. One such way is to consider the provision of tools that maximise the benefit of using friends, family and colleagues for help when making financial decisions. We call it social investing and believe that it can be used to bridge not only the ‘advice gap’, but also the ‘confidence gap’ which exists and stops customers making the move into retail investing.  We have looked at this in more detail in our earlier white paper “Social Investing – Opportunity to Address the Confidence Gap”.

confidence gap

What’s in it for the Government?

Take some risks now to create the optimum regulatory and business environment to address this significant challenge. Get it right and it will help ensure operators innovate and develop the right solutions and millions of people could be better off in retirement. Get it wrong and the burden on the state of millions of middle income individuals not properly prepared for retirement will be far more significant.