John Browne believes the key to successful financial management lies in being well-prepared for the unpredictable
Expecting the unexpected used to be the preserve of strategists and corporate advisers; not any more. These days it is a skill that many people are having to acquire and, more than ever, there is widespread recognition that one of the keys to responding to the unexpected is to be financially well advised and prepared. That includes having access to liquid funds – cash and near-cash, deposit accounts and the like. Cash for simplicity.
How much cash does your client actually need? Every client will have different needs depending on their personal circumstances, amount of outstanding debt and existing savings and investments. The first step is to consider your client's lifestage – that is the relationship between their need for cash and those personal events that can be reasonably anticipated. These could include children's higher education (a growth area rather than school fees which is now a mature market), marriage or early retirement.
So there is no universal answer. There are, however, some rules of thumb. Your client should have a minimum of u5,000 in cash before contemplating speculative investments. Also, if your client has a large amount to invest, say u100,000, then the consensus among advisers is that 10 per cent should be put on deposit.
Martin Smith, chief executive of Abbey National IFA recommends that easily accessible cash should be sufficient to cover a family's six month income/expenditure plus any lifestage events. This means that it is important to check the terms of building society accounts so that money is not inadvertently tied up for long periods or subjected to heavy withdrawal penalties.
Which cash savings products should be considered?
To some extent this depends on how quickly money may be needed. Instant access usually goes alongside lower returns but there are exceptions. Some of the postal accounts of major banks and building societies allow instant (postal) access and offer more attractive rates than high street branches.
Bristol & West is active in this area and also offers special terms to ASIM members. Tessas are tax efficient, especially for higher rate tax payers, but lock up capital. They are best treated as part of a medium term investment portfolio rather than liquidity.
Cash unit trusts have not yet succeeded in the UK (although they dominate the French SICAV market). Symon Elliott, Prudential's sales and marketing director, says that they are becoming more attractive as interest rates rise. He emphasises, though, that cash unit trusts should be treated as medium term investments not short-term, quick access savings.
Moving offshore, special accounts are offered by banks and building societies through the Isle of Man and Channel Islands. These are open to UK residents.
The attraction for UK taxpayers is that interest is paid gross and accumulates tax-free. Tax is payable when interest is received but by exercising some choice about when to repatriate the funds, interest can be taken when your client is in a lower income tax band or if they retire abroad. These accounts are not to be confused with offshore currency funds which are essentially unit trust type products investing in sterling or overseas deposit instruments.
One type of client familiar to solicitors is the person with an excessive part of their investment in cash. Anthony Wands, director and head of Thesis, part of Thomas Eggar Verral Bowles, comes across people daily who have u100,000 plus on deposit. Wands' clients are a polarised mix of those who do not perceive cash as an investment and those who see it as their sole form of investment. Cash has to be managed as well and as actively as any other resources, says Wands.
The parameters are: credit risk deposit, interest rate payable, maturity, penalties and adequate liquidity for the client. Check also on where the client holds his or her cash. It may be delivering poor returns. Remarkably, one in three of the population still has an obsolete deposit account. In total more than u20 billion is held in these old accounts and National & Provincial alone reported moving 600,000 savers to improved terms when it scrapped its old, lower interest accounts.
There are undoubtedly times when it pays to be cash rich, but for most clients a balanced portfolio of investments made up of equity, higher risk/reward vehicles, tax efficiency and cash or near cash will give better long term returns. It will also provide cover for those expected unexpected events.
This is all very sensible but sometimes it's hard to avoid the temptation of a spending spree. Maybe restricted access to cash is not such a bad thing after all.
John Browne is head of Strategic Advantage, a business planning consultancy for law firms and financial services organisations.