Legal connections help build trust with clients

Peter Nellist, partner at law firm Clarke Willmott, answers this week’s questions from Simon Hildrey.

Q: What type of client base do you have?

A: Most of our clients are in the pre and post-retirement age group. They generally need tax advice, particularly on inheritance tax, as well as financial planning, including investment management. Many clients have been referred from the legal practice at Clarke Willmott. We are finding, however, that an increasing number of clients are coming to us directly because friends have recommended Clarke Willmott or have read about us.

We charge fees to all our clients. It becomes apparent early on if a client is not happy to pay fees. We spoke to one lady for an hour as a free consultation and told her we felt she had a high-risk portfolio. It comprised a handful of stocks worth a total of 1m. She said they were blue-chip companies like GlaxoSmithKline and therefore there was little risk of them suffering a fall in share prices. She did not want to pay a fee and went elsewhere, retaining her portfolio. This was in 2000 and GlaxoSmithKline then fell in value by around 50%.

Q: What type of investment management service do you offer?

A: More than 90% of our clients have a discretionary management service. This is because, as a firm, we can trade investments in bulk and therefore benefit from wholesale charges. The client directly benefits from this discount in charges as well. We rebate trail commission as we only charge fees, and therefore we do not make any profits from trading investments. This aligns our interests with those of our clients as we are not interested in unnecessary trading.

We believe in using a combination of direct equities and funds within portfolios for clients. The proportion used depends on the objectives of the client and their risk profile. We may use direct equities in the UK and then funds to gain overseas exposure, or to invest in UK small caps.

Q: Which asset classes do you use and how important is asset allocation?

A: Asset allocation is important and there are suggestions that in excess of 90% of returns are attributable to asset allocation. It is important in spreading risk. At some point there will be a correction in equities, so it is important to hold other asset classes as well.

We have strategic asset allocations that are based on the client’s lifetime objectives and risk profile. There is no point investing in equities if the client is worried about losses, even if this means they miss out on returns in the future. We ask the client what level of losses they are prepared to accept, which is like a bucket of cold water for them. We also have tactical asset allocations that are driven by where we believe we can find value for clients.

We have focused on equities, bonds, cash and commercial property. We have not used hedge funds because we have been concerned about costs, the risk and not being able to know what they invest in. We have gained exposure to hedge funds, however, via investment trusts. We also like investing in chattels, such as maps, stamps and silver. Clearly, these do not appeal to all clients.

An investment that clients and many IFAs do not think about is the index-linked saving certificate. These certificates are linked to the retail price index, so they are providing clients with security against inflation, with no risk. The only problem is that the rate of inflation is not uniform. Services such as nursing home fees are rising much faster than the RPI, while most shop prices are not increasing quickly.

When constructing asset allocation, it is important to consider all wrappers and investments. For example, when a client retires, the annuity should be regarded as being in fixed interest, while drawdown will usually have equity exposure. Therefore, other investments must take account of this. We have always been great believers in clients retaining equities in their portfolios after they retire. Clients may live for another 30 years after retirement and equities are the best way to generate a real rate of return.

Q: What are your current asset allocation views?

A: At the moment we have a strong underweight position in fixed interest compared with the Apcims benchmarks. This is because of the current price of most bonds and the risk of capital losses. People regard bonds as low-risk but potential capital losses mean total returns can be less than cash and at a higher risk.

Commercial property is looking overpriced at the moment but we feel it will still generate a positive total return over the next couple of years. This is because of the strong inflows and the yield. Even though yields have fallen, they should still lead to positive total returns.

We are generally optimistic about equities. This is not just because of our views of the economy but also as a result of the value we see in equities. Barclays Bank, for example, has a yield of around 4.1% and a P/E of 13 times. A couple of years ago, Shell had a yield of 4%, had good cover and it was clear there was a limit to future supplies of oil.

We like investments that offer value, some of which may be considered to be not very exciting by others. Alliance Trust is a good international general fund. As an investment trust, the charges are relatively low, the new chief executive is impressive and the merger with the Second Alliance Trust will benefit it through reduced costs.

Q: Is it an advantage being part of a law firm?

A: We believe it is an advantage to be able to offer clients legal advice as part of their financial planning. We benefit from the fact that Clarke Willmott is a large firm that has been expanding in recent years. This gives us greater credibility with existing and potential clients.

The other advantage is that lawyers tend to have more respect among clients than IFAs. We believe strongly in gaining the trust of clients by acting in an ethical manner.

Q: Is tax advice and other financial planning important when providing investment advice?

A: Investment advice should not be looked at in isolation. Tax advice can benefit the client and can be important when managing investments. For example, providing inheritance tax advice can lead to savings in tax that pay for our fee. We do not allow tax to drive investment decisions but it can be an important consideration.

There is a lot of marketing of Alternative Investment Market portfolios at the moment to mitigate inheritance tax, for example. But can clients be certain that the rules will not be changed by the Chancellor in the future? Not only would a change in the tax treatment affect clients’ tax positions but would also detrimentally affect the value of Aim stocks. I guess a fair proportion of money invested in Aim stocks is there for tax reasons and therefore demand would be reduced by a tax change.

Clarke Wilimott was founded in Taunton in 1898 as Charles Peard Clarke. The law firm also has offices in Birmingham, Bristol and Southampton. It has 65 partners and more than 600 staff. As well as legal services, Clarke Willmott provides wealth management advice, including on trusts, tax and succession planning, and asset management. It has three solicitors who are FSA-qualified and five investment specialists.