Thursday, 19 August 2010

Not so Sweet FA

It was in the early 1990s that I discovered the Tightwad Gazette newsletters and from them 

Joe Dominquez’ book, Your Money or Your Life, that gave me the dream of retiring early. I never quite grasped the business of buying and selling U.S. treasury bonds though, and indeed 30-year treasury bonds were withdrawn at the time I would have begun investing. My parents’ deaths however, had left me with 2 small houses in Oklahoma City and, having been handed rental property, this became the basis of my retirement plans.

When I moved from Oklahoma City to Salt Lake City, I bought a house there.  I bought it on the basis of being in a good neighbourhood, convenient to work and within my means.  Property values were rising fast and I saved hard to get onto the ladder as soon as I could.  When I moved to England I didn't know how long I might  stay and so kept the Salt Lake City house in case I needed to return.  I applied the same rationale to buy a house in England.   My first financial goals were to pay off those mortgages, which I did. After that I wasn’t sure what to do with my extra income. The media was full of stories about Independent Financial Advisors, possibly because of the new government agency that had been formed, called the Financial Services Authority, which supposedly regulated financial institutions.

*Not to be confused with the Food Standards Agency, another new organization after the food and mouth demise of MAFF – Ministry of Agriculture, Food and Fisheries. It’s acronym city over here, don’t you know.

Anyhow, I saw a story in the local paper, which I later realized was actually an advert, about an advisor whose office was conveniently across the road from my office and so I rang him. I understood that I should want an advisor who charged fees, rather than one who got commissions, and on the phone he said he charged £50 a month for unlimited consultations. I thought I could cope with that for a while and so made an appointment. 

The first warning should have been that, once in his office, the fee became £100 a month. Being a wimp and keen for advice I went along with it, but mentally assigned him a black mark. He gave me a sort of lecture, listing all the things we would deal with and I took copious notes. He sent me away with about a 30-page form to complete, which gathered information about my income and expenses, all my assets, my relationships, insurance policies, everything you could think of with a financial basis. It was almost as bad as completing a US tax return, but also illuminating. The questionnaire asked several times about whether I had views about ethical investments and I always indicated I wanted ethical investments, though I wasn’t sure what this meant.

At the next visit, he reviewed my information form, gave me roughly the same lecture and said we would consider investments at my next visit. These visits were about a week or two apart, so I did feel I was getting reasonable use of his time in exchange for the fee, and if it was slow going, I was learning a lot and being exposed to new ideas. It felt like I was taking big steps, which was what I wanted. I felt I needed to move my financial knowledge forward significantly. Unfortunately, it was about this point that he mentioned I likely should have paid tax to the UK for my US rental income. I had never heard this in the 10-11 years I’d been here, but granted I didn’t ring up the Inland Revenue and ask, either. I didn’t know any other Americans in my position, or any Brits with rental property for that matter. The UK takes most taxes at source, from your paycheck and from your savings accounts. Filing an annual form isn’t required for most people unless they are in the highest income brackets…or have different sources of income. The financial advisor recommended an accountant firm to me and I followed up immediately. The short version of a sad story is that I ended up paying £28,000 in taxes and penalties, which wiped out my savings account. It was painful and it brought home the fact that I would give the UK government 40% of any rental income I got for as long as my salary was as high.

My next appointment with the FA was for around the first of April. In the UK, the tax year runs from April to March, beginning something weird like the 6th of April. This means that any investments for the previous tax year have to be in place before the 6th. I’d not appreciated this properly, so that when he rang to ask if we could re-schedule that appointment, pleading that he was in the midst of exchanging contracts to buy a new house and it was proving very complicated and stressful, I readily agreed. 

In the UK there is a Roth Individual Retirement Account (IRA)-like investment called an Individual Savings Account, only Roth’s requires that the money have been earned and there isn’t this restriction on ISA’s. This can be a cash account or can be stocks and bonds. The interest or income is tax free (in the UK, anyhow) and you can withdraw from the accounts at any time, but you can only put in up to a certain amount for each year and if you don’t fill that amount it is lost and if you take it out it cannot be replaced. I figured I could go to any one of the banks that were offering ISA cash accounts and just take care of that myself. I found however that you couldn’t just walk in and give them money, at that time of year you had to make an appointment. Could I get an appointment at that late date anywhere? Of course not. I figured his cancelled appointment cost me a year’s ISA allocation, and that was the second black mark.

The accountants and HMRC (Her Majesty’s Revenues and Customs, part of which is the Inland Revenue) were still negotiating and calculating, so I still had money in savings. At our next appointment he started the standard lecture but, consulting my notes and seeing old ground, I moved him on. He suggested a stocks and bonds ISA for the new tax year, which I agreed to. The FA recommended buying from a certain brokerage company and disclosed that he would get a fee for directing the business to them. I was OK with that, except that the form required me to state that I was not an American citizen.  I pointed this out and the FA told me not to worry about that, just sign. No, I said, I can’t do that.

We had a most amazing ‘discussion’ where he explained that no one would know, I could sell the securities before I went back to the US, it was just a small formality, people signed this sort of thing all the time, it was how he was going to make me rich, I should leave it to him to make these decisions, etc, etc. and I explained that I was not willing to knowingly sign a false statement. Period. (Or, or full stop, as they say over here, apparently having blushing adolescent associations with the other term.) It went back and forth for about 30 minutes with him pulling out all his arguments and reassurances. Finally, he understood what ‘No’ meant. So, he pulled out another folder of brochures which paid him a slightly higher fee (See, you would have saved money, he said) but with no restrictions on citizenship. I gave him a check for the investment but walked out pretty shaken. This was the third black mark and by now I’d paid him about £300, plus he got an initial commission for the ISA and it turned out a further annual commission on top of that.

I decided that I was going to be done with this guy. Oh yeah, when he initially reviewed my financial information he’d noted that I was interested in ethical investments. I asked him what was defined as ‘ethical’ from this standpoint. He said it referred to certain categories of business, such as gambling, sex-related or environmentally damaging, but he laughed and told me if I was determined to avoid these I’d never make any money. He didn’t recommend sticking to ethical investments. When I inquired why his form asked on so many occasions about my preference for ethical investments when he didn’t believe in them, he simply replied that the Financial Services Authority required him to ask. Here I’d formed a cozy idea about his ideals and they were no such thing.  He said if I was going to 'go green' I'd never make any money!

So, I stopped my direct debit payments to the FA, stopped making appointments and when he rang I explained that I didn’t wish to continue doing business with him. I kept my notes, though, and did eventually write a will, another big item on the list. After leaving work, it made no sense to pay an accountant’s fees and I was already doing my own US tax returns, so I sat down and plowed through the UK forms and have done ever since. I figure I have death and taxes taken care of as much as I can at this point. I’ve continued opening ISA accounts each year, though I can’t always fill them and I still pay US tax on that income. I read about finance and economics as much as I can stomach and I think I absorb a certain amount.

I've formulated my own plan:

  • Have enough in savings to cover my minimum living expenses until I can draw my UK work pension at 60, taking into account exchange rates and fees and inflation.
  • After that, invest as much as I can bear to 'throw away' each month into index-linked stocks in an ISA; tax rates in the UK do more damage to my rental income than taxes in the US, where the property is located. 
  • Continue to hone my frugal skills to live as cheaply as possible without sacrificing health or a good quality of life.
Where do you get your financial advice? 


Struggler said...

Wow, he does not sound like a shining example of his profession! I'm glad you severed the relationship. My husband would enjoy reading this, because it basically reinforces his argument that we're better off managing our finances ourselves. I think that's fine, as long as you or a partner are interested and capable - I am capable but certainly not interested!
We do our taxes ourselves (they're nasty, since we have money in both the UK and US), but happily after a few years of swearing at the AMT form, even they get easier. And we have a chunk of savings in tracker funds although clearly as we approach retirement the riskiness of those will be less attractive.
The ethics issue is tricky. I prefer not to invest in dodgy companies, but modern multinationals are so complex that the management time to "decide" whether or not an individual stock is ethical can be a huge overhead for the fund manager. So, a little reluctantly, I've conformed to hubby's way of thinking, which is to invest purely for the best return, but, separately, to support and donate to the causes you most believe in.
You've picked a hot topic here, for sure! I'm so sorry about all the tax owed on the rental income.

Jo said...

While working money was put in deferred comp. With each raise (which didn't come often at the State) the amount was increased. When the US offered IRA's started putting in that each year. Added some automatic bonds each month. So now with SS, state retirement and Rick's military retirement we are where we were when working. Except that now we can play instead of going to work. Took deferred comp, IRA's and reinvested with another program which is insured, so it can go up but not down. So once we get to be 72 we will have to decide how much of that we want to take each month and what we want to do with it. Actually, considering we didn't do a lot of planning, it has worked out quite well.

Shelley said...

Struggler - I'm happier reading your comment as it tells me (a) I'm not alone in fighting tax forms and (b) it wasn't a completely boring post! I agree the whole ethical thing is way too complex and I don't stay awake worrying about it, to be honest.

Joanne - Sounds like you and Rick have managed to keep your head above water just doing the sensible things, which is comforting. I'll be much better off once I hit 60 and can draw my NHS pension, so just need to survive another...6 years (without wishing my life away!)