Beyond seeking a financial return and building personal wealth, the next generation of investors will look to invest in ways that align with their values and passions, such as tech innovation, and environmental and social justice issues. There is also a tendency for younger investors to place the company’s purpose ahead of the return. We will consider the more traditional types of investments, such as stocks and shares, as well as alternatives such as impact investing and real estate crowdfunding.

 

Maarten Hoffmann: So, Gregor, if I may, I’d like to come to you first. Are you seeing younger investors coming through seeking more social impact investing, or is it not registering with you yet?

Gregor Watt: Not really. It hasn’t grown anything like I would have expected, and the number of people who open the conversation in the first meeting, stating that they are concerned about where this money is invested, is much lower than I had expected. This desire to ethically invest has been around for a long time, but I have not seen the increase that one might have expected.

MH: Charlie, would you agree?

Charlie Lloyd: The management industry is very good at creating new things to sell, such as ESG, which is a catch-all for such investing. In 2020, we saw a big drawdown in the markets, and ESG-type strategies and investments did very well as interest rates plummeted. There’s a connection between low rates and certain parts of the stock market doing very well. Then in 2022, we had inflation, and inflation is generally bad for assets such as certain growth stocks in the equity market. There was a stampede of money that came out of ESG strategies in 2022/2023, as the performance was so poor. Therefore, I think people like the idea of ESG strategies until they see that it can impact their returns and wealth. It has peaked and troughed more recently, so the FCA have brought out the anti-greenwashing rule because they are aware that there are a lot of fraudulent or exaggerated claims in the asset management space.

GW: There’s also an issue around definition. If we go back 40-odd years to Friends Provident and their Stewardship Fund – they were the pioneers of it, and they would field non-stop phone calls from people saying ‘why do you own that particular stock as it doesn’t match your ethical criteria?’ And ‘how can you own Sainsbury’s stock as they sell alcohol and tobacco?’ and the answer was that they don’t make it, they merely sell it. I remember a call about a particular carpet manufacturer as they sold carpet to the MOD; in the caller’s view, that made them unethical. The problem here lies in the definition and how far you take it.

CL: It’s very subjective. We dealt with a client recently who is very firm in their Christian faith. He didn’t mind oil and gas and carbon emissions, but had very strong views on adult entertainment shares. The next person through the door might have no issue with that but object to any carbon-emitting shares, so it is very varied and individual.

Eloise Jenner: We deal with clients every day and help them decide what to do with their pot of investment money. Certainly, most people like the idea of ethical investing, but importantly, not at the expense of their returns. The result is that many will take the core bulk of their funds and ask to place it in traditional investments, and then the leftover amount, they will be a little more adventurous and look to put that into more ethical assets. Most clients like the idea of it, but not at the cost of their returns.

Gemma Spencer: Eloise, do you find that reaction is the same with younger investors who are further away from retirement, therefore feel that they might be able to take that risk?

EJ: Normally, yes, young people have a longer time-horizon and are prepared to take a little more risk, but I find they are more inclined to ask about current fads such as AI, crypto, tech and the like, as they have read about such burgeoning sectors and possibly their friends have done so. We advise on the risks of such investments, and if they are happy to proceed, then go for it. However, at Shackelton, we don’t advise on those types of things. It is up to the individual to make their own choice, based on sound advice.

MH: Jo, you advise on the tax implications of such things?

Jo White: Absolutely and various reliefs are going down the EIS (Enterprise Investment Scheme) route where there is Income Tax relief, Capital Gains Tax, Inheritance Tax relief but, as Gregor said, the vast majority only put aside a small amount of their overall investment that they are prepared to take the risk on. It’s what they might call their play pot, so losing that will not affect their overall investment and return.

 

MH: Do you feel that the stories of great ethical investments are just PR for the industry?

GW: It comes back to Charlie’s point about greenwashing. Everyone jumped on the bandwagon as the things to have, but that was mainly driven by corporates. Organisations rushed towards a green, socially responsible, and ethical approach, but investors didn’t necessarily agree with them. This led the regulator to investigate whether it was true or whether these ‘green credentials’ were being fabricated, hence the term ‘greenwashing’.

EJ: A lot of this is being led by technology and the fact that these days, someone can jump out of bed, get onto an online platform and start investing. However, one fact has never changed: get sound independent financial advice before you do anything.

 

MH: Let’s look at an imaginary case. Someone has inherited £2 million from their father’s portfolio and wants to invest. How do they know which advisor to go to, which investment firm to trust?

EJ: Take advice.

 

MH: Yes, but how do I know who to take advice from?

GW: One option might be to start with your late father’s adviser and talk to his friends. Please don’t use Tik Tok where the vast majority of people are not qualified to give advice. A lot of younger people will go onto an unregulated platform thinking they can get all the answers they need in 30 seconds. This might just be the single biggest threat to your capital.

CL: There are ways to find out what to do - a sensible person might do a Google search of their local area for financial advisors and then look at their reviews, or websites like Vouched For can certainly point you in the right direction.

JW: Another good pointer is who the late father’s advisor was. If he trusted them, then so might you. Always talk to your family and let them know what you are doing. At Kreston Reeves, when discussing Inheritance Tax planning with an elderly client, we will politely ask the family to join us so that we can discuss it together, so they are aware of the parents’ wishes.

 

MH: I see the rise of investment apps, such as IG, ETORO, XTB and so on. They seem to be doing well, so is it a side step from the financial advisor?

CL: These are spread betting platforms, and I think you do get a cohort of professionals using those, but I don’t believe there are many young, inexperienced people using them apart from the odd play pot.

JW: Every client is different. With different needs and varying requirements for what their investments need to do and for how long. You cannot just say everyone should be doing this or that; it’s very personal to your circumstances. Certainly, these platforms are fun for a small play pot, allowing you to follow your friends and enjoy the experience. But for serious investing, you need personal, tailored professional advice.

GS: It always comes back to bespoke advice, based on the individual’s circumstances. A client might say they have this long-term goal to retire at 50, and an advisor will inform them that they don’t have enough money to do that. So, then the discussions begin around how to achieve that goal.

 

MH: What happens when the market is fluctuating or there is a major event, such as COVID or Trump? Is it a letter saying sorry, your investments have suffered?

GW: It’s all a part of the pre-investment discussion where I will explain that statistically, one out of every four years, the investment will be worth less than it was last year. That’s the normal part of investing.

The best way to explain that is to refer to a recent client of mine who came to me in 2020 when the market was collapsing in the March of that year, and said he wanted to switch to cash. I asked why, and he said he didn’t know when the fall was going to stop, so he wanted to take action now. I asked him what sign he was looking for if we move you into cash, and when you would come back to me and say ‘I want to go back into the market’.

He didn’t have an answer to that. So, he went away and switched his ISA to cash, leaving his pension invested. A year later, the difference in performance was 14% between his ISA and his pension. Effectively, he had lost 14% on the cash. Every market fall since then, I have been waiting for his call and he has never been in touch as he trusts me to make the right decision, and that is what you pay a professional financial advisor for - years of experience in the markets.

 

MH: I suppose. Gemma, that such clients come to you for legal advice on such things?

GS: Yes, and my job is to play devil’s advocate. I have to ask all the difficult questions that people often don’t want to hear. I hear questions such as ‘Can I give my house to my children now to avoid Inheritance Tax?’ I have to ask, ‘Are they planning to move out?’ ‘What happens if your son divorces his wife, and suddenly the house is put on the market?’ ‘If you’re staying, will you be charging any rent?’

It’s all these sorts of questions that they haven’t asked themselves, and my job is to ask them. You don’t know what you don’t know, so my job is to clarify the position.

 

MH: That’s the tax position - from there, do you then refer them to one of your trusted advisors?

GS: Absolutely. I will offer them a few trusted advisors to speak to, knowing they are in good hands. It’s all about having that black book of people we trust to give the right advice - it’s our duty of care. That’s why I joined Kreston Reeves, as it offers that joined-up approach. If the client needs accountancy advice, I make a call and a professional accountant is there within minutes. Very few accountancy firms have this in-house legal advice

CL: Getting legal and accountancy advice can be intimidating to some people. Getting all that advice under one roof is often the perfect answer. It’s like needing a builder for some work on your house - do you contact the plumber, plasterer and painter individually, or do you contact one building company who brings all those people in? I know which one I would prefer.

EJ: It’s also about protecting your future. Do you have a Will? Do you have a Power of Attorney in place should something awful happen? So many people think about this later in life, but a 30-year-old is as likely to get hit by a bus as a 70-year-old. Therefore, we would always advise clients to ensure these things are all in place to protect the future of their investments.

GS: It’s the same with a sole Director of a company - what happens if that bus comes and it might not kill you, but you are incapacitated in the hospital? Who takes care of the day-to-day running of the company? Does your spouse know enough to run it? If not, the company is in limbo, losing market share and money all because you didn’t have a simple power of attorney in place.

 

MH: Many young investors want to invest in AI, but how do they find an advisor who knows enough about it to safely recommend where their money should be placed?

CL: It’s all about diversification. If you bought a US Market Equity Tracker today, you are already getting a lot of exposure to the AI market. Stocks, such as Microsoft, Alphabet and Nvidia, are all very exposed to AI spend, so you are getting approx 30% tech exposure, of which a high proportion is AI. So, arrange a balanced portfolio, and you will have some exposure to it without excessive exposure.

 

MH: Are you seeing an increase in clients asking about AI stocks?

CL: Clients are certainly interested in it, and we do have a specialist AI fund, but it’s not a tech fund; it invests across various sectors. Health Care is going to be a big beneficiary of AI, and hopefully, they will crack the NHS efficiency nut at some point, but clients are constantly interested in AI and its various applications. Clients are concerned about things that might impact the market. We receive a lot of questions about Trump, for example, and the emotional side of investing, mainly because they dislike him. However, we take a very unemotional approach. There will always be something to be upset about - if it wasn’t Trump, it would be Russia or Israel. Therefore, our job is to remove emotions and be practical about things.

 

MH: Are you seeing much interest in crypto?

CL: As they say, be prepared to lose all your money and to be frank, I don’t really understand the value drivers behind it. It’s a little like the stock market’s on steroids; it’s very volatile.

GS: It’s also the worry about access. With so many stories of people dying and taking their passwords to the grave with them, there is no way to recover that password. That is a huge concern.

GW: It’s the epitome of the “greater fool” theory. I just need to find a bigger fool to sell it to for a profit. The hype and publicity around this sector means they can easily be found.

GS: We have quite a few clients who have invested in crypto, and it is less volatile than it was.

CL: Are those investments treated as capital gains?

JW: Yes, absolutely, and you have to recognise tax on all this income. It rather depends on what you invest in, as you only pay on any gains. Any income from these funds is taxed in the year it is received.

GW: You also suffer Income Tax along the way on dividends and interest arising.

JW: There are also IHT-free portfolios that benefit from IHT relief, such as business property relief, which at the moment gives you 100% relief once you have owned the shares for two years. With the changes coming into effect next year, an individual is capped at 100% relief on £1 million of value and 50% thereafter. However, for AIM-listed shares that currently qualify for 100% relief, this will be capped at 50% relief, regardless of their value, from April next year. The other thing that will change is pensions and Inheritance Tax. The proposal is that, from April 2027, if you die with a fund, it will be subject to Inheritance Tax. So, we have to look at the client’s exposure to this.

EJ: The issue, from 2027, is that pensions will form a part of someone’s estate, so dependents will potentially pay 40% IHT on a pot which used to be IHT-exempt. This is then compounded as, if that person dies over the age of 75, their dependents will also still pay Income Tax (at their marginal rate) when withdrawing the funds out of the pension pot.

GW: Clients often ask me if they will lose their right to tax-free cash at 75. They will not, but I advise that they may want to take it as if they were to die shortly after 75, their family will have lost the tax-free amount.

EJ: Indeed. I have a few clients who have over ten million in pensions, and the plan was to just forget about it, but now they are coming in for meetings asking what they do now with the rule changes to Income Tax on pensions.

 

MH: And what about the value of Trusts?

JW: A lot of people are scared of Trusts, and that’s essentially that because they don’t know how Trusts operate, but there is undoubtedly more use of Trusts now. The advantages, and there are many, include retaining control and removing the asset from your estate. However, you still want to know that those shares’ voting rights are in sensible hands. One can be the creator and the trustee of the Trust but you cannot benefit from it, but it does allow you to have some control over the Trusts activities.

For example, it would be particularly useful for those seeking a more purpose-driven investment. Trusts can be beneficial as you can decide what it invests in. The main benefit is that it removes the asset from your estate, taking into account the seven-year rule (i.e., if you die after placing the asset in the Trust, there is no IHT to be paid).

From an Income Tax perspective, if you structure it correctly, there could be some savings. In another scenario, if I were to give my rental property to my daughter and she held it in her name, it would be hers. However, if I put it into a Trust, it can benefit several people, such as my daughter, her children, and anyone else.

GS: It also has great benefits if that daughter should come under financial pressure or gets divorced, it’s not an asset of the marriage, it’s isolated.

 

MH: So would that mean that, in said divorce, the husband couldn’t get his hands on the Trust assets?

GS: It’s not watertight, but it adds a very good layer of protection. It makes it significantly harder for one party to gain an advantage in a divorce, depending on how the Trust has been set up and who benefits. It is also important to have a professional review the Trust from time to time to ensure it remains relevant in light of any changed circumstances.

 

MH: Now let’s have a look at alternative investments. If we look at the last ten years, stocks have risen by an average of 107%, classic cars are up by 97% which are also exempt from Capital Gains Tax, property has risen on average 50%, art by 49% and gold by 45%.

So the Classic Car market has risen by 97%. Classic Cars are not a diminishing asset as each year there are fewer and fewer of each model still in existence, there is no CGT, you can touch it and drive it, and you have total control of the asset with no exposure to the vagaries of the market. Do any of you get involved in such advice?

GW: Funnily enough, I recently went to the South of France with a friend in his Aston Martin DB5, but he collects them as a passion and doesn’t really care about the value.

EJ: I find that such investors are not doing it purely for the investment, but rather due to their love of these cars or their passion for art.

 

MH: I think historically, that is right, but these days I see lots of people contacting me to say I don’t give a hoot about the cars, but what’s the return?

CL: I think that’s right. There are a few barriers to entry, as with shares, you can invest £10, but you would need a lot more for cars or art.

 

MH: That’s right, if you are looking for something as rare as Ferraris, but let’s look at run-of-the-mill models. The 1961 Volvo P1800 is not exactly cutting edge; in the last two years, it has risen by 183%. Or the 1972 VW Beetle, in ten years, it went up by 239% - it’s quite extraordinary. Of course, you have storage and servicing costs, but it’s still quite a sound investment.

JW: Of course, you would expect me to speak of the tax side of things - for example, is their will up to date, does the inheritor understand the value of the cars and what to do with them?

 

MH: I think that’s correct if it’s a personal investment, but the majority of such purchases are done through a syndicate, and there are rules in place as to what happens if one member dies, and the value is duly noted each year, as the head of the syndicate is responsible for such things.

EJ: There is also the issue of needing cash. I can’t take the door off a car to sell if I need a lump sum. However, I can usually withdraw cash from an investment. It’s the same with property, I can’t take a brick out of the wall to raise some cash.

 

MH: I guess such investments are what we have been calling ‘play pots’. The chunk left over from your core investments to play with.

CL: Art and fine wine are similar, as they tend to be looked at by people with a passion for, well, art or wine.

GW: It comes down to the same thing every time. If you have a passion for one specific type of investment, then go for it. But in general, if you are there purely to increase your investment, a fund manager will have forgotten more about the market and how to analyse a company than you can ever know.

 

MH: I guess it’s the same old adage - no point in having a dog and barking yourself. As we come to the end, what is the overall outlook for the UK markets?

CL: In the market, we are seeing a decline in the number of UK-listed companies, so the state of UK capital markets is pretty poor at the moment. The government and regulators are undertaking efforts to enhance the UK’s appeal. Still, fewer companies are listed in the UK, mainly due to cost, as you pay stamp duty on UK stocks. The rules are quite cumbersome, and many companies find it more attractive to invest in the US, where they receive better valuations. If you sell your business, you naturally want the highest valuation.

 

MH: In conclusion, is it correct that the hype around Ethical Investing is just that - hype?

EJ: I think clients like the idea of it, but the reality is that often that is not the best return, and as many investors are investing for their retirement and passing a legacy to generations below them and based on that objective, the return is more important than the actual investment.

 

MH: Many thanks to you all for the fascinating and very useful advice given today on a variety of subjects, and I thank you for your time.