Why do best buy savings accounts become uncompetitive?

Question
I have just received the annual letter informing me that my cash ISA interest rate will be reduced to 0.5%. I will now check out other banks, building societies prior to switching my cash ISA. My question is simple, why do they do this? Is it in the hope that they will be left with a small number of customers who do not keep tabs on their interest rates. Surely it might just pay them to build up a loyal customer base by paying a decent ongoing rate. There again maybe I am missing something?Answer
Yes, it's a very annoying practice that banks and building societies persists in doing, most likely because it's very profitable.

The usual ploy is they offer a very competitive (potentially unprofitable) rate to attract lots of new customers. A year or two down the line, the rate will more often than not have become very uncompetitive, either due to introductory bonuses expiring or the rate simply being cut. Of course, some savers will do the sensible thing and more elsewhere, but many don't meaning the bank/building society makes a very healthy profit thereafter.

I suppose the issue is the most competitive rates offered these days are either unprofitable or not profitable enough for the banks/building societies concerned, they're just a carrot to tempt in new customers. If one bank decided to offer a rate it could afford to maintain long term, chances are it wouldn't look especially competitive, so would likely fail to attract scores of new customers. I can only see this working well if all banks and building societies followed suit, which sadly I doubt will ever happen.

On the bright side, if you're pro-active and play the game by transferring accounts when rates come off the boil, you'll likely benefit from this practice - at the expense of those less active savers who stay put.

One alternative for those who don't want the hassle of monitoring or switching accounts is the Investec High 5 Issue 2 account, which pays the average of the top 5 savings accounts (as per Moneyfacts best buy tables), although the account has a potentially restrictive 6 month notice period.

Read this Q and A at http://www.candidmoney.com/askjustin/818/why-do-best-buy-savings-accounts-become-uncompetitive

Suggestions to track fund performance?

Question
Can you recommend a good web site to check performance of funds, It would be nice to find one where you could have a list of the funds that you have on a default list that you click on rather than having to trawl though the thousands of fund to find your every time.?Answer
There are a few options I know of, as follows:

Citywire Virtual Portfolio - probably the most comprehensive and easy to use. Lots of information including news alerts on your holdings.

Interactive Investor Virtual Portfolio - I haven't used it, but appears comprehensive.

This is Money Power Portfolio - again, I haven't used it but seems pretty comprehensive.

Google Finance Portfolio - simple to use, although heavy US bias, not all UK funds appear to be covered.

If readers have feedback regarding the above or other suggestions, please post below.

Read this Q and A at http://www.candidmoney.com/askjustin/816/suggestions-to-track-fund-performance

What counts as cash in asset allocation models?

Question
I am formulating an asset allocation model for my fund portfolio and would like to ask you a question on this subject :

The usual asset model will include recommended percentages for equities, bonds, commodities, property and also cash. Please could you inform me if this element of cash is supposed to be just the part that the fund providers leave as cash; or is it supposed to be the total of one's own cash funds including cash ISAs, plus bank and building society accounts?

I would be grateful to receive clarification of this matter and thank you for your assistance.Answer
In general asset allocation models assume cash to be that in your investment portfolio, not your other savings. The rationale is that investors should have sufficient savings elsewhere to fall back on - so asset allocation focuses purely on investing.

The main decision when measuring cash weightings in portfolios is whether to include the cash balances held by the underlying fund managers. While doing so is more accurate, getting the data can be a hassle and it's usually at least a month out of date.

I tend not to bother (and just include a platform cash account and money market funds etc) as the majority of managers don't use cash strategically in any case. But it's good to be aware when holding funds where the manager does sometimes take big cash positions.

Read this Q and A at http://www.candidmoney.com/askjustin/815/what-counts-as-cash-in-asset-allocation-models

Is Saxo MWM good value?

Question
How would SAXO MWM now compare in your excellent ISA Discount Brokers Guide, especially in the Trail commission table? I have noticed that they now offer 100% discount on both the fund platform fee and the Trail commission since your reply to the question from starlight29 on 08/09/12. They are also discounting an annual fund fee of 0.5% to 0% until the 1st January 2014.Answer
Thanks for reminding me to add Saxo Modern Wealth Management (MWM) to the ISA Discount Broker Guide - have just done so!

In terms of cost Saxo MWM doesn't fare too well in most scenarios. They rebate all sales commissions and platform fees, which is great, but the savings are somewhat offset by the steep 0.5% annual account fee, plus a further £35 a year for ISAs and £195 for SIPPs.

As you mention, the 0.5% annual fee is waived until 1 January 2014, but unless you plan to transfer to another platform within a year or so thereafter it's not something to really factor in when deciding whether to use Saxo MWM. If you do transfer out there's a fee of £15 per holding (for 'as is' in-specie transfers) which is not unreasonable compared to some competitors (Hargreaves Lansdown charges double this).

I haven't used Saxo MWM's fund/portfolio tools (only available to clients), but the brief videos on their website suggest they're probably above average, although I doubt they rival Bestinvest's.

Share dealing is available at £9.95 for UK shares on deals up to £75,000, but rise significantly for larger deals and trading on overseas markets.

Overall it looks a reasonable proposition that's simply too expensive in the current market. Saxo's fee needs to be nearer 0.25% if they're to be a serious contender.

If any readers have used Saxo MWM, I'd be keen to get your feedback regarding service and features.

Incidentally, I asked Saxo MWM a couple of weeks ago if they'd supply data for my new fund platform comparison site (www.comparefundplatforms.com) - still waiting for them to reply...

Read this Q and A at http://www.candidmoney.com/askjustin/813/is-saxo-mwm-good-value

Difference between designated accounts and bare trusts?

Question
What's the difference between 'assigning an account', 'designating an account' or putting the account into trust for a grandchild?Answer
These options exist because children are not allowed to hold most investments in their own name until age 18 (16 in Scotland). The restriction doesn't apply to savings accounts, although banks and building societies typically impose their own conditions on when an account can be held in the child's name, e.g. age 7.

Let's start with 'putting in trust' first, as it tends to be the best option. The trust is invariably a 'bare' trust - the simplest type of trust. This means assets are held in the name of a trustee(s) (e.g. parent/grandparent) for the benefit of a beneficiary (e.g. child/grandchild). The beneficiary receives all gains and income, on which they're personally taxable, and has the right to take legal ownership of the asset(s) at age 18 (16 in Scotland).

In other words, a grandparent can give money to a grandchild and for all intends and purposes the grandchild owns it, although it can't officially be held in their name until they reach age 18. This means the money is also treated as a gift for inheritance tax purposes, hence will fall outside of the grandparent's estate provided they live for at least 7 years after making it.

Setting up a bare trust requires a simple form, usually provided by the investment company concerned. More details in my earlier answer here.

Banks and building societies also use some form of simple trust like this when opening an account for children who are below the minimum age they're allowed to hold it in their own name.

A designated account means the money remains the grandparents, but they've flagged that it's intended to pass to the grandchild at age 18. This means the money continues to belong to the grandparent, hence is taxed as theirs and doesn't fall outside their estate for inheritance tax purposes. Setting up a designated account usually just means adding the child's initials to the application form. While very simple and flexible (the grandparents aren't obliged to hand over the money in future), it may not be very tax efficient, especially for larger sums.

Assigning an account usually refers to policies with life insurance companies, meaning that the policy is legally transferred from one person to another. It can be useful when a grandparent owns an investment bond that would trigger a large tax bill if surrendered. .Provided they're happy to give it to someone else (aged 18 or over), the bond could be assigned accordingly, potentially saving tax if the new owner is in a lower tax band.

In practice I'm sure there's quite a lot of confusion surrounding designated accounts and bare trusts, with many people using the former thinking they're not liable to tax. I suspect HMRC generally turns a blind eye, as it's hard to police and the sums usually small, but personally I'd use a bare trust where possible.

Read this Q and A at http://www.candidmoney.com/askjustin/809/difference-between-designated-accounts-and-bare-trusts

Will switching to clean fund units trigger CGT?

Question
In view of the new clean fund classes, it will often make sense to switch existing fund investments into the new clean class because of the lower AMC. However, if you sell the old fund class and buy the same amount of the new clean class of the same fund, does this trigger a gain for CGT purposes?

You would think that it would count as repurchasing the same shares within 30 days, so the new investment will just be treated as having the same cost as the old investment. You would also think that it would be treated as a share reorganisation, similar to the treatment when you switch from accumulation units to income units or vice versa.

Either way, there should be no gain triggered. However, is this correct, and does it depend on whether you convert or switch?Answer
My understanding is that switching between different unit classes of the same fund is treated as a share reorganisation - that is, it won't trigger a gain for capital gains tax purposes.

There are two HMRC references that appear to confirm this. The first CG57709 says:

"Any switch from one class to another within the same unit trust should be treated as a share reorganisation."

The second is CG51700 which says:

"For capital gains purposes a share reorganisation is not treated as a disposal of the taxpayer's existing shares or an acquisition of any new shares and new shares issued are treated as though they were acquired at the same time as the existing shares."

So, in layman's terms. If you switch from Fund A Retail units (e.g. charging 1.5% a year) to Fund A Clean units (e.g. charging 0.75% a year) it won't trigger a capital gain. But when you eventually sell the Clean units the purchase price to calculate the gain will be the original price you paid for the Retail units.

Read this Q and A at http://www.candidmoney.com/askjustin/808/will-switching-to-clean-fund-units-trigger-cgt

View on JPM Healthcare fund?

Question
I'm looking for a new fund to add to my ISA portfolio, as a result of one of my current funds intending to close. I would like to diversify into a healthcare fund and rather fancy JPMorgan Funds – Global Healthcare A (dist) - GBP. However, other than the analysis on Morningstar, I can't seem to find out much independant information about the fund, or whether it is available to me on the Cofunds platform.

The information includes the following, which I'm not sure I understand the implications of: "On 01/10/02 the benchmark for this Fund was changed from a gross dividends reinvested basis to net dividends reinvested as this better reflects the tax status of the Fund."

Can you also tell me what the "(dist)" suffix means?Answer
JPM Global Healthcare is a Luxembourg domiciled fund (i.e. 'offshore') that invests in biotechnology, pharmaceutical and healthcare companies.

There's no real downside to investing in offshore funds provided they have 'distributor' or 'reporting' status, as this means they'll be taxed in the same way as onshore funds (otherwise gains will be taxed as income, which is seldom desirable). This is what the 'dist' suffix is referring to, it's highlighting that the fund pays out its income (which usually means it'll have distributor/reporting status).

The fund isn't available via Cofunds (yet, at least), nor any of the other main platforms that I can find. You can however buy it via JPM's own Wealth Manager 'mini platform' with no initial charge and annual charges (total expense ratio) of 1.9%, the latter being a bit steep.

The information regarding the benchmark (against which JPM compares performance on the fund factsheet etc) means that it now assumes dividends are paid with some tax deducted rather than gross. This is just reflecting what happens in practice for distributor funds, so not something to be concerned about.

Looking through the fund factsheet, everything on the surface is as you'd expect from this type of fund. There's a heavy bias towards the US and larger companies, the 10 largest holdings are mostly household names and there's a reasonably diverse range of companies held. The management team also has a good performance track record since launch just over three years ago.

I'm afraid I've never done any research on this fund, but on the surface I can't see any obvious reason not to invest if you're happy it meets your needs and fits well into your portfolio. Just bear in mind healthcare type funds can suffer high volatility at times, especially when biased towards biotechnology companies. Similar funds you might also consider include Polar Capital Healthcare Opportunities and AXA Framlington Health (the latter is available on Cofunds).

Read this Q and A at http://www.candidmoney.com/askjustin/807/view-on-jpm-healthcare-fund