What You Need to Know about Guarantor Loans

The Slow and Steady passive portfolio update: Q1 2019

Heresy! Prepare the stake and firelighters, for I am about to commit passive investing heresy most foul. I am going to invest part of our Slow & Steady portfolio into an active fund.

I can see the mob forming now. Loathing hangs in the air like smoke, torches spark, lips snarl, my mother turns her back.

But allow me to… explain.

We need inflation protection. When inflation runs amok, the only reliable guard is inflation-linked bonds. Yes, equities outpace inflation over the long term but they’re likely to be mauled when price rises get out of control. Witness the -74% smashing of UK equities from 1972 to 1975.

As for gold and commodities more broadly – neither are dependable allies.

No, it has to be inflation-linked bonds and I believe there’s an active fund that addresses the needs of the Slow & Steady portfolio better than any rival index tracker.

The answers to three questions explain my thinking:

• When is it okay to choose an active fund?
• What is it about this fund that makes it the chosen one?
• What’s wrong with the competing index trackers?

Let’s go through these questions, and then you can burn me as a heretic and scare the children with my blackened bones.

My championing of passive investing and index trackers is not ideological. It’s pure pragmatism based on the overwhelming evidence that low-cost investments and strategic asset allocation win better results for investors (as a group) than high cost investments and market-timing techniques.

I’ll choose an active fund when:

• It’s cheap.
• Its purpose is aligned with my strategic asset allocation objectives.
• It’s not a black box. In other words, its workings are reasonably well communicated, and the manager’s freedom of action is so constrained that I don’t have to worry they’ll be piling into palladium futures next week.
• It serves my needs better than any equivalent index trackers.

I believe my chosen fund meets these tests.

What’s the active fund?

It’s the Royal London Short Duration Global Index-Linked Fund – hedged to the pound.

This fund mostly trades in the high-quality, low volatility, inflation-linked government bonds needed to protect the Slow and Steady portfolio from high and unexpected inflation.

It’s cheap at 0.25% OCF – the same price you’d expect to pay for a global government bond index tracker that’s hedged to the pound. It’s not as cheap as the Vanguard UK inflation-linked gilt fund it’s replacing in our model portfolio. But that fund and others like it have a major problem.

The problem with UK inflation-linked gilt funds of all stripes is that they harbour real interest rate risk. They’re like prime beef cows carrying a nasty brain disease you’d rather not take a chance on.

In summary:

• UK inflation-linked gilt funds are dominated by long bonds.
• Long bonds are likely to suffer most if real interest rates rise.
• Real interest rates have been bouncing along the historical bottom since the Global Financial Crisis.
• If rates rebound then the long bond vulnerability of inflation-linked gilt funds could drown out their anti-inflation benefit – and stiff you with significant losses.

The fix is a fund that invests in shorter duration inflation-linked bonds. This way you get inflation-protection with lower real interest rate risk. A short duration fund will still take a hit if interest rates rise, but it’s less sensitive because it quickly replaces low yielding bonds as they mature with higher yielding versions.

The only shortish inflation-linked UK gilt funds I can find come with eye-watering price tags because they must be bought through approved financial advisors.

In contrast the Royal London fund is reasonably priced, widely available, and its global inflation-linked bonds can stand in for gilts due to their high quality and returns that are hedged back to the pound.

The Royal London holdings have a short average duration of 5. This means the fund stands to lose 5% of its value in the face of a 1% interest rate rise – which compares well with a 21% loss for the Vanguard inflation-linked fund in the face of the same rate rise¹.

The fund holds a diversified portfolio of bonds with credit ratings that are mostly as high or higher than UK equivalents.

Global inflation-linked bonds won’t precisely match UK inflation rates but the evidence suggests they’re reassuringly close and owning them adds a diversification benefit to boot. And more than 20% of the fund’s holdings are in UK bonds.

The Royal London fund has existed for over three years and stuck to its mission of investing mainly in global inflation-linked and UK bonds.

It can invest in conventional bonds, corporate bonds, and in fixed income instruments with a lower credit rating than enjoyed by the UK government. But Royal London publishes plenty of information so I can keep an eye on things and sell if the managers head off the map.

I’m comfortable that the fund fulfils the Slow & Steady’s anti-inflation asset allocation requirements now and in the probable future.

I’m not interested in the fund’s recent performance. This move is about building fit-for-purpose inflation-proofing into the portfolio; short-term results are irrelevant. I expect this allocation to hand us a slightly negative return in the years ahead, given how low bond yields are and the market’s low inflation expectations.

So I’ll keep our inflation-linked bond asset allocation at 5% for now, but build it up quite quickly to 50% (of the total fixed income allocation) as our time horizon ticks down.

With plenty of recovery time still on our portfolio clock, I think we’re currently better served by mostly holding conventional government bonds with greater powers to counterbalance equity losses during a recession.

Must you do this?

There is an index tracker alternative: the Legal & General Global Inflation Linked Bond Index Fund.

I could happily invest in this fund, too. The trade-offs are:

• It’s an index tracker so there’s no need to worry about mission creep.
• It’s less diversified because it’s ex-UK – so no UK bonds at all.
• It’s a touch more expensive at 0.27% OCF.
• Its duration of 8 carries slightly more interest rate risk. However, that duration still fits with our model portfolio’s remaining 12-year time horizon.

There isn’t a huge amount in it. If you’re uncomfortable with going over to the active side, and have a time horizon greater than eight years, then the L&G fund is worth researching. (Shout out to Monevator reader Mr Optimistic for reminding me of both these global linker funds in the comments to the last episode of the Slow & Steady portfolio).

Incidentally, the real interest rate risk embedded in the Vanguard inflation-linked fund hasn’t materialised in the four years we’ve held it. And it has performed creditably for us: 8.93% annualised return, which ranks fourth out of seven funds.

But the results aren’t the point. What matters is we can’t rely on it to play its part in our portfolio and we have better alternatives.

Using an active fund like this does not change our passive investing stance in my view. We’re not market-timing, we’re not choosing the fund because we think it’s hot. We haven’t abandoned our investment principles. We are simply using the best fund available to meet our long-term asset allocation needs and to protect ourselves from foreseeable risk.

Hot! Hot! Hot!

I don’t know if I’ve done enough to extinguish the purifying flames. Hopefully the wood bundles are being taken away and I’m welcome back to the fold as a black sheep rather than roast lamb.

Either way, the Slow & Steady Portfolio has had a smoking quarter. It’s recovered much of the ground lost between October and December, with our annualised return now clocking in at a healthy 9.15%. Check it out in EyeBurn Neuro-vision:

 

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £955 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

New transactions

So as mentioned ever so briefly above, we’re selling off our Vanguard UK Inflation-Linked Gilt Index Fund. We’ll replace it with the Royal London Short Duration Global Index-Linked Fund.

Every quarter we also contribute £955 in new cash that’s split between our seven funds according to our predetermined asset allocation. The Royal London fund therefore picks up the share of new cash allocated to inflation-linked bonds: £47.75 or 5%.

We rebalance using Larry Swedroe’s 5/25 rule but that hasn’t been activated this quarter, therefore our trades play out like this:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%

Fund identifier: GB00B3X7QG63

New purchase: £47.75

Buy 0.236 units @ £202.44

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%

Fund identifier: GB00B59G4Q73

New purchase: £353.35

Buy 1.007 units @ £350.93

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £57.30

Buy 0.2 units @ £285.94

Target allocation: 6%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.26%

Fund identifier: GB00B84DY642

New purchase: £95.50

Buy 59.95 units @ £1.59

Target allocation: 10%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.22%

Fund identifier: GB00B5BFJG71

New purchase: £57.30

Buy 25.963 units @ £2.21

Target allocation: 6%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £296.05

Buy 1.744 units @ £169.72

Target allocation: 31%

UK index-linked gilts

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%

Fund identifier: GB00B45Q9038

Sell all: £2185.46

Sell 10.964 units @ £199.34

Target allocation: 5%

Global index-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.25%

Fund identifier: GB00BD050F05

New purchase: £2233.21

Buy 2157.691 units @ £1.04

Target allocation: 5%

New investment = £955

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Cavendish Online. Take a look at our online broker table for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £25,000. The Slow & Steady portfolio is now worth £45,000 but the fee saving isn’t quite juicy enough for us to push the button on the move yet.

Average portfolio OCF = 0.18%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,

The Accumulator

1. In principle, all things being equal, and all manner of extra caveats that could fill the internet.

from Monevator https://monevator.com/the-slow-and-steady-passive-portfolio-update-q1-2019/

Cutting Out Debt Effectively

5 Tips to Cut Debt Quickly 

Life with debt is a painful reality for a lot of us. The financial strain of owing someone money is bad enough, but add to that the emotional distress, and it’s no wonder people are eager to get debt free as fast as possible.  

Whilst there’s no one-size-fits-all approach to getting back in the black, there are simple steps you can take to drastically improve your situation. That said, here are some tips to help you see a marked reduction in your debts, and take back control. 

Budget and cut 

Understanding where your money is going should be step one. Drawing up a detailed budget is the easiest way to spot needless drains on your income. Identifying these, and making the necessary cutbacks will free up extra cash to pay off your creditors. 

Don’t add to it 

Once you’ve got a budget drawn up, you should know how much surplus cash you have to work with. Wherever possible, leave the credit card at home, and stick to spending within your means. This should allow you to meet all your minimum monthly repayments, thus avoiding a further hike in debts. 

Prioritise 

When you owe money to several creditors at once, it can be tempting to try and eke out whatever dribs and drabs of cash you have evenly. The truth is, some debts are more pressing than others. List them in order of importance, taking into account factors like interest rates, late fees, final warnings, and so on. Making your way through this list, really knuckling down on them one-at-a-time, can result in more effective reductions overall. 

Take out a Trust Deed  

If you want something that feels a little more formal and secure, seeking help from somewhere like Trust Deed Scotland could be the perfect solution. A Trust Deed is essentially an agreement between you and your creditors to pay back what you can realistically afford each month. If you stick to the terms, any outstanding unsecured debt will be written off at the end of the contract. The structure this approach offers can be a huge help for those feeling overwhelmed. 

Downsize 

This could be taken in a literal sense: moving to cheaper accommodation, flat sharing, or returning to the family home whilst you get back on your feet. Alternatively, it could mean a clear-out of unwanted stuff. Just think how much value lies in all the un-worn clothes clogging up your wardrobe, not to mention the discarded gadgets or unloved furniture. They say a tidy house equals a tidy mind, and if selling old belongings also brings in some fast cash, all the better! 

from Finance Girl http://www.financegirl.co.uk/cutting-out-debt-effectively/

The Seven Best Ways to Shop Smart

Got a big holiday coming up? Debts to clear? Maybe you’re just looking to be a little more frugal? Whatever the reason behind the penny pinching, here are some simple ways to help you shop smart and save money. 

Use cash or debit cards 

Credit cards are ideal to fall back on in an emergency, or in the face of a temporary cash flow problem. That said, you shouldn’t let their convenience lure you into using them for day-to-day expenses. Using cash or debit cards instead is a simple way to set yourself an automatic spending limit, avoiding the trap of unwanted debt and nasty interest fees. 

Have a cool off period 

We’ve all regretted an impulse buy, but if something catches your eye in a shop window, it’s unlikely to sell out within a couple of days. Take that time to mull it over, and if you still want it, you can go back and get it. This way you ensure you’re only spending money on the things you really want or need. 

Use discount retailers 

Designer labels don’t come cheap, and even some high street shops can be pricey these days. There is a way to get big name goods without the big price tag, however, and the secret lies with discount catalogue stores. Studio is one of the best-known examples, and this Studio 24 catalogue review breaks down some of the labels you can expect to find for less, as well as their Buy Now, Pay Later scheme, which helps to spread the cost. 

Be wary of special offers 

BOGOF! Half price! When it’s gone it’s gone! This kind of sales schtick is hardly new, and yet we’re all guilty of buying into it. Just remember, it’s only a bargain if it’s something you wanted in the first place. 

Take the time to browse 

Looking something up online is a great way to compare prices from different retailers, but also to check out reviews. After all, if you’re forking out cold, hard cash, you want to be sure it’s a quality investment. 

Lists, lists, lists! 

Organisation is your friend when it comes to smart shopping. So, take stock of what’s already in your cupboards, draw up a weekly meal plan, and write out exactly what you need. Arming yourself with this knowledge every time you hit the shops is a sure-fire way to avoid needless spending. 

Embrace the second-hand market 

Pre-loved doesn’t have to mean poor quality. There are some fantastic deals to be found for all sorts of goods on the second-hand market. You could even sell some of your own stuff to fund your next shopping spree – everyone’s a winner!  

from Finance Girl http://www.financegirl.co.uk/the-seven-best-ways-to-shop-smart/

Weekend reading: Choose time

What caught my eye this week.

The idea of trading money for time underpins early retirement, although it’s not often put that way.

We can debate safe withdrawal rates, passive portfolios, and whether investment trusts have a role to play in creating a retirement income.

But the day you leave work and never intend to go back – however you got to that point – there’s no argument. You’re by definition turning down the chance to make more money.

You are swapping money for time.

There are excellent reasons to quit work ASAP. Nobody lolling on their death bed ever wished they’d spent a few more years at the office and all that.

Personally, I see downsides, too, especially to very early retirement. As a result I expect to keep doing some work indefinitely.

But you don’t have to go totally cold turkey to swap money for time.

More flexible working – especially from home – can kill your commute and give you the freedom to work around you, instead of an employer. Or you can try to work fewer hours at a conventional job.

Either way the pay-off is a double whammy, because they don’t tax free time.

In contrast early retirement back loads all the extra time into one initially distant but eventually never-ending block. It’s a slog to get there, but in theory a coast thereafter.

For some, it’s nirvana. For others it can lead to boredom, ill-health, social isolation, and a life more ordinary if it cuts down your options.

For the latter reasons, for me financial freedom is the better part of FIRE.¹ But wherever your own heart takes you, think about the value of time.

As Harvard Business School professor and happiness researcher Ashley Whillans noted this month:

Over and over, I find that prioritizing time over money increases happiness.

Despite this, most people continue striving to make more money.

For example, in one survey, only 48% of respondents reported that they would rather have more time than more money.

Even the majority of people who were most pressed for time – parents with full-time jobs and young children at home – shared this preference for money over time. […]

Research shows that once people make more than enough to meet their basic needs, additional money does not reliably promote greater happiness.

Yet over and over, our choices do not reflect this reality.

True, plenty of people strive to survive. Work isn’t optional for them.

But many regular Monevator readers do have choices – or at least they can create them.

Not everything that’s valuable shows up in a net worth spreadsheet. Far from it!

Time to choose.

From Monevator

Apple Card, fintech, and the future of good money habits – Monevator

From the archive-ator: The Devil’s Financial Dictionary: An ABC for passive investors – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!²

First house price fall in England since 2012 – BBC

Investors face ‘unacceptable’ delays to switch platforms [Search result] – FT

UK households spend above their income for longest period since 1980s – Guardian

Why investors are worried about the yield curve [Search result] – FT

Mobile eWallet usage surging around the world – ThisIsMoney

Households’ stark net borrowing position has been partly financed by non-secured loans – ONS

Products and services

Five ‘favourite’ cash ISA options – ThisIsMoney

Ways to own gold: Raising the bar into a safe haven [Search result] – FT

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

One in 14 used cars for sale have had their mileage tampered with – ThisIsMoney

Moneyfarm offering up to £600 cashback if you open its ‘Brexit ISA’ with £20,000 – ThisIsMoney

Investing platform Willis Owen retrospectively identifies top performing funds [I’d also point out active investing is a zero-sum game, so you can also safely ignore the comments about when active funds do better than passives et cetera]  – ThisIsMoney

Comment and opinion

When everything declines at once – Morningstar

The myth of average returns – The Evidence-based Investor

Nothing is safe – Of Dollars and Data

You probably don’t want another ‘generational buying opportunity’ – Bona Fide Wealth

Better than golf – Humble Dollar

Pension Calculator: How much money do you need to retire? – The Humble Penny

Never confuse luck with smart investing – Bloomberg

Different kinds of information – Morgan Housel

Will Nutmeg’s crowdfunding plans cut the mustard? [Search result] – FT

Five years into the slog and not bored yet – Quietly Saving

Pensions, doctors, and the NHS crisis caused by the tapered annual allowance – Young FI Guy

The 4% rule is dead? No it’s not! – MoneyMaven

How to increase the odds of owning the few stocks that drive returns [PDF] – Vanguard

What went wrong at Interserve? – UK Value Investor

Five personalities who can boost the value of your professional network – Financial Samurai

Brexit

MPs reject all possible Brexit solutions. What now? [Excellent videos] – TLDR

The obscene moral spectacle of Theresa May’s resignation – Politics.co.uk

Brexit: What the fuck is going on? [Video, week old but still relevant] – YouTube

The humbling of Britain – The New Statesman

Game of Thrones, hamsters, and other things that didn’t last as long as Brexit – BBC

When even the BBC turns to swearing [Video] – YouTube

Theresa May and Jeremy Corbyn have never been less appealing – YouGov via Twitter

Kindle book bargains

How Women Rise: Break the 12 Habits Holding You Back by Sally Helgesen – £0.99 on Kindle

The Talent Code: Greatness isn’t Born. It’s Grown by Daniel Coyle – £0.99 on Kindle

The Complete Guide to Property Investment by Rob Dix – £0.99 on Kindle

Winners and How They Succeed by Alistair Campbell – £1.99 on Kindle

Off our beat

Man stole $122m from Facebook and Google by sending them random bills – Boing Boing

How Moneyball ruined baseball – MarketWatch

Life After Facebook: The second act of billionaire co-founder Eduardo Saverin – Forbes

How to share a bed and be happy – Guardian

And finally…

“The two greatest enemies of the equity fund investor are expenses and emotions.”
– John C. Bogle, The Little Book of Common Sense Investing

Like these links? Subscribe to get them every Friday!

1. Financial Independence Retire Early.
2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator https://monevator.com/choose-time/

Apple Card, fintech, and the future of good money habits

This will date me even more than my nostalgia for Bruce Willis in Moonlighting, but I’m old enough to remember when choosing how to run your financial life meant picking the current account that offered the best freebies.

Branded piggy bank, Young Person’s Railcard, or copy of Now That’s What I Call Music: 17?

Talk about choice paralysis.

As for the banks themselves, there was even less to tell between them. One offered a slightly less ruinous overdraft, another might pay you a few quid on any money it hadn’t nudged you into spending. Once cash machine withdrawal fees were ditched in the 1990s, the banks became interchangeable in most people’s eyes – even if we seldom changed between them.

This bland monopoly invited disruption. It took a while for technology to make that possible, but the past few years has seen a wave of competition.

Young people increasingly wave their phones to pay for things or flash luminescent credit cards that double as flirting tools at the bar. They manage their finances using friendly apps that slide into their direct messages when there’s a service outage. They round up their loose change for a rainy day, and see their spending across town visualised as a heat map. In the US the super-popular Venmo service even turns your spending activity into a news feed that you can share with your friends.

Fintech (that’s short for ‘financial technology’) has exploded, and all this is not even to mention a slightly earlier round of innovation, such as PayPal and the peer-to-peer lenders like Ratesetter.

A list of the UK-based new wave alone sounds like the line-up of a music festival where you’re too out-of-touch to know the bands – Revolut, Monzo, Squirrel, Chip, GoHenry, Dozens, Plum, Yolt, Loot, Exo, Divido, TransferWise, Bean, Tide and many more.¹

This list is far from complete. And while London is undoubtedly a hotbed for fintech innovation, there are hordes more doing the same thing around the world.

Now I suspect there’s already a vast range of reactions to this post from the Monevator faithful.

Some of you are old hands at shuffling digital versions of your credit cards or – like my ex, which startled me when I first saw it – paying for almost everything with your phone.

Others were feeling pretty hip because you just used a contactless card for the first time.²

The point is the financial future is here – if unevenly distributed –  and there’s zero chance of the rate of change slowing.

Apple plays its card

It’s not only two guys in a WeWork office who are trying to shake up financial services, either.

The world’s occasionally most valuable company, Apple, just unveiled Apple Card, a fee-free credit card that’s linked to Apple Pay and backed by Goldman Sachs.

Due to launch in the US this summer, the tech giant’s card will pay 2% cashback on purchases made with Apple Pay, rising to 3% at the Apple Store or via its (expanding) subscription services.

There will also be a shiny titanium physical card, for those all-important at-the-bar props. You laugh, but when marketing to a generation that routinely uploads photos of their breakfast, this stuff matters.

Vanity will come at a price, however, as cashback with the physical card will only be 1%.

And incredibly it won’t even have a contactless chip in it.

Apple shares rose on the news of Apple Card (alongside much else) and Visa shares fell, but this may prove misguided. Most of these services run on Visa and MasterCard’s underlying networks, after all.

I think it’s the fintechs who should be most scared, given screenshots like this:

Automatic categorization of spending and maps displaying where you dropped your dough?

This sort of thing was fintech’s domain. They’re going to find it hard to run ahead of Apple and its billions.

Old money

Figuring out the future of fintechs is tricky, then. But divining the fate of existing financial service companies is equally non-trivial.

Take the banks. They’ve been written off by fintechs as lumbering dinosaurs ripe for the devouring.

Perhaps, but in that case start-ups such as those I mentioned earlier – and mobile-first challenger banks like Starling, Tandem, and Atom – have so far proven to be little more than mosquitoes. They might suck a little blood, but for all their buzz the big banks still hold most of the public’s cash and debts on their books.

Preoccupied perhaps by the effort needed just to meet banking regulations, the challenger banks haven’t so far matched the innovation of financial platforms like Monzo, let alone what’s promised by newer entrants.

The challengers are also yet to attract truly landscape-altering amounts of money.

Meanwhile the fintechs have unveiled endless features – from bots that query your spending to tools that help you shuffle your loose change into savings or freeze your cards with a tap on your phone – but they manage mere pennies, relatively speaking.

Happily a fintech is cheaper to run than a big bank. There’s none of the branches, for starters, and Eastern European tech teams can do much of the heavy lifting. Yet most if not all are still unprofitable, not least because of the marketing cost of winning new customers.

As for the big retail banks, they already have roughly all the money. In this sense they’ve already won!

But big bank business models are based on providing expensive loans (when not ripping us off more directly, with say the £35bn PPI scandal), which makes it hard for them to embrace more customer-friendly solutions. They have thousands of costly bank branches to manage down in the face of political opposition. And they have a massive ‘tech debt’, running on legacy systems that might still in places use frameworks devised in the 1950s.

This combination of having most of the money and seeing little need to innovate – especially as it’s so bloody difficult for incumbents – has meant the big banks have mostly sat out the fintech Cambrian explosion.

But I believe 2019 is the year this changes, thanks to open banking.

To oversimplify, open banking is a government-regulated push for banks to make possible the sharing of their customers’ data through a software layer that other banks and third-parties can hook into.

At first the banks seemed to be treating open banking as yet another compliance box to be ticked, but my sense is there’s now a bit of “one for all and all for one” in the air.

Last year HSBC was one of the first major banks to embrace open banking. Its Money Connected enables you to see your savings, loans, and mortgages held with other banks. (Essentially what the fintecherati call a ‘wrap platform’, which have long been popular in places like Australia).

This year I’ve had emails from Lloyds, Natwest, and others talking up similar – and related – services.

Santander, for example, has teamed with MoneyBox to enable its customers to round up transaction amounts and automatically pop the difference into a savings account.

This is just the beginning. No sensible bank will offer up its own data without trying to gobble up and make use of the data of its rivals. So now it’s begun they’ll all be at it.

Fintech will eat itself

This must be frightening for the fintech leaders (though I’ve yet to hear any admit it).

If the big incumbent banks copy all the neat tricks of the newcomers, it’s hard to see why customers will bother moving their money. A pink credit card will only get you so far.

In fact I’ve long expected the first phase of the fintech revolution will end with a massive roll-up by the big banks.

Something similar happened 20 years ago, when lots of high interest savings accounts popped up on the Internet and looked set to siphon away the big banks’ cash deposits. But ultimately their business models floundered, despite lower overheads, and they were snapped up by the established giants.

Seeing the same fate for the fintechs is not quite guaranteed. For a start, rolling them up is more technically challenging.

It might seem that buying a fintech would be an easy way to bolt bells-and-whistles onto an old bank’s customer offering, but the nightmare task of stitching the underlying technologies together could make it too much hassle. (Think of the car crash at RBS when it attempt to spin-off Williams & Glyn or the tech meltdown at TSB, for instance.)

Some of the fintechs were founded on the premise that new technology could do things old tech simply couldn’t do.

There’s also the question of what’s really to be gained by the big banks. The start-ups have attracted only small amounts of money so far, and I think there’s uncertainty even where they’ve done a better job at gaining customer numbers. The likes of Monzo and Revolut boast millions of users, but those customers are obviously more footloose – and probably less profitable – than those of us continuing to stick with the accounts we opened as students 30 years ago. Flighty millennials might not be worth paying up for.

Then again, perhaps this fintech revolution really is just that, and we should throw out our old notions of four or five big companies keeping most of our money in their vaults. Maybe the fintechs will continue to leach away assets from the big banks. In the meantime consolidation could be more fintech eats fintech as they strive to turn a profit.

Either way, I believe we can expect big bank accounts to morph to look more like what’s hitherto been offered by the fintechs.

Perhaps the greatest prizes will therefore go to any start-ups that can change the fundamentals of consumer finance – deeply altering our behaviour, say, or running ultra-lean businesses that are able to make us money faster than their deep-pocketed rivals can outspend them – as opposed to the apps with the cutest gimmicks.

Can fintech afford to be a force for good?

One way or another, fintech-style offerings will soon be ubiquitous. Through consolidation or disruption, I expect to see a crowded shelf of viable services competing to manage your money – whether hailing from banks, tech firms, start-up app developers, or your local coffee shop.

This presents a bit of career-risk for us financial bloggers. Many fintechs seek to automate good financial hygiene, from budgeting and saving money for a rainy day to putting your surplus cash into cheap index-tracking ETFs.

They could make good financial habits into a commodity.

Well, that’s the dream. There are competing incentives that suggest the revolution’s aim to do good could run into roadblocks – not least the need to make money.

At a recent event for one fintech raising funding, Dozens, the likeable CEO said he didn’t expect his company to ever provide loans except for sensible purposes like mortgages. All well and good but not particularly profitable. This CEO argues that being built from the ground-up as a super-lean customer-focused company will enable it to forego usurious cash cows such as high-fee credit cards. It is the equivalent of the line from Amazon’s Jeff Bezos, who warned “your margin is my opportunity”.

However if other start-ups turn borrowing money into a fun game, say, and get rich on the proceeds, then more noble-minded firms could lose out to their less scrupulous rivals’ marketing budgets.

We’re therefore likely to see all these services wrestle with doing right by the customer – if only because they have to, because fintech makes managing money so much more transparent – while finding a way to squeeze a profit from us.

Already we’ve seen fintechs drop fee-free foreign cash handling after reaching scale, for example. And big banks have been cutting teaser rates since the beginning of time.

Finally, many of these new services aim to make spending money frictionless – something eagerly embraced by retailers looking to prize us from our savings. What we gain in smart text alerts and automatically investing our loose change, we might lose when airily waving our phones around in a late night out on the town.

Watch this space

So perhaps there will be a future for personal financial advice. As our financial lives get ever more complicated – even if helped by apps that promise to make things easier – there will be landmines and booby traps galore.

I believe that within five to ten years everyone will manage their finances – or at least monitor their finances – using software and systems that only a nerd-dragon would have at their disposal today.

But money and investing will remain a fraught subject, because so much of it turns on our emotions and human frailties – and because the desire for companies to part us from our hoard is at the heart of capitalism.

Boring monolithic banking and money blogging 1.0 is dead!

Long live sexy banking and money blogging 2.0!

For the record I’m a shareholder in several of the fintech firms I’ve mentioned. I’m also considering a small investment in Dozens, which is currently raising money on Seedrs. While we’re at it I also own shares in PayPal, Square, Apple, and a couple of the big UK banks. And breathe! Let me tell you about complicated…

1. Note: See my disclosure comment at the end of this article.
2. I’m not joking. I’ve been told by industry types that contactless payment usage plummets outside of London, where we’ve all been trained to accept it by London transport.

from Monevator https://monevator.com/fintech-and-money-habits/

Five smart ways to handle a sudden windfall

Life can be an exciting and unpredictable thing. One minute, you are going about your normal daily routine and the next minute, everything can have changed forever. Very often, this can be a positive thing as the life-changing event that comes along can improve your circumstances. One great example of this is getting a sudden financial windfall.

Suddenly getting a large amount of money can happen in a number of ways. Maybe your lottery numbers finally came up and you scooped millions in a jackpot win, or maybe your rich old uncle left you a significant windfall in his will when he passed on. Whatever the exact situation, you can sometimes find a lot of money coming your way out of the blue.

Make sure to handle your new-found wealth properly

Many people assume that coming into money in this way will answer all their problems and make life perfect. While this is entirely possible, it will only happen if you are prepared to deal with all that the windfall brings. Having lots of money can actually feel a little scary as well as exciting! The key is to think ahead to how you will manage it. This is essential so that you do not waste it or get ripped off while also allowing you to enjoy it to the full.

How can you manage your finances to make the most of any windfall?

• Use an asset management firm – top of the agenda for most normal people will be talking to a professional asset management firm. This will ensure that you get expert advice on how to invest your money and make it work for you to earn more into the future. Most normal people will not have the knowledge or investment skills to do this alone and make the right calls.

Al Masah Capital is one of the best around globally and has been helping its clients manage their wealth and assets since 2010. Since then, it has built up a strong reputation for delivering honest advice, performance and value to its customers. With a range of low to high-risk portfolios to consider and various assets classes such as funds and bonds, Al Masah Capital is a wise move for any investor.

• Do nothing! – as well as finding professional help in terms of investing your windfall, there are a few other tips to help make it a little easier. The first thing is to do nothing at all! This may sound strange advice, but it will help you to avoid rushing into bad decisions. Take a little time to think about what you will do with the windfall and how you will divide it up to be used. Giving yourself this thinking time will make it less stressful and ensure that you use it rationally.

• Pay off debts and taxes first – once you are ready to start using your new stash of cash, paying off debt should be high on your list of priorities. Living debt-free is the ideal that we should all be striving for, and a windfall can make this a reality. As well as paying off debts such as loans or credit card bills, make sure to set some aside to pay any taxes associated with your windfall. This could be something like inheritance tax if it is money left to you in a will.

• Set some aside in an emergency fund – while investing some of your money is wise so that you earn more moving forward, do not invest it all. It is sensible to set some aside in a bank savings account for emergencies and those times when you need quick access to cash. If you have it all tied up in long-term investments, then you are in a bad situation if you need liquid cash fast.

• Put money into a pension scheme – one very good way to use your new-found wealth is planning for your retirement. For most people, this will involve opening up a pension plan to put money into if you do not have one or paying extra into a current one if allowed. This will help you enjoy your life when you retire and have plenty to live on.

Make sure to treat yourself

As well as all of the above, it is also vital to treat yourself and your family a bit! While you do not want to go crazy, a nice holiday or new car will make sure that you actually have fun with your new windfall. Just do not get carried away and spend it all. If you have recently come into money and need help, then the above are great tips on how to handle it for the best.

from Finance Girl http://www.financegirl.co.uk/five-smart-ways-to-handle-a-sudden-windfall/