The best way to grow your retirement savings is to invest them intelligently. Putting money in a a bank deposit account will, after deduction of DIRT, more than likely not earn you enough to even cover inflation.  In order to beat inflation you have to invest in such a way that your rate of return goes above and beyond inflation. The best place to to use what are referred as "real assets". In essence, this would historically have meant property and stock market equities.

Unfortunately the Celtic Tiger has put paid to the chances of a property lead investment growth at least for teh foreseeable future. Which leaves the stock market based approach but that too carries risks. So how can you maximise your earnings while minimising your risk?

Diversity

Diversification is the first place to start in any investment portfolio, irrespective of whether retirement is the end goal or not. You don't want all your eggs in one basket. There are countless investment opportunities from individual stocks and unit funds to commodities, property to cash deposits . In an ideal portfolio, all of these should be used. Generally, when one class of assets loses value another class goes up. If you're well diversified you won't lose all of your money if one group takes a dive. Unfortunately, however, there is a closer correlation between equities and bonds than most people care to mention and from time to time both move in the same direction at the same time.

If you're not a professional investor, you probably don't know how and where to invest your money. In that case, you shouldengage a financialplanner or an investment adviser who does a lot of research into your personal circumstances before compiling an investment recommendation. If you are investing your own money, don't fall into the trap of trying to profit from ups and downs, known as timing the market. This is a certain way for anyway to lose money over time.

Start And Keep Up A Pension Plan

Put the maximum amount possible each year into a pension arrangement whether it is a personal pension, occupational pension scheme or PRSA. 

Time and Money

The longer you're in the market, the better you'll do. You should make a plan and start saving as early as you can, putting away as much as you can. You should either decide upon a fixed percentage of each months earnings to invest for retirement, or decide upon a maximum amount of money to spend. Using the maximum amount to spend approach is great for people who expect to earn more and more over time. It allows you to save a larger percentage of money as your earnings increase, rather than spending a larger amount.

In either case, make yourself a retirement goal, come up with a plan to accomplish that goal, and stick to it. You can use our free retirement calculator to find out how much you need to put aside each month to reach your goal.

As experienced Financial Planners we have become skilled in assisting our clients plan for their eventual retirement. A comfortable Old Age is not, however, just about having a pension plan, even though this may be part of the solution. Clever planning for retirement can assist greatly by:

1. Building Sufficient Savings & Investments

Once you retire you will need to ensure that you will have a source of sufficient income for the rest of your life, especially if you encounter medical issues in later life. Ideally, you should have enough savings to allow you to approach investing in a conservative manner which will provide you with a monthly income you can live from.

It is very important that you diversify your investments so if one specific investment fails it will not have a disastrous effect on your wealth. Why not use our retirement calculator to see how much money you'll need to have accumulated before you retire, and then read our articles on how to invest to learn more about diversification and smart investments.

2. Considering Inflation

Inflation is the hidden and subtle threat to any person in retirement as it is quite probable that, once retired, you will not be capable of replenishing your capital through future income. The long term Eurozone average rate of inflation is circa 2% per annum. If this continues into the future it will mean your money will lose 2% of it's value every year on average. In order to merely keep up with inflation, your funds will need to make that much, as a minimum with your investments.

3. Getting Out of Debt

Before you retire you should pay off all your debt. Ideally, it should be cleared substantially more before just retirement. Apart from decreasing your monthly personal expenses, it will also free up money for investing to provide you with even more retirement income as the years progress.

4. Trim Your Expenses

The lower your ongoing expenses are, the easier your retirement will be to manage. Because of the change in lifestyle it is quite probable that you can find areas where you can save money, leaving you with more to enjoy doing what you want to do most.

5. Revisit Your Health Care Coverage And Buy As Much As You Can Afford

It's likely you'll need medical care at some point during your retirement, and even it is quite probable that such costs will increase substantially as you get older. Make sure that you are not compromised by your health at a time in your life when you can least afford serious financial expenditure.

6. Consider Retirement Timing

Many people aspire to retire early but this has a dual effect on retirement funds. Firstly there is less accumulated and secondly the same fund has to service a longer period. We would always encourage our clients to consider how much better they can live by postponing their retirement by a few years. If you already have sufficient funds to retire, working several more years will significantly increase your retirement income and security. This being said, the prospect of more retirement income should be balanced with your own quality of life. Money isn’t everything and it is important to enjoy your life while you can.

As someone who is advising investment clients for almost 25 years it never ceases to amaze me when history tends to repeat itself. Not only do we see investment bubbles form and burst with increasing regularity but we also see the emotional reaction from clients ebb and flow as well.

When markets are in the ascendency everyone, it seems, chases the latest investment trend in the same manner as fashion trends exist. In the last decade we have seen bandwagons of technology stock, property and more recently gold. When corrections occur, as they will from time to time, then an overreaction of selling the same assets materialises.

At such times, many investors who are uncomfortable with stockmarket investment but who realise that it is necessary for long term growth prefer to use Tracker Bonds which are linked to stock market indices but which guarantee a return of capital.

Such products usually lock in client monies for a fixed period varying from 3 years to 6 years. The reason for the lock in is due to the fact that between 77% and 92% of the investor capital (depending on the term involved and the prevailing interest rates) is placed on deposit for the complete term of the investment. The balance is then used to pay introducer commission, the cost of buying stock market options as well as the profit margin for the product promoter, usually a financial institution. If the institution is only dealing with, say, an 8% balance (i.e. 100% less the aforementioned 92% on deposit), then it is more likely to embark on extensive marketing in order to draw in a greater volume of funds so as to make the product a profitable business proposition for themselves. There is nothing wrong with making profit providing that the eventual investor is fully aware of what they are doing with their money.

What many investors may not appreciate is while tracker bonds fulfil a reactionary investment need for safety they invariably compromise the client more by ensuring that their money becomes inaccessible for the period of the investment, which can be up to over six years in length. If no growth is achieved on the stock market portion of the tracker bond, then the client receives only that amount which was guaranteed, usually the original investment. Most such investors overlook the fact that their monies actually incurs a loss in value due to inflation in the intervening period. Considering that the long term Eurozone inflation averages out at 2% (if you ignore our recent deflationary experience) then the growth needed just to maintain purchasing parity is actually 2.74% p.a. if allowance is made for DIRT of 27%, which is the tax rate that now applies to all tracker bonds. Over time, these amount to a significant loss in real value.

If these were the only considerations then a relatively submissive investor might dismiss these drawbacks if their main concern is to at least know that a substantial portion of their money is safe. Safety is, like beauty, in the eye of the beholder. All tracker bonds carry what is referred to as counterparty risk, whereby the guaranteed return of capital is available only if the guaranteeing institution is still capable of fulfilling the return of capital. If a financial institution’s trading status is compromised, so too is its ability to give guarantees or, more importantly, fulfil them.

In my experience many investors rarely read the small print of investment brochures or contracts, trusting instead the adviser’s wisdom. A noticeable clause in such documents, for those eagle eyed enough to read them is now, since 2008, the specific reference to this counter party risk. Whether the return of capital is guaranteed by the promoting institution or the bank with whom the monies are actually deposited, there is a real risk that a default by the institution could occur.

This counter party risk is no different than that which exists if a person places money on deposit directly with a bank. While the EU wide Deposit Guarantee Scheme is in place to protect up to €100,000 per person, any excess can be more at risk with one bank than another, depending on the relative banks’ own financial ratings. Generally, the higher the investment rating of the institution, the lower the deposit rate offered. Inversely, those financial institutions that need funds to improve their own solvency and liquidity reserves tend to be higher risks and therefore need to offer a higher deposit rate to attract funds.

In recent times, many Irish people have transferred monies away from the Euro and into other currencies such as Swiss Franc, Norwegian Kroner or Sterling on the premise that these currencies are safer relative to the Euro. In so doing, investors (or more aptly, deposit holders) have already taken substantial risk which can result in substantial losses being incurred if the new currency holding loses value relative to the Euro. In many cases currency losses can arise quite swiftly without any immediate hope of recovery. The recent 8% devaluation of the Swiss Franc by its own Central Bank is a case in point.

The bottom line is that there are no sure bets and everything, even apparent safety, comes at a price.

When I meet a prospective client one of the first areas to be discussed is what financial products they currently hold. While many people will know that they have a mortgage and its broad details, less will know about what their pension fund and investments are applied to and even fewer again will know what level of life assurance they hold. Most people usually do  not give time to, never mind arrange, either their Will or an Enduring Power of Attorney, two key personal legal issues especially if they have dependants. In fact, I know very few individuals that have everything properly organised both financially and legally.

In truth, most people put more energy and thought into planning their summer holidays than they do into protecting their own and their family's future. The protection that gets the most attention is that which is foisted upon people, namely motor insurance because it is a legal requirement as well as house insurance and mortgage protection cover because of their necessity to be in place before drawing down a mortgage.

Why is it then that most people are so complacent on these extremely important matters?

From experience I know it is usually because they assume that they have sufficient coverage of financial planning issues with existing products and presume because they have either or both a pension or investment product or even set up  life assurance that they have properly organised. In other cases, it is because they have never really bothered to educate themselves in financial matters and behave ostrich like ignoring the potential problems hoping that they will disappear.

When you analyse a new client's various financial products it  usually becomes apparent that they have accumulated such products through a succession of financial advisers, all usually consulted for a particular purpose only, be it investment, pension, mortgage or life assurance. The hotchpotch of financial product is a natural consequence of all of this. If you approach matters in a disjointed manner, you get a disjointed portfolio!

If you recognise yourself in this, what's the solution?

Firstly gather up all the data that you have on your personal affairs and make a list of personal spending, insurance cover, mortgages, pensions and investments. Lists are very powerful as they focus our attention, quite often, on matters that we have long forgotten about.  Check the last few months’ bank statements and credit cards and you will be surprised at how easily expenses accumulate. Most people use ATMs and the spending from the cash is usually the most difficult to pin down. This might mean that you will have to monitor expenses going forward for the next few months.

For investments, pensions and life assurance get a copy of the summary schedule or ask for the insurance company or the investment company to send you recently updated details.

Next, give some serious thought as to what is important to you and your family - now and in the future. Is it school or university fees, a second home in sunnier climes, paying down the mortgage, taking long term care of a disabled child or sibling, having a decent retirement fund or all of the above and more? This second exercise might take several weeks as many people rarely give sufficient thought to what their purpose in life is!

When all is done, approach a financial planner and ask them to analyse your portfolio of products in terms of liquidity, risk, debt, savings and solvency. These are key to not only understanding your current state of affairs but also how you can start to plan your financial future. A full list of Certified Financial Planners is available on www.fpsb.ie  

A financial planner should be able to analyse the key elements of your holdings and advise on the relative strength or weakness of your financial portfolio and how it is affecting your life now. Likewise the financial planner will also be able to identify the effects of current spending patterns and whether possible future needs might be met. These needs may involve anticipating future cashflows, tax computations and required rate of investment return.

Historically, very few advisers in Ireland have built this broad approach into their actual client interaction. This is because very few clients understand the need for such full root and branch reviews as they have been educated by the financial services industry to react to problems by buying financial product rather than anticipating them in a constructive manner and then identifying the optimal strategy.

The one good thing that has come from the demise of the Celtic Tiger is that there is now a realisation that there is no free lunch as well as the cause and effect of poor financial planning. Rather than look backwards, perhaps now is the time to look forward and start taking charge of your own financial future.

Today is a good day to start.

Recently while reading the Sunday papers I came across an article which contained summary views from a number of financial advisers and investment managers on what readers should be investing in going forward. The article was typical of what usually appears in the printed media at every year end with a view to what investors should be doing over the coming 12 months.

On reflection, this type of article occurs throughout the year with perhaps more subtle commentary depending on the then current investment conditions. This, of course, is not unique to Ireland and happens in every country throughout the world. Everyone wants to know what the experts think and how one can take shortcuts in making money.

There is a saying that those who can, do. Those who can’t, teach. While this is extremely unfair to those in the education sector, the principle when it comes to advising others about monetary matters boils back down to the fact that if you could be so sure of your investment outlook why would you share it with others? Just say nothing, take your own money, put it into the markets and make yourself a fortune. There would be no need to have clients. All one would have to do is just make money for oneself.

The truth, however, is that nobody actually knows what the future holds in any sphere of life. Otherwise we would all have crystal balls and be heading to the bookies to make money. Even the really smart investors such as Warren Buffett and Anthony Bolton had their own fair share of poor stock choices and these individuals were a rare breed out-thinking, more than most, markets over a longer term but rarely, if ever, getting it right in the short term.

Then why is it that such commentators can get coverage so easily? Partly because such pieces help to give readers a variety of financial perspectives and partly because everyone is, at heart, a little greedy and wants to find out what they might be missing out on. In recent time the Celtic Tiger showed up Irish greed in property and contracts for difference by people who could afford neither the expenditure nor the risk. Further back in history one can find similar greed a la the Dot Com Bubble, the USA Savings & Loans Crisis, the South Sea Bubble and even the Tulip Bulb collapse. Add in the many con-artist schemes that attract the “suckers” and it is easy to see how greed can be exploited.

This avarice is also evidenced by the public focus on investment performance league tables of unit funds. Investment companies, in turn, make hay out of highlighting their top of the table status in order to promote their funds. When they underperform they sidestep the issue by explaining that their funds are primed for growth in the near future when some different circumstances may arise.

So what is an investor to do?

One aspect that all reasonable and experienced investment advisers will agree on is that broad diversification will assist in smoothing out volatility in performance of individual assets or asset classes, while time will assist on recovery of underperforming assets provided that they have not been overly encumbered by borrowings.

This approach has been proven to be enhanced by the process of rebalancing individual portfolios. In this respect it is interesting to see that some Irish investment companies are now promoting this process as the new way forward when, in fact, it has been an acknowledged approach for decades.

 The key for personal investors, however, is to match risk with reward or more specifically define what reward is needed before taking risk. Over a long advisory career I have seen many investors let greed get the better of them in pursuance of higher returns than those needed to achieve their personal objectives. These objectives, quite often, amounted to merely having sufficient funds in their old age to enjoy a quality life. By compromising the objective with higher risk, many have fallen short of their eventual needs and in some cases wiped out a lifetime of earnings from hard work.

In a nutshell, any investor should start by ignoring the experts. Figure out what is important to you and your family’s future and then work with a financial planner who is capable of determining what investment performance is needed. Then and only then, should you start by constructing an appropriate investment portfolio while at the same time bearing in mind that no adviser or fund manager is the font of all knowledge.

At this stage most self employed people know that as part of the Government's initiative to promote job creation, a 0.6% levy has been introduced on personal pension funds. The levy is being applied on all capital value assets under management of funded pension schemes and personal pension plans established in Ireland. Thankfully it is not applied on Approved Retirement Funds of those who have retired.

The levy has been stated by the Government to be temporary, and will be in force until 2014, thereby hoping to raise an estimated €470m annually.

Before we go any further, let's not deal in semantics. This is not a levy - this is a TAX to add to all of the other taxes that the Government finds that it has to implement because of past transgressions.

While the market has been advised that the TAX will apply based on the market value of assets as at 1st January 2011 there has been very little specific detail from the Department of Finance on the practicalities of the proposal. Whether the TAX will be introduced before and, if so, continue after 2014, time will tell but its very existence points to a very basic lack of understanding on the Government's approach to retirement funding.

Firstly the long term timebomb of the need to have adequate retirement funding for our aging population just started to tick louder. By taxing pension funds by a further 0.6% a personal pension fund will be reduced by 6.2% over a ten year period or 12.7% over a 20 year period. If the eventual fund was originally likely to be €1,000,000 this would account to a reduction of €62,000 or €127,000 over time, depending on your term. These reductions, based on current annuity rates of, say, 4.5% will see a loss in annual income from retirement age onwards of  €2,790 or €5,715.

This is all the more incredible when one considers that up to even last year, the previous Government had stated that they sought to ensure that all employers have some form of compulsory pension scheme in place. While a different Government is in place now, the same problem remains and has been exasperated by the raiding of the National Pension Reserve Fund just to help bail out the banks. One can only hope that when the  banks become permanently solvent that they will be capable of being sold on by the State for a considerable profit and thus recharge the National Pension Reserve Fund.

The application of the levy/tax is also unfair on the private sector. If one assumes an annuity rate of 4.5%, the o.6% levy represents a 13% reduction in annual income being absorbed by the private pension holders.

This is a one sided tax as no equivalent charge is being placed on public setor pensions which, if it was, would have resulted in a 13% reduction in gross monthly pension payments. I don't imagine that too many public servants would stand idly by for a 13% reduction in retirement income.

At its heart is a totally inequitable position which is fundamentally unconstitutional. Why is one sector of Irish life being penalised directly without the other side having to take any pain?

Within the pensions industry, even in the last few short days, there is a growing voice for legal action by way of a test case to be taken. Time and many actuaries and lawyers later will tell if the Government really knows how to handle this problem of their own making!

One of the advantages of the Celtic Tiger, apart from everybody more or less carrying on as if the good times would last forever, is that investors learned that greed does not pay. Sooner or later, there is a price to pay. For those that can restart their lives eventually there were a few lessons to be learnt, the least of which was realising that if something looks too good to be true, it ALWAYS is!

So what should investors seeking high investment returns be wary of? The answer is the length of the proverbial piece of string. We could be here all day going through every con artists approach but their main tactics can be summarised as follows:

1. Anybody who suggests that they have a risk free investment offering is probably lying. Even cash in a bank carries risk. Just ask the many thousands who withdrew money from the Irish banks in recent months because of the fear of a bank collapse.
2. Someone who has says that they have the magic touch and produces consistent returns even when the markets do not facilitate such investment performances.  This is usually reinforced by them stating that their approach and knowledge is proprietary and will not be disclosed to third parties. All regulated investment companies will never make such claims - this is why they always advise that past performance of investments are not an indicator of future performance.
3. If someone is promising high investment returns, then why do you actually need private investor monies? If the deal is that good any self respecting fund manager would jump at an opportunity of getting an investment that gets higher than normal investment returns. The reason why any fund manager might not invest is because the proposed investment carries far too much investment risk for the relative return or because the promoter of such a "great deal" knows that it would not stand up to scrutiny.
4. In my experience the offer of an unusually high rate of return is usually the most consistent hook used by scam artists and preys, in particular, on either people's greed or a desperate attempt to make up losses from another bad investment. Indeed, it is somehow sad to see certain individuals get conned several times by the same type of scam because they find themselves in desperate straits in the first place.
5. Any investment adviser that maintains direct custody of client assets is potentially suspect. Unless there is an independent, third party, custodian to maintain control over client assets, conmen can easily compromise such monies. Large, well recognized custodians are to be proferred as they make a serious business out of providing independent trustee services. Furthermore, in the event that they fall short of their fiduciary responsibilities it is quite likely that they will have large professional indemnity insurance cover that will pay out to cover any unanticipated losses.
6. Auditors have a similar capacity to either enhance or destroy a scam artist's reputation. In the USA for example, one of the reasons that the Madoff fraud remained undetected for such a long period of time was due to the lack of a credible auditor. In Madoff’s case his company was audited by a tiny accounting firm with only a few employees, something which was totally disproportionate to the funds of $50 billion that Madoff was supposedly managing.
7. Financial Cons only exist because either the investors or their advisers are not thorough enough in their due diligence process and therefore do not ask the right questions. Sometimes this is because all parties rely on the reputation of one or more of the promoters. Sometimes this reputation might have been earned historically but the same circumstances may no longer apply. Sometimes the con artist relies on investors desire to be with the incrowd and creates a further lack of due diligence by individuals assuming that if it is good enough for "so and so" then it's good enough for me!  These type of investors are just easy targets for scurrilous scam artists. In many cases, pride often prevents them from telling others if they find out later that they have been stung!

Finally, if you are considering an unregulated investment vehicle, the best approach before you might invest is to engage a capable professional in order to carry out due diligence. This individual should be someone who has the experience, knowledge and skills necessary to analyse any such investment scenario. A fee paid for such work in advance of any potential investment might save a lot of money later on if the investment turns sour!

Occassionally just when it seems like I may be making a new client relationship I am asked "How do I know that I can trust you?" The posing of the question is not unreasonable when you consider that they may be about to hand over the advice on their investment, pension, life asurance and financing to someone that was, up to a day or two previous, a total stranger!

When you reflect further on those high profile cases in the media of advisers who have compromised client assets, it is only right and fitting that the issue is addressed. After all, if you have just spent a lifetime accumulating wealth you need to be sure about who will be helping you manage it going forward. And if the adviser cannot prove their bona fides you would be right to walk away. So what bona fides do you need to establish?

In Ireland, all financial advisers usually have two public profiles that can be investigated quite easily. The first is the website of the Central Bank of Ireland which is the regulator for financial advice in Ireland,  http://registers.financialregulator.ie/ . Using this you can find out if the business with whom you are dealing with is authorised to deal with individuals resident in the Republic of Ireland. If they don't appear on this website, then you should consider dropping them immediately as there is a very high probability that they are not a legitimate business. Alternatively, if they are a legitimate business it is quite probable that they are not dealing in a regulated product and as such you will not be covered by the ICCL which is the investment industry's compensation fund. The coverage of this fund can be viewed at http://www.investorcompensation.ie/index.php - in essence, you are only covered if the adviser is dealing in regulated products in which he/she is authorised to deal in or advise on. For this you need to refer to the aforementioned regulator website to check out exactly what products that they are authorised for.

Following on from this you need to be sure that the particular adviser is knowledgeable enough to give you specific advice. While both the Irish Brokers Association and the Professional Insurance Brokers Association support the concept of "Grandfathering" i.e. allowing those with long service in the financial advice business to be deemed worthy of giving financial advice by way of their longevity in the industry without having a professional qualification, I would hold a different view.

Put quite simply, I would feel that, at the very least, any prospective client has a right to deal with a Qualified Financial Adviser (QFA) . This is someone who has at least proven their professional understanding of the financial services industry. Proof of certification can be sought at the website www.qfaboard.ie . As the QFA qualification itself is 10 years in the Irish market place there has been ample time for someone who is serious about their business to prove it.

The QFA qualification, however, is not the only professional qualification that deals with financial advice. The recently introduced Certified Financial Planner® qualification which has resulted in the recent generation of the first circa 60 individuals in Ireland who have obtained this worldwide standard and will, I believe, become the new benchmark for financial advice in Ireland. These individuals will receive formal professional recognition by July this year having successfully completed a Graduate Diploma in Financial Planning through UCD Business School before sitting a final exam of this global body.

The independence of the adviser also needs to be verified. This can be cross checked against the above regulators website where the financial adviser should be registered as either an authorised adviser or multi agent intermediary, both of whom operate in the independent advice area. If the adviser is not registered as either but is instead a direct sales employee or a tied agent of a financial institution, you will not be able to get independent financial advice as the product range that they can advice on (and sell) is confined to that financial institution.

The adviser should then be prepared to give you advice on a fee paying basis. If they are not or are have difficulty quoting you this option, it is probably best to walk away then. If someone is relying solely on commission sales from a product transaction, then it is very unlikley that they will be totally independent and unbiased.

If the adviser has passed these basic tests, you should ask them to send you whatever relevant documentation is needed for you to become a client. The response should be to send you a very detailed terms of business as well as copies of their various regulatory approval documents. On top of this you should also be asked to complete a financial information document which is more commonly referred to as a Factfind. These non regulatory documents should be quite detailed. If they are not, it is quite probable that they apply a light touch approach to client relationships - not a good sign!

Ask them also for a copy of  a report that they have provided to previous clients, with the client names blanked out. It is not that you are looking for free advice as everyone requires bespoke advice but it it does give you a sense of the quality of information that you are likely to receive. It also gives you a sample to compare against any particular advice that they may give you in the future.

Finally ask them for a number of client referrals who have been dealing with them for several years. If they baulk at this, then they are either  not geared up to dealing with clients or may have something to hide.

If the prospective adviser hims and haws  at any of this, then go on your gut feeling, which will probably tell you to walk away and seek another adviser. I know that this may seem a lengthy process but bear in mind that it is your money that we are talking about and, above all, your financial future!

In the last 12 months the question that I get asked most frequestly is: " Is my money safe?" There is no doubt that that the level of distrust and incredulity that is directed towards banks has turned a once sacred cow into a national pariah. And from that, depositors now fear for their own account balances like never before. The ongoing, but necessary, rationalisation and merging of the whole banking system has only served to feed these concerns.

Ironically, the more that Irish depositors withdraw from local banks in order to protect their own vested interests of personal money, the more the national interest gets compromised and requires further bail-outs. This has become a vicious circle which has fed on itself and will quite only stop feeding once a sense of calmness settles on deposit holders, particularly private account holders.

If you are one such person, then perhaps now is the time to take stock and in particular to identify what protection is in place for your money.

As I write, there are two levels of protection afforded to Irish retail depositors, as distinct from institutional or corporate. These protections are the Deposit Guarantee Scheme and the Eligible Liabilities Guarantee Scheme.

The Deposit Guarantee Scheme is operated by the Central Bank of Ireland and extends to particular retail deposits held with banks, building societies and credit unions that have been established and authorised to trade in the Republic of Ireland. Other EU countries have similar schemes covering their deposits held with banks established in that State. The EU limit on all such schemes is €100,000 per depositor or €200,000 per couple and covers the sum total of all deposits held with an institution. This scheme is open ended and has no particular time limit. The scheme covers:

• current accounts;
• demand deposit accounts;
• term deposit accounts;
• notice deposit accounts
• share accounts with building societies and credit unions.

Retail investors are defined as one of the following:

1. private individuals, sole traders, partnerships
2. small companies, which meet at least two of the following requirements:
   1. a balance sheet total of less than €1.9m
   2. turnover less than €3.8m,
   3. average number of employees less than 50.
3. charities,
4. voluntary organisations,
5. credit unions, in respect of deposit they may hold with other financial institutions.
6. trustees of Small Self Administered Pension Schemes.

The scheme does not protect what might be called ‘professional’ investors, such as deposits held by pension funds other than SSAPS, life and general insurance companies, investment funds, large companies, etc. Importantly, any amount the depositor owes a bank is not deducted from the deposit amount to determine the amount of compensation a depositor can get in the event of the bank being unable to repay its depositors.

However, all of the Irish banks and building societies covered by the Deposit Guarante scheme are also covered by the Eligible Liabilities Guarantee Scheme, which covers retail deposits for the excess, if any, over €100,000 per depositor - see below.

I would add that a depositor with more than €100,000 to invest (or €200,000 for joint accounts) can split their deposits over a number of different institutions to benefit from the €100,000 limit with each institution.

The Eligible Liabilities Guarantee Scheme was introduced on 9^th December 2009, and guarantees certain deposits held with banks covered by the scheme (called the ‘covered institutions’) as follows:

• the excess, if any, over €100,000 of deposits which are covered by the Deposit Guarantee Scheme, and
• the full deposit amount, without limit, for other deposits not covered by the Deposit Guarantee Scheme and which are covered by the Eligible Liabilities Scheme.

At this point in time while the Deposit Guarantee Scheme is openended, the Eligible Liabilities Guarantee Scheme only extends to 30th June 2011. It should be added that, any deposit term that commenced before 30th June 2011 will be covered up to a maximum term ceasing at 30th June 2016. Interestingly, any fixed term deposit account opened with a bank before a bank joined the ELG scheme is NOT covered by the ELG scheme and may only be covered (if a retail depositor) by the DGS.

Finally, the operation of the ELG scheme is subject to ongoing approval by the European Commission, in accordance with EU State aid rules. The next review is on 30^th June 2011 and the Commission could extend it at that date to 31^st December 2011.

Foreign owned banks may be accepting deposits in the Republic of Ireland either through ownership of a separate bank established and authorised here (e.g. KBC Bank Ireland plc, which is 100% owned by KBC Bank) or through a branch established here (e.g. Rabobank operates here as a branch of its Dutch bank) or operating on a cross border basis (e.g. Investec Bank plc operating from the UK). The foreign banks which operate as separate banks established here are covered by the Irish Deposit Guarantee scheme, up to €100,000 per depositor. None of these foreign owned banks are part of the Irish Government ELG scheme.

There is a broad approach among investment advisers that as a client becomes older they should be advised to become less risk orientated in their investments. This is partly driven by the thought of “how would I advise my parents?” and partly driven by fear of the Financial Regulator finding fault with an adviser’s investment process.

Indeed in October last year, the Central Bank of Ireland issued a consultancy paper looking for feedback on changes that it was considering making to the Consumer Protection Code. One such change that the regulator proposed was the definition of a “vulnerable consumer”, which it defined as a consumer that is “vulnerable because of mental or physical infirmity, age, circumstances or credulity”.  The attempt by the regulator to define vulnerability is, no doubt, prompted by the many cases of poor financial advice to the elderly on which the Financial Services Ombudsman was asked to adjudicate in recent years.  If the proposed change in wording to the Consumer Protection Code were to be implemented, it would sharpen the focus of financial advisers on how they should interact with many of their clients, including the elderly.

Either way, these are excellent braking measures since we would always want to care for our own kin and therefore why should we treat elderly non-family any different?

By paying increased attention to their vulnerability, however, are investment advisers doing the elderly more harm than good by only just recommending cash or fixed interest options, as most advisers actually do. Is this old style, old age, approach a rather simplistic tactic as many advisers do not want to have to deal with stressed elderly clients worried about the stockmarket roller coaster?

Don’t get me wrong, I am not, for one, recommending a sea change in approach but I do wonder if the financial advisory community has unwittingly become almost condescending to many of its senior citizens or overlooked the need to revise its thinking in line with changed macro economics? By assuming that they will either become too stressed about investment risk or cease to be intelligent when they get into their 60s and onwards, are we removing, in some cases, appropriate investment products for their specific needs in these changing times?

Now I realise that this perspective may be deemed to be investment advice heresy by many of my peers but the fact remains that because someone is elderly doesn’t mean that they have stopped living or does not require a minimum rate of investment return from their investments to meet their future needs. Even a well meaning label by the Financial Regulator shouldn’t remove the need to discuss the full range of investment options rather than, as it seems to happen, start and end with cash-based or fixed interest instruments.

Of course, the rationale of increasing an investment portfolio allocation to less risky, less volatile assets as one gets older seems quite understandable, even if you leave aside the emotional issues. As individuals edge towards being immediately pre-retirement investors only to become post-retirement investors, their ability to earn their way out of a stock market fall diminishes considerably, as does their ability to outlive the long term effects of a market decline.

But is this approach possibly dangerous advice?

From an investment management point of view, the traditional approach of reduced risk has much to do with the historic perspective of locking in guaranteed rates from Government Bonds. Of course, on an historic basis, such lock-ins then were far more attractive than they are now as, in the past, interbank interest rates were 4 or 5 times current levels and it made sense not just to be conservative but also very sensible. Why wouldn’t one lock in high interest rates if one had the option, especially if inflation was likely to fall into the future, which it did!

The major personal difference between now and, say, 30 years ago is that life expectancy, through better health services, has extended the need for income and, in some cases, capital. On the financial side, interest rates are now far lower than they were in the distant past.

It is all very well to say that as a person moves into the last chapter or two of their life that they have fewer expense needs as their lifestyle slows down and their mortgage is paid off. Ask anyone, however, who is either elderly or has an elderly relative if they would have anticipated 15 years ago how much money an 80 year old retiree might need, especially with regard to healthcare. This has not been helped by the Government’s announcement last week of the effective future curtailment of the Fair Deal Scheme for nursing home care. For those unable to get government financial support in such circumstances at such a vulnerable time of their life, the burden of financial care may be untenable.

And just in case readers of this article think that it can’t be that bad, just do the maths!  The average cost of nursing home care is €1,200 per week or €62,400 per annum. Pay this fee for, say, 4 years and you realise that a need for €249,600 can easily occur. This is a massive sum. If the Fair Deal scheme is closed to future participants or even to a lower number of participants, then someone somewhere will be expending quite a considerable amount of funds if they want to make sure that either they or an elderly relative will be properly cared for in the twilight of their life.

There is no doubt that returns are correlated with risk, and that equities are more risky and volatile than bonds over most periods. But as long as your time horizon is 10 years or longer the risk in owning stocks seems to be overdone especially if one has a broad-based diversified portfolio. Even over the last 10 years, with all the market crashes and uncertainty, returns on equities were essentially flat. And that is a bad period! The question is, I suppose, what is the possible return over the coming 10 years?

Just because someone is 60 or 65 doesn’t mean that they need to go to cash immediately even if they are risk-averse. The higher cost of long term care means that it probably doesn’t become a serious issue until age 70 to 75 and onwards. This means that in many cases, some level of investment risk could still be considered over the intervening period, providing that the risk is spread broadly over a wide range of assets.

The historical option of buying Irish Government stock is no longer the safe bet that we had previously thought and it would be a very brave adviser who might recommend a large holding of such bonds. The current high yields attaching to Irish government stock is the stockmarket’s way of recognizing the high risk that such bonds hold and so are possibly not ideal for any investor of any age other than those prepared to take serious risk.

Equities, for their part, require far more growth now than they have priced in which is stretching their valuations. This being said, time in markets usually produces results. Even moderate exposures to equities can make substantial differences to portfolios relative to cash only holdings.

Of course conservatism is necessary for those who are naturally risk-averse irrespective of their stage in life. But ignoring an investment return needed to maintain a portfolio is like throwing the baby out with the bathwater. Riskless investors face a difficult dilemma with risk-free returns currently so low. Probably the best solution is to never be in this plight in the first place, by undertaking adequate saving and reasoned investing from a young age.

No matter how old a person is, any investment planning needs to start with an investor’s net financial worth before balancing expected investment returns with expected income and capital needs. This is as applicable to a 65 year old as it is to a 25 year old. Risk tolerance rather than just risk propensity is also a key consideration in relation to the range of possible investment returns.

In any event, my belief is that the automated old age / low risk approach needs to be revisited by many investment advisers to reflect not only the different personal circumstances of their elderly clients but also the changed economic environment we now live in. To do otherwise may be doing such clients a disservice.