Last year was the hottest since records began in many parts
of the world. The effects of global warming are widespread.
One of the most notable is the shrinking of the arctic ice
cap. This is proving disastrous for polar bears who rely on
swimming out to ice flows to hunt for food only to find the
ice flows have gone. Many drown as a result. Unfortunately,
no-one has told the bears about global warming. As humans
we have the advantage of being aware of it and have the ability
to combat it or at least adjust to it.
What has this got to do with the world of finance?
Global warming is not the only change to affect our way of
life in recent years. Security and the way we travel have
changed considerably. The financial world has also changed
in many respects. Anyone who has not adjusted to the changes
could find life very difficult indeed. Several factors have
caused these changes to take place, including terrorism, money
laundering, criminal activities, corporate scandals and the
collapse of markets and pension schemes.
Banking and investing is no longer a simple matter
Not so long ago banks, life companies and investment houses
would happily take your money and no questions were asked.
Not any more. Tough anti-money laundering regulations now
oblige institutions to verify the identity and residential
address of every account holder and ensure that the source
of funds is legitimate. Severe penalties may be imposed where
due diligence has not been exercised. In countries where regulations
are strictly enforced directors, managers, as well as financial
advisers can face jail terms for knowingly or negligently
accepting the proceeds of ill-gotten gains.
What does this mean to you?
Firstly you have to prove who you are, normally by supplying
a copy of your passport. Easy enough except that this has
to be certified. This may cost nothing if your financial adviser
is able to sign the copy, otherwise you will have to search
for a lawyer, notary or government official, who will normally
charge a fee. Interestingly, some institutions in jurisdictions
such as the Channel Islands will not accept the signature
of a senior person such as a head teacher or even the CEO
of a large company but they will accept the signature of a
police officer. Next, you have to prove where you live by
providing a copy of a utility bill or bank statement. Not
always easy if you are an expat living in Bali and your correspondence
goes to your office. In one case I had to seek the help of
a village chief to certify that a client lived in a house
that had no official address! If you are unable to provide
these documents the institutions will simply not take your
money. Worse, if you invested your money before the rules
came into force they won’t even let you have your own
money back!
How the way we invest has changed
Prior to the year 2000 conventional investing meant holding
a portfolio of cash, bonds and equities. After a couple of
decades of booming stock markets portfolios generally became
heavily overweight in stocks (= equities). Individuals, fund
managers, life companies and pension funds all fell into the
trap. The bursting of the technology bubble in early 2000
followed by a three year bear market reduced the value of
investments by 50% or more. The crash, coupled with corporate
scandals such as Enron, destroyed the public’s confidence
in the markets – for a while anyway. The financial services
industry responded by getting us to change our approach to
investing and to alert us to the dangers of putting too many
eggs in one basket. Consequently today, portfolio managers
and informed investors adopt what is known as ‘modern
portfolio theory,’ using a methodical allocation of
funds into a wide range of asset classes which can include
cash, currencies, bonds, equities, commercial property, commodities,
hedge funds and other alternative investment classes. Anyone
still following the old model risks falling into the same
trap again.
Retirement will never be the same
Earlier concepts of retirement have also gone through the
window in recent years. Just as the polar ice caps are melting,
so is the ability of governments to provide financial security
to the population in retirement. Occupational pensions are
in disarray following the 2000 – 2003 crash and companies
can no longer afford to provide defined benefits on retirement.
The only solution for the individual is to make greater personal
provision for retirement during his or her working life.
What if we bury our heads in the snow?
If we do not accept and conform to the requirements of anti-money
laundering legislation, if we do not adjust our investment
model to take account of a changed financial world and if
we do not recognise the changes we have to make to our pension
plans, then we are going to face a bleak future. At least
by being aware of the changing world we have a chance to do
something about it. It is an opportunity the polar bears do
not have.
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The views expressed are his own. If
you have any questions related to personal finance you may
contact him at 021 520 8099 or
colin.bloodworth@financial-partners.biz
