What were the challenges?
The main issues that the lawyers had to consider were:
- What would the impact be if care costs increased in the future – at what level does affordability become an issue?
- Should they simply remain in cash and not expose the fund to any market risks and volatility? Do they need to invest?
- What level of risk could they take to generate a return and to reduce the impacts of inflation over Jonny’s lifetime?
- The lawyers need to be seen to be acting responsibly, acting in Jonny’s best interests and considering all options.
How did i4C solve their challenges?
Lawyers engaged financial planners to model various scenarios using i4C to explore what variables might impact Jonny’s situation.
Initially, i4C demonstrated that the trustees could afford to keep Jonny’s funds in cash, and could withstand the increase in care costs (assumed to be an additional £100,000 per annum post school). However, the exact future levels of additional care costs that could be incurred over Jonny’s lifetime were unpredictable. The trustees’ main consideration was to target some growth and develop a safety buffer against future costs.
i4C was used to model investments considering various levels of risk – between cash, cautious and cautious to balanced. This showed that over a longer-period that the difference between holding cash and being invested in a cautious to balanced risk portfolio was small. The investment plans were stress tested further by factoring in many potential market losses during Jonny’s anticipated lifetime.
Even in the unlikely event of regular large drops in value and no growth spikes, i4C demonstrated Jonny’s fund would grow if a part was invested rather than if it remained wholly in cash throughout his lifetime. It was agreed, however, that a large cash balance would be retained to cover the impact of immediate short-term market losses.
What was the outcome?
Following the interactive use of i4C, it was agreed that £850,000 would be invested and £350,000 would remain in cash.
i4C enabled the adviser to be appointed by the trustees as they:
- Analysed the trustees and Jonny’s situation over a longer-period;
- Stress tested live with the trustees and in written form against a number of interacting variables to develop the optimal solution; and
- Did not just consider the investment strategy.