Fighting complexity

As I mentioned in my January 2020 report, January is the tax deadline month in the UK. And it is the annual tax filing process where the overcomplexity in my financial affairs becomes most visible, and any problems created by that complexity become urgent and pressing.

In previous posts here and here I’ve discussed the complexity that has arisen in my financial affairs. Partly this is a quality problem, reflecting my higher than average net worth, and the journey I’ve taken to build my wealth. Partly this is deliberate strategy on my part – to diversify across providers, to make use of tax sheltered accounts where possible, to spread funds between me and Mrs FvL. And partly this is just creep – the equivalent of middle aged spread: it happens without you really noticing, until one day in January somebody takes a snapshot of you and you realise how unappealing the image is to outsiders!

Reflecting on the consequences of my overcomplexity, I think three problems nag at me:

1. The burden I shall impose on my executors. I struggle sometimes to manage my finances. My other half, or my family/friends, or a trained financial/legal professional, would be left with a genuine labyrinth to navigate.
2. The time I spend managing my money. As it happens, I am sad/bored enough to quite enjoy this. But I suspect I would enjoy it just as much if it took half as long, and I would find more productive/enjoyable things to fill my time.
3. The hassle/time/expense of the annual tax filing process. Let me dig into this a bit below.

I have used the same accountant for years. She knows my affairs pretty well and we have developed a reasonable system/way of working over the years. My limited company has a separate accountant and process, who/which I am largely ignoring in this blog post. Here are some stats from my personal tax filing process for the last tax year:

• 82 files that I’ve sent to my accountant. These are statements, EIS certificates (for the UK angel investing tax breaks), payslips, etc. These 82 files do NOT include some important material my accountant gets direct from my broker/private bank.
• 69 pages: the number of pages in my tax return.
• 110 emails, exchanged between me and my accountant, over the last 12 months. This is going to cost me….
• 570 rows in my investment tracking spreadsheet, covering both me and Mrs FvL. One row represents one holding in one account across all our publicly traded investment accounts. We have about 200 holdings in total, so each holding is coming up in almost 3 places (e.g. in my ISA, Mrs FvL’s ISA, and my General Investment account).
• 10-20 hours a year of my time is spent specifically working on my tax admin each year. Plus at least double this on tracking my activities.
• 1800+ investment-related transactions for just 12 months in my tracking system on Quicken. This covers me, Mrs FvL, and my personal limited company’s liquid portfolio. Every single one of these transactions has been typed in by me. Of these, about 500 are of a dividend payment of less than £50.

I reflected over the Christmas break on what I might do to curb this complexity.

Firstly, I have multiple providers/brokers. I consolidated this list down significantly when I bought my Dream Home. However now I am consciously reexpanding the list, looking for more FSCS protection / diversification in case of Woodford/MF Global/etc blow-ups.

Secondly, I have a large number of holdings – around 200 in total, across me and Mrs FvL. Our portfolios contain over 100 individual stock picks, as well as 40+ ETFs and 30+ funds/investment trusts. But my smallest 50 holdings amount to only 8% of my portfolio’s value. This could be cleaner.

Next, my personal tax filing workload has made me appreciate that the complexity of my tax admin burden arises only from unwrapped accounts. For my SIPPs/pensions, which have a few dozen holdings in them, no filing is required at the moment except the amount of my annual contributions. For my ISAs (tax-free accounts), with another few dozen holdings, no filing/etc of any sort is required – I don’t even need to tell my accountant about them. So the ‘executor complexity’ is even greater than my ‘accountant complexity’.

Finally, I am an angel investor. The main complexity this creates is from EIS. Claiming the relief when I make the investment is fairly simple. However the reporting process upon exit can be quite tricky – especially if the exit is 10 year after the investment and you didn’t keep good records of what you invested in. If the exit happens less than 3 years after the investment, or if the company gets wound up, or the exit is paid for with another company’s shares, the complexity skyrockets. I don’t see much that I can do about this complexity; it is effectively a different form of tax.

Most of these factors are deliberate. Making changes is hard. But on the tax/admin point, I resolved over the Christmas period to undertake some radical actions, and significantly reduce the complexity of my unwrapped accounts. To this end I want to:

• Reduce number of unwrapped unique holdings to 100, from ~140. This might not sound that dramatic but it is quite a big step. And it needs to happen before the next tax year, beginning 6 April.
• To achieve this reduction in holdings, I need to concentrate my smaller single stock holdings in wrappers (ISAs/SIPPs), especially if they pay dividends. In several cases, to do this I am selling the unwrapped single stock, as well as a wrapped ETF, and then re-buying the single stock in the wrapper and the ETF in the unwrapped account. Warren Buffett would not approve – thanks to hefty dealing costs. Nor would @TheAccumulator – because I may end up with higher yielding/less tax efficient holdings unwrapped than before.
• Lift my minimum investment size to £20k, from £5k. This feels like good discipline. I also have in mind making <£50 dividends a rarity – so at least the effort of typing them in feels more worthwhile! In practice what this means is keep <£20k holdings on ‘watch list’ – either to build the position or close it. This is a natural consequence of consolidating my holdings. But it also says ‘play holdings’ are to go; they outweigh in complexity/hassle what they deliver in learnings/fun/etc. With the imminent influx of funds from selling the Former Dream Home, I will have an opportunity to top up my smaller holdings.
• Keep using the same range of brokers. This diversity is valuable to me. And the FSCS limit of €100k per account encourages multiple brokers. There is an argument for ensuring that my smaller accounts are only used for tax wrapped accounts, thus eliminating any tax reporting, but that adds even more complexity. So for now, I just have a lot of General Investment Accounts.

I’ve been doing quite a bit of work on this pruning exercise already this year, as shown below. My unwrapped accounts are already becoming significantly less complex. But I have a couple of large unwrapped portfolios that I will need to close out a lot of positions, and either open equivalent positions in a wrapped account or dispense with some much-loved holdings. Head and heart are currently fighting it out.

In any case, I hope to report more progress before too long. Then the real test is the size of my statements/accountant dialogue/log file next January. Talk about long term investing, tsk.