Its name is Inflation, and it’s one of the most underappreciated forces that can impact your life financially.

So, what is inflation? To put it as simply as possible, it is the decrease in the purchasing power of your money over time. For instance, think about what you can buy from the supermarket for 100 CHF today, and then what you might be able to buy with the same 100 CHF, but in 10 years’ time.

Each franc is worth less because the price of goods and services is more expensive. Even a low rate of inflation, if persistent, can have a significant impact on the long-term purchasing power of money. At just 2 percent per year, if sustained, inflation will double the price cost every 35 years. So, in reality, a franc would lose half of its purchasing power. Imagine what the effect would be at 5 percent per year or 8% like we are seeing in parts of Europe or the US now.

If someone took out a fixed-rate, 10-year mortgage at 1 percent and inflation turned out to be 2 percent over the life of the mortgage, the debtor (borrower) would end up paying a real interest rate of negative 1 percent. That’s a good deal for the debtor, but not for the creditor (lender). As you can see from this simple example understanding inflation and its effects can have a significant bearing on your financial assets.

For those that may remember Switzerland, which is now considered a low inflation rate country, has seen multiple occasions of high inflation rates most notably in December 1973 when the headline rate hit 12%, far above where we are today. As the world recovers from the effects of Covid-19, we are starting to see a rapid acceleration in inflation for advanced and emerging markets, driven by firming demand, supply chain shortages, and rising commodity prices.

As the cost of oil rises, the cost of fuel increases which has a knock-on effect on just about everything we purchase. This is especially scary for retirees with large holdings of lower return assets, such as cash and bonds. Fortunately, a common secondary effect of inflation is rising interest rates, as upward price pressure eventually prompts Central Banks to increase borrowing costs and dial back bond-buying programs to cool a heating economy.

To ensure your investments can weather the effects of rising inflation, one should always seek the advice of an industry professional. For more information and advice contact a qualified adviser at Swissential on tel. 022 786 2020 or email info@swissential.com

What fees could you pay? Does this 1% cover the custodian fees? What about the investment management fee? And the underlying fund fees? The big one and no one speaks about is the financial planning fee – what is that? Is that included in that 1%?

If you want to manage money by yourself its easy to keep all fees below 1%. You just need to worry about the custodian (where do you hold your investments – avoid banks if you want to pay less than 1%) and the underlying investments (shares = no cost / collective investments 0.2% – 1% p.a.) But do you have the knowledge to manage your own investments? Are you confident enough to avoid common behavioral traits that ruin any best laid plan? And do you know why you’re investing in the first place? What is your Plan?

Outsource the management or if you receive financial planning advice and fees creep up. But not necessarily by much.

The discussion about fees is an important one and knowing what you pay and to whom is important. Not just for your own piece of mind but for accountability. And lump sum fees should never be built into products – you must be able to cancel them. I’m amazed at people who tell me 1% a year is expensive. People think they pay far less than they actually do and they receive little to no service. I look at portfolios that are charged at 0.5% management fee and I look under the bonnet and they pay over 2.5% per year within collective investment fund charges – some fees are explicit and some hidden – do you know where to look?

Also and by no means a small point is the significant impact of financial planning. Not only from a time saving perspective (your time) but you can save significant taxes too. Why are you investing if you can buy back missing years of your second pillar? What’s your tax rate 25-40%? Wouldn’t you prefer a tax saving and a plan to maximize these and balance this with your investments over time? Pay for advice and you might end up investing less than you would otherwise, saving tax and time. You may end up paying for a service that helps you achieve what you want and saves you money. You’d want to pay for that service? Right?

Value. That’s what is important. Not the size of the fee.

Data from the FinaMetrica (a renowned risk profiling platform) spanning different market conditions over time, demonstrates remarkable consistency in the average scores. Consistency is a good thing. If a client’s risk tolerance changed every time they came to an advisor’s office (or joined them on a Zoom call) it would be very difficult to give consistent defensible advice.

A client’s risk tolerance is how emotionally comfortable they are with taking risk. Imagine a continuum from reducing risk to avoid unfavourable outcomes up to embracing risk to achieve higher returns—where a client sits along that continuum is your risk tolerance. Risk tolerance is a psychological trait, a distinguishing characteristic that makes each person different, much the same way I could be on a scale somewhere between introverted and extroverted.

Like other psychological traits, risk tolerance tends to be stable over time and market conditions. Most people do not change from being an introvert one day to an extrovert the next, nor does their risk tolerance change. Not all questionnaires that claim to measure a client’s risk tolerance are created equal. Psychometrics—the marriage of psychology and statistics, provides standards for evaluating tests, sorting the good from the bad. A good test should be both valid—measures what it purports to measure, and reliable—measure consistently over time with accuracy.

FinaMetrica published data built on more than 1.2 million risk tolerance tests globally from January 2008 through to April 2020, spanning the Global Financial Crisis (GFC) of 2008 to the boom leading up to the current Covid-19 crash. Risk tolerance, globally and across the major markets of Australia and New Zealand, United Kingdom and United States, stays at an average of around 50 (on a scale of 1 to 100). Sure, there is some variation, but not in magnitude nor very correlated to market movements. Interestingly, because FinaMetrica has had thousands of the same clients take the test both before and after a crisis, researchers have confirmed this consistency is not only on average but that individuals largely test the same after a crisis as before.

A risk tolerance test that follows short term market volatility is dangerous for clients and advisors. If a poorly constructed test was applied during bull markets and it made people look more aggressive than they really are, when a downturn comes, they might panic sell and crystalize losses. Conversely, if a faulty test were applied during a down market and it indicated people are more risk averse than they truly are, their advisor could invest them more conservatively than they should, and returns could be unnecessarily sacrificed. Poor risk tolerance tests correlated to the market are also challenging for financial planning professionals and their firms, who must satisfy regulators that the tool they are using is fit for purpose. This is hard to do if the results change every time the client is tested.

So why do many advisors believe a client’s behaviour changes in a downturn and that they become more risk averse? Or why do so many clients do the wrong thing, panic and sell more equities in a market crash if risk tolerance is stable? Maybe it is not the client’s risk tolerance that has changed (as indicated by the FinaMetrica data) but the perception of risk in the marketplace. Clients might be quite willing to live with a 30% drop in their portfolio value but when CNN tells them this crisis could lead to the next Great Depression, no wonder they can become scared!

COVID-19 has brought a market shock and there will be others to come. Advisors who have performed a valid risk profile for their clients (and as we discussed many clients have not completed a proper risk assessment) find that clients are more likely to stay the course. In all cases advisors can and should provide an important role helping clients manage uncertainty to deal with the fear generated in the media, through proper guidance and education. If assessed properly, risk tolerance will be a stable factor in any financial planning conversation, steering the focus towards long term risk and return expectations; restraining excitement during upturns and dispelling unnecessary fears during downturns.

Too often in people’s mind: Taxed at source = Nothing else to worry about. This is simply wrong.

The main reasons for this we have encountered throughout our daily work and interactions with international professionals are, in order:

1. Real ignorance of how the system works (the individual has no concept he/she is doing something wrong)
2. Faked Ignorance – due to a lack of interest or a potential loss from doing things right by the authorities (ex: increase in taxes when declaring a foreign property)

Switzerland is one of the very few countries that levy a wealth tax on its tax residents. To be precise, the cantons levy such taxes. You will therefore pay more wealth tax depending on the canton in which you live, and also the municipality where you live within that canton.

We thought we would draw your attention to a few things, so you cannot say you did not know. When you are taxed at source you should be declaring your wealth by filing a separate form when above a certain threshold …. so that you can unfortunately be taxed on your wealth if it is appropriate:

1. CHF82’839 for a single person living in Geneva
2. CHF165’678 for a married couple living in Geneva
3. CHF112’000 for a married couple living in the canton of Vaud

Your wealth is composed of all your bank deposits, investments and properties, in Switzerland or outside. The main problem of doing something wrong without knowing is that you then do it wrong all subsequent years increasing the likelihood of getting caught. Considering taxes can be backdated for 10 years and penalties applied, the price of one single repeated mistake can be dear.

In a new world, with automatic exchange of information and increased transparency, ignorance is no longer a medicine of choice.

Sorry to be the bearer of bad news, but it is for your own good.

The answer is of course YES – but, we are not tax advisors and only recommend established professionals as a service to our clients. The real question is in fact this: How much should you be paying for a tax return?

Let us give you some pointers so you can make the right decision for your circumstances. There are 3 main scenarios to consider.

A. You have recently moved to Switzerland & your company uses the services of KMPG, PWC or E&Y – grace period up to three years.

You therefore have a free pass for two to three years, before you actually have to pay for it yourself. In this case, we have several pieces of advice for you:

DON’T:

1. Not pay attention to how the system works for 2 to 3 years.
2. Start wondering towards March of year 2 or 3 (when it is your duty to file a tax return) “How does it work? How should I deal with this?

DO:

1. Try to understand, if possible, what KPMG, PWC or E&Y do for you whilst it is a “free” service provided by your employer.
2. The last year your tax return is covered by your company, start asking colleagues and trusted friends who they use for their tax return and roughly how much they pay. You would be surprised at the difference in price, from CHF100 to CHF2’000 for a simple tax return.

B. You are taxed at source – grace period up to five years.

Your employer collects your taxes straight form your salary on a monthly basis. This is simple and straightforward, but again, this will not last forever. This system only works until:

• your household income (you and your wife or registered partner) exceeds CHF500’000 (Geneva canton) or CHF120’000 (all other cantons) in general
• you purchase a property in Switzerland
• you get a C permit
• you get married to a Swiss person (a career opportunity can turn into a beautiful love story!)

Whilst you are taxed at source, you do not need the services of a tax advisor to help you file your “Rectification of Holding Tax document” at year end. A simple chat with your Swissential adviser will suffice – it is part of our service. This said, you should pay attention to the income thresholds described above to make sure you are starting to file a normal tax return when you ought to. If this is the case, please review the below:

C. You have a fiscal duty to file a normal tax return – no more grace period.

Whether you must file a normal tax return straight form your first year of arrival in Switzerland, or your grace period has expired (i.e. your company no longer pays for the service for you, or your tax at source status no longer applies), you should consider the comments below. Please also bear in mind if you were taxed at source and must now file a tax return, the taxes already paid will be deducted from the remaining taxes due to the fiscal authorities (or you might even get a tax credit, which is always a pleasant surprise).

DO:

1. Use the services of companies tested by a trusted friend or colleague
2. Pay the right amount for the service you need. Most people do not need to pay more than: – CHF250 to CHF300 for a simple tax return (single person, no children, on a C permit, with one property abroad).CHF500 to CHF600 for a more complex tax return (i.e. married with kids, two incomes, a property abroad and several bank accounts and investment accounts held abroad)
3. Should you feel thrifty and up to the task, depending on whether your situation has not changed from one year to another, file your tax return yourself. You can use the work previously completed by your tax advisor last year. Speaking French, German or Italian certainly help depending on where you live in Switzerland.

DON’T:

1. Be cheap and try to do it yourself because you think “it won’t be that difficult”. If anything goes wrong, you can waste a lot of your time and energy trying to fix it with the authorities.
2. Don’t always think that the cheapest quote is the best. Paying too little can be as grave a mistake as paying too much. Make sure that everything you need is covered – half a job done is no compensation for the additional time you’ll need to spend on this.

At Swissential we advise pragmatism. Filing a tax return when using a professional means:

• you speak to a professional for 30 min to explain your situation and to get acquainted
• you send them the relevant documentation they have requested
• you speak another 30 min to confirm nothing is missing and that you understand the tax return that has been prepared for you – remember, once you sign, you engage your responsibility so please only sign what you understand everything
• your tax advisor will do a standard follow-up with you.

For something to be simple, you need to understand it first. We hope we managed to make this matter a little bit simpler. If not, let us know and we are happy to help.

The whole process can take two to three hours and therefore justifies paying CHF250 to CHF600.

Setting aside love and feelings (we are a financial advisory firm after all), our consultants usually get the same question from our clients, “I have heard I will pay more taxes if I get married, is it true?”.

There are 5 parts to that questions: Administration, 1st pillar, 2nd pillar, your global income tax rate & Inheritance tax. As expected, the answer is both yes and no, depending on how restrictive you are with your answer and the structure of your earnings. Let’s look at why.

1. Administration: Married = 1 point
   Being married simplifies a lot of the day to day life. Consider just filing your taxes. Married couples file one tax return, unmarried couples have to file separate returns. This advantage, in case of divorce can also become a real Pandora’s box.
2. 1st Pillar: Unmarried couples = 1 point
   A full annuity for a couple after 43/44 years of contribution will never exceed 150% of a standard annuity for one person. Therefore, there is certainly a disadvantage for married couples in this regard.
3. 2nd Pillar: Married = 1 point
   Many pension foundations require at least 5 years of proven common living to offer the same benefits unmarried couples have than married ones. Often, too many foundations offer no benefits at all to unmarried couples, resulting in a significant loss should the worst happen to one of the members of the couple.
4. Global Income tax rate: We have a tie
   Depending on your canton of residence, the splitting of your income (50-50 or 70-30) and your total common revenue, you might pay more taxes should you get married. In general, the more you earn, the less beneficial it is to be married. For a combined income above CHF300’000, it is often better to not be married.
5. Inheritance Tax: Married = 1 point
   Forced heirship exist in Switzerland, it is therefore more difficult to protect a partner than a wife. Also, whilst there is virtually no taxes between spouses (up to 6% in Geneva above CHF500’000), taxes amount to 26% above CHF100’000 for partners.

All in all, if you are ready to pop the question, don’t let taxes prevent you from doing so as it is not a good enough excuse!