This is of course true, and as a result, a huge amount of investors are rushing to buy stocks, bonds and funds before the clock strikes midnight on April 5.
However, is panic-buying to utilise that £15,000 tax-free ISA limit the best way to work your money? Head of FE Research Rob Gleeson (pictured) certainly doesn’t think so.
“The industry tries to whip up a buying frenzy in order to push products, and actually, if you had a well-thought-out portfolio beforehand, there’s no need to add to it just because it’s ISA season,” Gleeson (pictured) said.
“The whole idea of pushing funds on people, ‘what should you buy, what should you buy, what should you buy’, isn’t the way I would be advising my customers if I were an advisor.”
While forcing retail investors to buy as much as possible is not the most beneficial way to encourage wise investing, there is the argument that they spend unnecessary money in tax by failing to use their ISA.
As a result, bringing these tax wrappers to the forefront of people’s minds could be seen as a positive.
What’s more, providers usually offer better rates closer to the ISA deadline, meaning that investors could find themselves better off by holding out until the last minute.
Patrick Connolly, head of communications at Chase de Vere, believes that the ISA marketing push through February, March, and April, is nothing more than logical decision from the investment companies, as opposed to a way to callously force people to part with their cash.
“This is the time that many investors think about using their annual ISA allowance before the end of the tax year, or use their new allowance early in the new tax year,” he explained.
“It makes far more sense for investment companies to spend money on advertising and promoting their products and services at a time when people are more likely to invest than at other times in the year when they aren’t.”
It’s important for investors to be well-informed before making an investment decision, and it could be argued that ISA season brings some good potential options to light through finding the investor, as opposed to the investor finding the company.
Martin Bamford, financial planner and marketing director at Informed Choice, agrees with this to an extent, but is by no means a fan of the ISA drive.
He said: “A plus side is that fund providers do spend an awful lot of money reminding people about the importance of long-term investing. It’s just a shame that these marketing pounds are not more evenly spread throughout the tax-year.”
However, in terms of sentiment, he is far from convinced that ISA season has the investor’s genuine interests at heart.
“I think the ISA season is a silly, marketing-driven event. Sensible investors have their own ISA season at the start of each tax year.”
“By waiting until just before April 5 to make your ISA investment decisions, you risk investing in flavour-of-the-month funds rather than a portfolio carefully designed to meet your own investment goals.”
This time of the year can certainly be a breeding ground for rash decisions, with panic at the heart of new investments rather than enthusiasm for what looks like a good buy.
FE Trustnet recently highlighted how many investors had turned to small-cap orientated funds this time last year following a period of strong performance.
According to FE Analytics, the average fund in the IA UK Smaller Companies sector returned more than 33 per cent in the 12 months prior to the end of the last tax year, while the FTSE 100 was up 11 per cent, and fund flow and factsheet popularity data showed small-cap funds were gaining a huge amount of attention within the investor community.
Performance of sector versus index between April 2013 and April 2014
Source: FE Analytics
However, over the last year institutional investors have been taking profits from higher risk areas of the market as macro headwinds have intensified and, as a result, the IA UK Smaller Companies sector has seen net outflows in each of the last nine months, according to the Investment Association.
Just look how smaller companies funds have performed since the April last year due to that falling appetite for risk.
Performance of sector versus index since April 2014
Source: FE Analytics
Connolly agrees that investors are in danger of picking flavour-of-the-month funds. However, he points out that, if investors ignore the marketing push, they can make well-informed decisions by getting into the spirit of ISA season.
He said: “While these investments companies promote their products more at times when investors are most likely to buy, they will also promote the products which investors are most likely to be interested in.”
“You only need to type “Neil Woodford” into Google to see how many of the execution-only brokers are currently pushing his new investment trust - it’s all about people trying to sell you funds which they think they can tempt you to buy at a time when you’re most likely to buy them.”
“The challenge for investors is to ignore the marketing hype, ignore the adverts they see and the emails and mailings they receive and focus on the funds which are really the most suitable for them.”
Gleeson, on the other hand, believes that ignoring the bombardment of advertisements is easier said than done.
“There must be some pattern of retail investors just buying funds off the back of adverts and promotional campaigns, otherwise the asset managers wouldn’t be spending money on it,” he said.
Gleeson explains that, in the field of research, his role is to sell diversified portfolios to people that have been planned to remain lucrative in the long-term.
“You’ve got extra cash now in your ISA allowance, so you can top up the ones that are underweight,” he reasoned. “I’m much more of a proponent of careful planning and investing for the long-term, rather than buying stuff because it’s the month that all the advertising comes up.”
“If you already have some investments, why did you buy them in the first place? It’s because, last year, you thought these were the best places to invest. So what’s happened? The world is broadly the same place this year as it was last year, so why do you need to re-visit those decisions?”
“Either you agree with your initial decisions or you don’t agree, in which case you should be selling out of your old stuff. If not and that’s the best fund available, just top it up.”