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Are some products or investments 'off limits' to advisers?

For some financial advisers there are sectors, products or investments that appear somehow ‘off limits’ due to a variety of perceived issues – perhaps both real and psychological.

Andrew Aldridge
|
11th May 2018
Andrew Aldridge Deepbridge Capital
"One of the most frequently provided reasons is around compliance because it can appear to mean that the decision is out of the adviser’s hands."

For some financial advisers there are sectors, products or investments that appear somehow ‘off limits’ due to a variety of perceived issues – perhaps both real and psychological.

Tax-efficient investments, such as Enterprise Investment Scheme propositions, VCTs or Business Relief vehicles, can perhaps appear to be some of these and working with large numbers of advisers over the years, we have heard all manner of reasons given when it comes to not being active in the sector – despite advisers expressing an interest in the potential tax planning and growth opportunities.

One of the most frequently provided reasons is around compliance because it can appear to mean that the decision is out of the adviser’s hands. “It’s not me but my compliance people,” can be a regular refrain.

However, in reality the ‘compliance issue’ purportedly stopping advisers when it comes to tax-efficient investing for their clients can be something of a myth, because if the suitability is right, and all other boxes are ticked, then to our mind, the compliance argument shouldn’t really hold water. If a product is appropriate for a client then ultimately compliance will usually support advisers in making sure this correct recommendation is as straight forward as possible,

In that regard, some advisers might still suggest the compliance requirements are simply ‘too hard’, that there are too many obstacles, jumps, hoops, put in their path by those ‘pesky’ compliance people. The adviser is apparently willing but they allege that the compliance body is stopping them from going ahead.

As a tax-efficient investment manager we work with most networks, national firms and service providers in the UK, and almost without fail, the message we get back when it comes to their advisers, firms, and clients writing such business, is that recommending appropriate tax-efficient investments is perfectly do-able, in fact it’s all pretty straightforward as long as the adviser follows the right practices and processes.

From our conversation with compliance personnel, it appears that most of the information they require will be recorded by advisers anyway in the reasons why document, will be part of the factfind the adviser conducts, and when it comes to the specific product, will be in the Investment Memorandum.

Again, for advisers who might perceive this sector to be incredibly different to what they’re dealing with elsewhere, it’s clear this isn’t necessarily the case and the requirements of their compliance department or external service provider will not be different, neither will it be overly-burdensome on the professional life of the adviser. Yes, it may be that such propositions require pre-approval from compliance but in reality the information requested is likely to be readily available so this shouldn’t be an onerous task.

In these days when time is precious, it might seem the easiest option is to simply recommend the investment product ‘of least resistance’ but if this isn’t the most effective tool for the job then this could ultimately be a compliance issue further down the line and therefore working with compliance at the outset to ensure the right type of product is being utilised is likely to be in everyone’s long term interest.

Of course, we also hear about the risk involved, and clearly this sector is not for every client. Tax-efficient investment in unquoted stocks should always be considered as high risk and illiquid – there’s a very good reasons for this, and as the Government has repeatedly outlined, there should be a higher risk involved for clients in order to receive the reliefs and the benefits from investing here. But, again, from a compliance perspective while the risk is higher, there is an acknowledgement that this will be usurped as a reason not to invest if such investment is part of an overall tax-planning strategy and the adviser concerned outlines their reasons why such a recommendation is right for that client. Of course it is also likely that any tax-efficient investments will only ever form a minority of a portfolio.

Compliance professionals are not going to ‘throw out’ a recommendation simply on the basis that it’s an EIS or SEIS or VCT, and it’s quite clear that for many clients tax-efficient investments are an increasingly useful part of a portfolio. Again, it’s about balancing client need with suitability, and when it comes to dealing with the tax-planning needs of their client, advisers should be aware this is an increasing part of their role.

So, when it comes to this sector, rather than seeing potential obstacles in the road – where they don’t necessarily exist – and rather than seeing compliance as a department that will set out to hinder rather than support, perhaps take the opposite view. Work with those departments and teams to understand their needs and requirements, and rather than seeing them as ‘the enemy,’ view them as an ally that can help you get to where you (and your clients) want to be. It can be much more straightforward and far less onerous than you might believe.

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