In the new world of investment advice, standing still is not an option, writes Connection Capital's Claire Madden
The IFA market has gone through a period of seismic change. Post-recession and post-Retail Distribution Review the sector has become much leaner and increasingly more professional. It's also more competitive. And to flourish in a competitive marketplace IFAs, like any other business, have to differentiate their service from others.
The current investment arena may offer an opportunity. In my view, the private equity market has been generally misunderstood. IFAs have tended to present it as high risk area to avoid... even to their more sophisticated clients.
Other factors may have also weighed against pointing clients in the direction of direct equity investments and private equity funds. These may have included the complexity of arranging deals and also the commission factor.
Standing still is not an option
Things have changed. We all now operate in a more transparent and diverse marketplace. Many of the IFAs I have talked to acknowledge the need to broaden their range of expertise, particularly with respect to alternative investments. And significantly, partly as a result of low investment returns elsewhere, there is a growing appetite among private investors for more diversification within their investment portfolios and access to a wider range of investment products.
I believe that IFAs, with a core of high net worth private clients, can stand out from the crowd by broadening their investment choice and by pointing clients in the direction of alternative asset investments, particularly private equity.
The idea that we might develop more collaborative relationships with advisers was sown by the results of a survey we carried out with our 750-plus HNW clients earlier this year. We got a 25% response rate – which I'm told is exceptionally high.
The survey was particularly interesting on the subject of clients' appetite for alternative assets, especially private equity deals. The majority of the respondents have allocated more than 15% of their current investment portfolio to alternatives. But, interestingly, they all also have access to investment advice from a variety of sources, mainly IFAs and private banks. In other words, at the high net worth end of the market clients are increasingly taking the initiative; they are looking to diversify and have a sophisticated approach to investment and advice.
All our clients are experienced investors, actively building and managing their own investment portfolios. They are also wealthy – typically with between £5m and £50m of assets. And they value the opportunity to access later-stage private equity investments in the SME market directly rather than through VCTs, EIS funds and blind pool investment funds.
The clear majority interviewed in the survey said they intend to increase their allocation to private equity in the coming year – a sure sign that there is more confidence in investing for the long term. Furthermore, a large proportion of respondents expect their liquidity position to decrease.
In other words, this is a very good time for IFAs to extend their expertise and direct their wealthier clients towards considering alternative assets such as private equity investment in management buyouts or growth capital in an established business.
We firmly believe that each deal should be assessed and structured in a way that maximises returns but also provides suitable downside protection. Far too many investments in private equity are tax driven under the VCT and EIS schemes – it is often easier to argue the tax mitigation case than the underlying investment case.
These sorts of deals are clearly not for everyone. Even among HNW clients, those who are interested in (and capable of) making their own investment decisions and entering into alternative investment deals may be in the minority. But, there are growing numbers of private investors who relish this option.
In the new world of investment advice, standing still is not an option.
More collaborative relationships with specialists in alternative investment may provide a new niche for your business and benefit many of your clients... you can probably already make a qualified guess as to who they are. If you can deliver access to alternative investment deals in an expanding market you could find that you are pushing at an open door.
Claire Madden is co-founder of private client business Connection Capital
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