Lack of due diligence holding back P2P in IFA market
THREE quarters of independent financial advisers (IFAs) would recommend peer-to-peer lending to their clients if there were greater client demand, or more independent due diligence tools at their disposal.
A survey by P2P research firm Orca, exclusively provided to Peer2Peer Finance News, found that the majority of IFAs would not recommend P2P investments unless they could easily access educational materials and analysis through one trusted source. Most suggested that they would prefer this information to arrive via a software or technology platform such as Morningstar, Bloomberg, or FE Analytics.
Only 20 per cent of the IFAs surveyed said that they were currently advising P2P solutions to their clients. Of those IFAs who were not currently recommending P2P, 75 per cent said they wanted more information. One quarter of those interviewed said that they would not consider P2P for their clients despite the attractive yield and diversification merits, as it was perceived as “too risky”.
IFAs have been historically cautious about recommending any investments which are perceived to carry risk. This attitude has been reinforced by the recently-introduced Retail Distribution Review (RDR), which holds IFAs accountable for poor financial advice, even after they have left their business or retired.
As a result, P2P platforms such as Octopus Choice have made it a priority to educate IFAs on the benefits and risks involved in P2P investing.
“Post-RDR they need to look at the whole retail market,” said Orca co-founder Jordan Stodart. “They shouldn’t care what the client demand is. It doesn’t matter if the retail services are integrated with the technology providers. They should look to P2P because it’s a retail product. If their client is crying out for yield away from correlated asset classes then they need to look at P2P.”
Orca’s data points out that more than £2bn was lent in the first half of 2017, four times the size of the total 2016 venture capital trust (VCT) market, which is on a similar part of the risk spectrum to P2P.
In the wake of RDR, IFAs have been operating under a 1-10 scoring system, where different types of investment are rated in terms of risk before being matched with an investor. P2P is not currently represented within the scoring system, so the default position is ‘off the scale’ in terms of risk.
As a result, those IFAs who do recommend P2P investments to their clients, have been forced to offer this advice “informally”.
Orca surveyed 30 IFAs who collectively advise on billions of pounds worth of assets.
“The more innovative IFAs we’ve spoken to understand this dilemma and want to offer value to their clients,” said Stodart. “Often their clients have asked about P2P and, as their trusted financial adviser, they expect an opinion.
Read more: Orca launches P2P due diligence platform
“Some IFAs have indicated that they’ve performed informal research, often free, and presented different options along with the more formal advice process. They’ve then instructed the client to invest themselves, ultimately losing assets under management but in the process mitigating their own personal business risk.
“This is not good for the adviser, who has to place self-preservation above delivering client value, and for the client who is forced to invest without advice.”