A REPORT has been published that aims to tackle advisers’ confusion and misunderstanding of debt-based securities (DBS), following their acceptance into the Innovative Finance ISA (IFISA) in 2016.
The CPD-accredited report, published by Intelligent Partnership, identifies some of the opportunities in the market and the role DBS can play in a diversified portfolio.
The term is used to describe a variety of different models for deploying capital, usually involving a borrower, lender and interest rate over an agreed period. DBS are increasingly arranged through crowdfunding platforms.
The report explains the investment types available, how to evaluate risks in varying market conditions, tax wrapper options, fees and returns, the difference between DBS and peer-to-peer lending, and due diligence issues.
Julia Groves, partner and head of crowdfunding at Downing Crowd, which worked on the report, said DBS can offer portfolio diversification.
“We believe that it’s vital that advisers are not just aware of the debt-based securities market, but also understand what it can offer their investors, at what sort of fees, risks and returns,” she said.
A growing number of providers are offering direct crowdfunded, unlisted bond investments such as Downing Crowd, Triple Point and Goji, but the market is still small in relative terms.
According to the report, many advisers confuse DBS with online equity crowdfunding or P2P lending and think of them as very high risk, unregulated investments.
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Guy Tolhurst, managing director at Intelligent Partnership, said following the retail distribution review, advisers need to be aware of all the possible investment options that could be suitable for each of their clients.
“This report aims to give IFAs and paraplanners the confidence and knowledge they need to assess opportunities in the debt-based securities area and allow their clients to take full advantage of the various offerings to access yield or diversify portfolios,” he added.
Downing launched its first crowd bond IFISA in March, enabling investors to access a weighted average return of 5.79 per cent for a minimum investment of £100. The first bond offer featured a £1.39m funding opportunity for Alternate Energies, which owns solar panel systems on residential buildings owned by Colchester Borough Council.
And in July it launched two £10m crowd bonds, offering initial interest rates of three per cent per year.
In the same month, Goji launched a P2P lending bond aimed at the advisory market which gives access to a portfolio of more than 200 different loans.