The peer-to-peer lending industry is maturing and considering new ways to interact with financial advisers…
PEER-TO-PEER lending in the UK has grown into a billionpound industry, offering superior returns to mainstream providers, yet many independent financial advisers (IFAs) are still steering clear.
The two industries may make strange bedfellows. The P2P sector emerged with the intent of cutting out the intermediary, but in a world where origination is key, IFAs can be an important source of business.
“The P2P model fits well with the goals of advisers seeking to create a balanced investment portfolio for their clients,” Jonathan Hodge, director of operations for RateSetter, explains.
“RateSetter already has a number of active investors that are advised by IFAs and we want to help IFAs understand our products better so that they can consider them appropriately.
“IFAs are very valuable and can help open access to P2P to their large client base. RateSetter aims to be suitable for all investors, both those at the start of their investment journey, and those with established portfolios.”
Paul Stallard, commercial director of P2P property platform The House Crowd, says lenders have so far been helped by “healthy numbers” of selfdirected investors, but would be boosted by the IFA market.
Despite the rapid growth of P2P, many IFAs remain sceptical about the sector.
Patrick Connolly, chartered financial planner for Chase de Vere, says his firm does not advise on P2P due to the lack of Financial Services Compensation Scheme (FSCS) protection.
“This means that money put aside to provide a consistent return could potentially be lost,” he says.
“This is a bigger risk as the market grows and more investments are launched, as this could dilute the quality, especially if we move into a more challenging environment.
“P2P is a risk for IFAs, and for their clients, to invest in an asset which supposedly gives a secure return but could be subject to capital losses and there is no protection in place if it all goes wrong.
“For those who are prepared to take the risks of investing in this asset class, we would suggest that they invest an absolute maximum of 10 per cent of their portfolio and that these investments are diversified into different P2P holdings.”
The lack of FSCS protection is just one gripe among advisers.
Anthony Carty, group financial planning and business development director at Clifton Asset Management, says risk profiling tools that many advisers use may also exclude P2P due to its low track record.
“Most IFAs rely heavily on risk profiling tools whose output rely on decades of past performance from various asset classes,” he explains.
“Direct lending is a relatively new asset class and whilst it is most closely correlated to the fixed income sector, IFAs would be hesitant in recommending an asset class that hasn’t yet been tested through a full economic cycle.”
He also questions whether P2P platforms have the capacity to attract IFAs.
“As most P2P platforms are still yet to make a profit, the question of IFA distribution is simply one of cost prioritisation,” Carty says.
“In order to ‘break into’ the IFA market, these platforms would need to employ a fairly substantial business development team.
“Considering the apathy amongst the IFA community as a whole towards the asset class, I would imagine most P2P platforms would rather spend their money elsewhere in terms of marketing and client acquisition.”
Phil Young of advisory business consultancy Zero Support says IFAs are also cautious of P2P because of its comparatively short loan terms.
“Advisers tend to get involved in long-term investing, P2P is still perceived as short- to medium-term by most and, as a result, gets left to clients to make their own choices directly,” he says.
Some advisers also cite concerns about professional indemnity insurance, which comes with higher premiums for P2P due to the perception that it is high risk. There are also issues surrounding the inclusion of P2P investments in self-invested personal pensions due to concerns that it could breach the ‘connected parties’ rule, whereby the individual lender may be connected to the borrower.
Despite these concerns, there are P2P platforms making this relationship work.
P2P property platform Octopus Choice launched in 2016, an offshoot of City institution Octopus Investments, and was created with IFAs in mind.
The lender works with more than 1,000 advisers.
“For them and us it’s mostly an issue of education and track record,” a spokesperson for Octopus Choice explains.
“Financial advisers – unsurprisingly and justifiably – are going to take a conservative approach. They’re not in the business of taking unnecessary risks with their clients’ money and will want to see that a provider has pedigree.
“There’s also a practical point around how easy platforms are to use, and how they integrate into the broader advice process. Advisers will take a holistic approach to their clients’ wealth – and if it’s not easy for them to set up and administer investments, then they’ll look for other more practical alternatives.
“The P2P market is very diverse, spanning everything from unsecured credit card debt to secured residential property lending, so it’s very important to carry out due diligence to look at the underlying asset.”
Zero Support’s Young suggests Octopus has been successful due to its existing relationship with IFAs.
He says if others want to follow suit, they may be better off approaching discretionary fund managers rather than advisers themselves.
P2P investment managers appear to have better relationships with IFAs. Firms such as BondMason and Goji successfully work with advisers who recommend their portfolios.
BondMason invests in a range of P2P loans and other alternative finance opportunities, while Goji focuses purely on the P2P sector, building a diversified portfolio for investors across a range of platforms through a bond structure.
“We use the term ‘P2P’ infrequently as IFAs don’t understand it or are very cautious about it,” David Beacham, head of distribution at Goji, explains.
“Every time an adviser gives advice they put their career on the line, so we need to provide a lot of comfort for them to advise in this space.”
Such trepidation may seem misplaced in a world where most P2P platforms are regulated by the Financial Conduct Authority and many offer Innovative Finance ISAs (IFISAs), suggesting the industry is becoming more mainstream.
But Beacham says advisers view the regulatory situation differently.
“The P2P platform that someone is investing in may be regulated today, but the underlying structure, the loan, isn’t,” Beacham adds.
“IFAs would say the IFISA is aimed at ‘bedroom investors’ so is irrelevant to them.
“Advisers need transparency to know what is in those loans. Our bond structure is regulated so an adviser is advising on that rather than the loans, while we do the due diligence.
“It is vital advisers can access P2P in a truly regulated structure, every bond we issue has more than 1,000 loan parts, which provides diversification and should provide comfort for advisers.”
Beacham says more awareness is needed among IFAs, especially as many investors are becoming attracted to DIY investment, which could hit their business.
“The lack of knowledge and understanding in this space is enormous,” he says.
“People think we are a lender and that we could be accessing payday loans. They will automatically pigeonhole you if you are not an opened-ended investment company, unit trust or quoted instrument.”
So, what more can platforms do?
Beacham says IFAs are more likely to be attracted to transparent pooled structures that diversify across a number of loans rather than platforms that allow individuals to self-select their investments.
This is an approach supported by RateSetter.
“Platforms that can articulate risk and return in a similar manner to IFAs’ own analysis will be better placed to offer their service and product,” Hodge says.
“The P2P industry must continue to build understanding with all parties so that insurers, as much as others, view P2P as a sensible part of any investor’s diversified portfolio.”
Access to data may not solve all the issues though. Octopus says any offering for advisers needs to be built with the sector in mind rather than as a ‘bolt-on’. “
At Octopus, we’ve spent nearly twenty years working with thousands of advisers up and down the country, and that trust has undeniably had a major and positive impact on our uptake,” the spokesperson said.
“But it comes down to more than just brand. It’s about the product as well. Unlike probably any other platform, we’ve built Octopus Choice with advisers for advisers.
“We designed and piloted it in co-operation with hundreds of them around the country and have a functioning platform that allows advisers to easily set up and manage multiple client portfolios. Not to mention, importantly, facilitating the adviser fees that they will expect to earn from their client in the process.
“You can’t just bolt on an adviser page to a website and call it an adviser offering. It needs to be part of a fully integrated service, with face-to-face support.”
Stallard says The House Crowd is looking to boost its IFA distribution and agrees that an IFA portal could be a good way of attracting advisers.
“If P2P platforms want more business from IFAs, the first thing everyone must realise is the profile of a typical P2P investor is the same as that of a typical IFA client,” he says.
“Platforms must give IFAs access to a level of education and information about P2P assets that is as good as – if not better than – the information investors can access themselves. They should do this by creating a specific IFA portal where analysis and consideration of P2P investment opportunities is made easy. This includes enabling the IFA to match client needs, objectives and their appetite to risk with various P2P investment opportunities.
“A specific portal will also permit IFAs to complete their due diligence more quickly, help with education, training, access to detailed investment information, and allow for automated investment processing and on-going investment performance monitoring.”
There is clearly more work to be done to attract IFAs, and the regulatory clampdown by the Financial Conduct Authority may well help provide the transparency that advisers require.
P2P platforms have done well to make their propositions so attractive to investors, but adapting their offering for IFAs could dramatically increase their customer base. The benefits would be reciprocal: by including P2P in their smorgasbord of investment options, IFAs would be offering their clients inflation-busting returns and greater diversity for their portfolio.
This story featured in the October issue of Peer2Peer Finance News, now available to read online.