What more can be done to attract financial advisers to the peer-to-peer lending sector? Michael Lloyd reports
It’s common knowledge that independent financial advisers (IFAs) have always been reticent about the peer-to-peer lending sector. Over the past few years, many platforms have devoted endless time and money to winning over the IFA market, with limited success.
So why does it feel like so little progress has been made?
There are a variety of reasons why IFAs are still cautious about P2P: a lack of education or awareness about the products on offer; the fact the P2P lending sector does not have financial services compensation scheme protection; the relative nascence of the industry; and the occasional piece of bad press following the high-profile collapses of platforms such as Lendy and Collateral.
The professional indemnity insurance costs for IFAs is another reason, as insurers are wary of any alternative investment, not just P2P. Advisers tend to stick to plain vanilla asset classes because they are easier to understand and defend in the event of a complaint.
And of course, investments in equities, bonds and property have a long track record which means that many investors will already have a pre-conceived idea of the risk involved. This makes it much easier for IFAs to ‘sell’ these traditional investment classes to even the most inexperienced investor.
By contrast, the P2P lending sector is still considered to be relatively new, and its shorter track record means that it has not yet completed a whole economic cycle and proven that it can survive in a downturn. Of course, the Covid-19 pandemic and inevitable recession will finally put that argument to bed.
But for now, with just 15 years of history to draw from, advisers find it difficult to assess if P2P is low, medium, or high-risk.
This poses a challenge for any IFAs looking to advise on P2P.
“It’s difficult for IFAs to engage with the sector,” says Anthony Carty, group financial planning and business development director at self-investment specialists Clifton Asset Management.
This is the unfortunate reality of the P2P/IFA relationship. Education is obviously needed, to show IFAs the risks and returns of the sector and where P2P can fit in their clients’ portfolios.
More third-party risk assessments of P2P may also help to improve engagement with advisers. But it’s not just down to the platforms. IFAs also have a responsibility to seek to upscale and engage with the sector in order to advise clients with a wider knowledge of investments in their toolkit. This may be more likely at a larger IFA firm, where there are more resources available, and more spare time to spend researching alternative investment opportunities.
IFAs lead busy lives and many have come to depend on using investment portals where they can easily apply for whatever investment they are interested in for their clients.
Some P2P platforms such as Octopus Choice – although it is not currently lending amid the pandemic – have developed their own portals for IFAs that are simple to use and favoured by this community.
“I don’t think many platforms are IFA friendly,” says Carl Roberts, chartered financial planner, and founder and managing director of RTS Financial Planning.
“We’ve used Octopus Choice; one of the main reasons is they’ve built up a good, long-standing relationship with the IFA world.
“They were in the Enterprise Investment Scheme space and built up a good reputation through that.” Industry onlookers have suggested that more platforms should introduce IFA-friendly portals and products to encourage uptake among the adviser community – but these products have to be suitable for their clients, and they must be easy to understand and to market.
Read more: Advisers and ISAs
Innovative Finance ISAs (IFISAs) have been touted as an attractive product for IFAs, due to the widespread recognition of the ISA brand among individual investors. However, it is down to the platforms to communicate these benefits to IFAs in a way that is compliant with the Financial Conduct Authority (FCA) marketing restrictions.
“P2P needs to ensure the right products are marketed to the right people and to be careful that IFAs know exactly what the features of the products are,” says Mark Turner, managing director, regulatory consulting at Duff & Phelps.
“I think IFAs should gain more comfort through the fact the sector is well regulated.”
In December, the FCA introduced a raft of new regulations into the P2P lending sector, including a provision which states that platforms can only communicate ‘direct-offer financial promotions’ to certain investors, including high-net-worth or sophisticated investors, restricted investors (the everyday investors who pledge to put no more than 10 per cent of their portfolio in P2P) and those receiving regulated financial advice.
This only heightens the importance of winning over IFAs, as they could unlock a whole new segment of the market for P2P platforms. While regulation is important, ultimately IFAs want to see evidence of consistent asset performance. A huge reason why many advisers have avoided P2P is the fact the sector hasn’t been through a whole economic cycle and thus does not have any proof of how it would perform during a downturn. Covid-19 is providing this test and platforms must pass it.
To attract more IFAs the sector needs to prove itself during the crisis, avoid any platform failures and return to pre-Covid-19 liquidity. The majority of platforms are faring well so far, although some have stopped lending during this time, including Octopus Choice and Lending Works, and we are still only at the beginning of what could be a severe recession.
Yet, the sector is confident it will survive. Those platforms that can show that they have provided a diversified source of income and have managed risk well in this difficult time, will stand out for IFAs. Furthermore, the downturn may show that P2P is even more attractive than other assets, such as stocks and shares, as it is does not experience the same level of volatility during economic instability and tends to offer fixed, inflation-beating returns.
“Lots of P2P lending platforms are holding out so hopefully IFAs will be more comfortable referring clients to platforms that have proved they can manage through a difficult economic downturn,” says Daniel Rajkumar, founder and managing director of Rebuildingsociety.
When Covid-19 is a distant memory, and the P2P survival stats are in, the advocacy work will need to begin.
There is no shortage of analysts who can provide deep and frequent commentary on stocks and shares investments, for instance, as well as making predictions about future performance. These insights coalesce to give advisers a sense of the viability of a particular investment opportunity, making it easier for them to make informed decisions about their client portfolios.
However, in P2P there is very little independent data to draw from. This makes it much more difficult for an IFA to make a recommendation. They effectively have to do their own homework on P2P. More third-party analysis and commentary is needed – from analysts, from commentators, and from trade bodies such as the recently-established 36H Group.
A few independent due diligence platforms already exist. In Review collates third-party feedback on alternative investments such as P2P lending, in a way that is easy for IFAs and potential investors to digest. Meanwhile market data portal Brismo compares the performance of different P2P lending platforms, although it does not contain data from every lender in the sector.
This is another reason why platforms need to target the larger IFA firms – they have the time and resources to compare platforms and produce their own due diligence portfolios. “Platforms that don’t display data and offer their loanbooks up for independent scrutiny should never be considered by IFAs,” says Mike Bristow, chief executive of CrowdProperty.
Carty adds: “As long as the lack of choice, flexibility and access is there that will continue to provide a challenge.”
IFA Carl Roberts does not believe the sector has done enough to target advisers and attributed this to high costs and the fact they may be used to working with, and marketing to, investors directly. “But until platforms do, P2P won’t be on the radar of IFAs,” he adds.
The fact is that there are some IFA-friendly P2P products, and IFAs are engaging with P2P lenders to a certain extent. But more progress is needed. Engagement with advisers may have been interrupted by Covid-19 but the pandemic also provides an opportunity for the sector. It is vital that P2P survives this economic downturn and continues to offer respectable returns for investors, while managing the inevitable defaults that will come with any recession.
If the sector comes out well from Covid-19, it will show that the P2P lending model is operationally robust and should be on the radar of every IFA in the country.
“I think IFAs will come around and won’t be able to ignore P2P forever,” says Lisa Best, head of financial services content at alternative investments research firm Intelligent Partnership.
“It’s another alternative that can provide income for clients and I think you’ll get more advisers coming to P2P as it becomes clear that it’s not susceptible to immediate mood swings from investors in the same way as equity.”