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Your clients are investing in lending: can you afford to ignore it?

Emily Landless

AdviceArtificial IntelligenceBehavioursDigitalEngagementTrends

As you may know Direct Lending was the world's fastest growing asset class in 2017. Changes to banking regulation post-2008 have led to its rapid growth and acceptance amongst institutional investors. Despite its recent popularity, it's something many advisers haven't worked with much but can you really afford to ignore it? We believe the answer is No. In this session, we will focus on the opportunity for advice. The majority of UK retail investors in Direct Lending have invested without advice, thanks in part to the strong growth of the Innovative Finance ISA and the very low rates available on Cash ISAs. But are investors taking on risk without understanding it? And does this mean there is an opportunity to advise?

Headlines:

  1. Direct lending was the world’s fastest asset class in 2017. Changes to banking regulation post-2008, have led to its rapid growth and acceptance amongst institutional investors.
  2. Direct Lending is an investment class that most advisers have chosen not to use, but should they continue to ignore it?
  3. Most investors in Direct Lending, have invested without advice, partly due to the strong growth of Innovative Finance ISA, and the very low rates of interest available on Cash ISAs.

Key issues and challenges:

  • Protecting clients’ investment in Direct Lending

There are a variety of risks, amongst them:

  1. Credit
  2. Interest rates
  3. Economic
  4. Counterparty
  5. Liquidity
  • The principal elements to look for in any Direct Lender in relation to assessing their suitability are as follows
  1. Financial stability and expertise of the company
  2. Robust management processes
  3. A return target that is commensurate with the underlying risk
  4. Transparency regarding underlying returns to investors and costs
  5. Access to clients’ money via a viable liquidity profile
  6. Suitability in relation to meeting the financial planning needs of clients and demonstration that Direct Lending is within their risk tolerance.
  • How Direct Lending can meet client needs
  1. For those clients who want to invest a portion of their assets in an income producing asset class that produces more than the average 1% elsewhere in a current environment where inflation is more than 2.5%, and who want a counterbalance for stock market uncertainty and low fixed income yields.
  • Specific uses for Direct Lending for clients include the following:
  1. Cash: transferring in low interest rate cash ISAs
  2. P2P “fightback”; giving an advised option when retail investors are going direct to platforms
  3. Volatility: hedging with a stable, low correlation product
  4. Yield: bringing in regular yield to a portfolio/pension
  5. Diversification: spreading risk

Conclusions and solutions:

Direct Lending is not yet an established asset class used by most advisers, but for some clients it deserves consideration for the reasons set out above and appears likely to increase in usage over time.

Expert: Jake Wombwell-Povey and David Beacham - Goji

Facilitator: Roderic Rennison - Rennison Consulting

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