Technology and Platforms – Tax Efficient Investing in 2017

Source: GBInvestments

The technology is there, the clients are there, and there is much to be learnt from both sides of the fence in order to satisfy ever-increasing client expectations, suggests David Lovell of GrowthInvest.

As the technology-focused Christmas and New Year Sales adverts try to move the collective focus and attention onto the very latest wireless tech offering, VR headset or Alexa from Amazon, it is all too easy to shrug shoulders, switch media, and revert to the potentially slightly lower technological  expectations of the current corporate and financial adviser workplace.

How ever many times we hear talk of robo-advice, the rise of Artificial intelligence within Financial Services, the Internet of Things or similar, there is no escaping the fact that the tax efficient investment landscape for the adviser and their clients is usually quite some way from being on par with the technology now considered commonplace.

Chasing HMRC, or providers for hard copy paper forms arriving in the post, is now but a distant memory for many standard fund and pensions investments found on traditional adviser platforms, never mind any comparison to the technology clients are beginning to experience and take for granted in their everyday lives. This potential disparity needs to be overcome very quickly if tax efficient and alternative investments are going to play the important role they should be in appropriate advised clients’ portfolios over the next few years.

The importance and suitability of these investments for clients is constantly debated, but it is clear that there is a great appetite for them amongst clients themselves: the alternative finance sector is booming and growing at a phenomenal rate, with over £3.2bn invested, lent or donated by over 1 million individuals in 2014/2015. This was primarily conducted through online platforms, of which there are now well over 100 of in the UK marketplace. This was a mixture of P2P lending, equity crowdfunding and donations or rewards-based crowdfunding, and there is a growing institutional influence in these figures, particularly within the lending marketplace.

However, with a staggering growth rate of nearly 300% per annum, equity-based crowdfunding already accounts for just over 15.6% of the total UK seed and venture-stage equity investment. This is a method of investing, lending or using otherwise latent cash assets that clearly has a wide and growing appeal to the UK marketplace, and is certainly extending beyond the younger generations into the traditional advised marketplace.

Technology

These transactions are being conducted online, by the individuals themselves, on secure online platforms which make the process as seamless and painless as possible for the customer: the technology itself is expected to be safe, secure, and very easy to use, to the extent that it becomes invisible.  This is not something that is the reserve of the tech-savvy “millennials”, but technology that is now welcomed and understood equally well by the pre- and post- retirement demographic segments that sit at the heart of nearly every financial adviser firm in the UK.

“Any sufficiently advanced technology is indistinguishable from magic”, as states one of Arthur C. Clarke’s many predictive/foresight quotes from 1973. As we now finally get to a stage where technology can deliver the type of advances such as driverless cars that until very recently remained the preserve of Clarke’s science fiction, we are faced with an investor who has very quickly changing and liquid expectations of service levels, in every aspect of their life.  These customers may not expect “magic” but they certainly expect technology to be near invisible.  Their liquid wealth is set behind these increasingly liquid expectations, and transparent, flexible technology is taken entirely for granted, even by those that are not necessarily using it themselves.

Thus, advisers and wealth managers are not only contending with the need to identify those with liquid wealth, but also match those liquid expectations – and those that can do this are coming out clear and demonstrable winners.  This is not based on the particular technology used, but rather the use of the increasingly invisible technology as part of a wider customer offer. This is well demonstrated within the adviser platform marketplace, where the 15+ platforms are now mainly concentrated onto only a very few providers of the underlying technology.

Over the last decade or so the focus has been on how technology affects the “user experience”, and “user experience” (“UX”)  consultants have quickly become considered a staple in many product teams.  This is starting to change and evolve as the User experience with the technology being satisfactory (at worst) is taken for granted, and the battle is about the overall experience of the customer, both on- and off- line – the “Customer Experience”, or “CX”. Is this a return to the good old-fashioned values of looking after the customer?  Something the financial adviser world has generally prided itself upon, at least for the most valuable clients? It is perhaps a sign that the advances in technology are now allowing the customer experience to become more central.

Certainly these core values, that stem from treating the customer as an individual, are at the very heart of any adviser experience, but now we have the underlying technology and integrated data to ensure that the experience is equally tailored online, and allows the client to have a seamless experience however they are interacting, just as they would expect to with their current account or airline.

Such things are notoriously difficult to measure, but Forrester’s latest research from June 2016 suggests that across a number of different industry verticals, including Investment Management, there is an incredibly strong correlation between positive customer experience scores and revenue growth, with the higher scoring CX companies outperforming their competitors – in some instances – by up to 7 times (it was over 3 x stronger growth in the Investment Management and Finance industries).    There are clearly other possible factors at play, but this is a trend that is repeated year on year, and makes perfect sense, where there is a reasonable element of choice for the consumer.

The Potential Market

The million-plus individuals figure referenced in Nesta’s Pushing Boundaries report potentially helps to frame a much wider possible universe for tax efficient investing in a landscape of low interest rates and increasingly stringent pensions caps. Indeed, at first glance the £330M of equity crowdfunding confirmed by the same report in 2014/15 seems to sit well alongside the record investment amounts of £1.82bn (c.20% YoY increase up from £1.5bn the previous year) flowing into Enterprise Investment Schemes (with Seed Enterprise Investment Schemes relatively static at £150m), as confirmed by the latest HMRC figures for 2014/15. Certainly the 3,200+ (over 10% YoY increase)  SMEs who benefited from this investment last year welcomed the investment and few would argue against SMEs having an even more vital role to play in the Brexit-influenced economy.

However, behind the headline figures, there lurks a possibly unpalatable truth that EIS and Seed EIS tax reliefs investments are only being used by a very small number of UK investors, with only just over 145,000 EIS subscriptions, from possibly less than 30,000 individuals.  This would seem to point towards a disconnect, both with the many more investors who are looking for higher returns on their investments in the equity crowdfunding market, but not taking advantage of the government sponsored tax reliefs, and also with advisers not directing appropriate clients down this road.

There are over 2.5 million advised clients actively investing in the UK marketplace, and whilst this number will not include ALL of the 600,000 or so households with more than £1m in liquid wealth, or indeed the 250,000 that earn more than £250k income, it will certainly include a significant percentage of them, many of whom should be considering such investments as part of their overall portfolio. The data, and the million figure would seem to suggest that many of them are already, but just not necessarily viewing them as part of the Financial Adviser part of their portfolio.

There would seem to be a much wider potential marketplace amongst UK investors for tax efficient investments via EIS and SEIS, and it would be surprising if these type of investments, alongside other “alternative” assets, do not become a very much more common part of a typical UK investor’s portfolio. The investor will not expect to have to manage these types of investments individually, and nor should they be restricted from being involved and interacting with this more tangible part of their investment portfolio should they choose to do so as their high expectations ensure that they do not face such restrictions in other areas of their lives.

Technological advances are breaking down barriers – both real and perceived – across the UK investment marketplace. So much so, that UK investors will quickly tire of any restrictions associated with the archaic, paper-based offline world that many feel should have been consigned to the last century. It is those platforms and providers with the foresight to embrace technology and really bring the potentially dynamic world of tax efficient investments to life, that will be used by the modern investor.