GBI Magazine recently partnered with Blackfinch to explore how appetites towards ElS investing have changed as a result of the Autumn Budget statement, and what tools advisers need to help achieve their Consumer Duty obligations.
This article explores the key survey findings, which could help advisers make a stronger case for recommending ElS investments to their clients.
First, we asked our financial adviser audience whether they had clients who were considering ElS investing now who weren’t planning to before the autumn budget statement. A total of 56% of respondents said they ‘definitely did’ or ‘possibly did’ have clients now considering ElS who hadn’t before. The survey response suggests that heightened awareness of taxation post-budget has increased clients’ appetite for understanding tax-efficient investing.
That awareness was confirmed by the response to our next question. We asked advisers to specify which factors are driving prospective or existing ElS clients. The most common was ‘capital gains and income tax mitigation combined’ with 59%, while 39% chose just ‘income tax mitigation. Of those surveyed, 27% said the ‘balance of risk with loss relief against the potential of growth’ is a key factor, while 24% answered ‘capital gains tax mitigation’, and 20% opted for the ‘diversification of underlying assets’. It appears that investors are drawn to ElS portfolios for the combination of available tax reliefs, including the opportunity to mitigate investment risk further through loss relief.
What tools and proof points are advisers looking for?
The survey also revealed which tools would be most beneficial for advisers and paraplanners when explaining an ElS investment to their clients – a critical role played by advisers to achieve Consumer Duty outcomes. For 40% of respondents, it is most important to provide a timeline of where client money will go, along with telling them when and how they can expect to receive tax reliefs and returns. After that, 32% said that a comparison of ElS investments against alternative options will be most useful, as it would help them explain the difference between the available options. Ranking lower, an easy-to-understand example of ElS portfolio companies would help according to 18%, while 8% suggested a comparison of EIS and VCT investments would put advisers and paraplanners minds most at ease.
Next, the survey listed several factors for consideration when selecting an ElS for a client, and asked advisers to rank them in order of influence Unsurprisingly, the results were dominated by proof of investment performance and portfolio management, and trust in the abilities of the ElS product provider.
The top answer was ‘the number of successful ElS exits achieved to date’, with 38%, and with 31% of respondents naming this as their second-most influential factor. Having ‘a track record of the investment team across all products they manage, not just EIS’ was the second-top answer, with 35% of the votes (57% in the top two), while ‘the returns performance of the ElS product’ was chosen as the top priority by 23% (54% in the top two).
The least important factors were ‘the size of the investment team and their personal credentials/ background’ and ‘the age of the ElS product, which received 12% and 8% of the top two votes, respectively.
EIS is rising up the agenda and clients are looking to activate this tax year
Are adviser’s clients likely to invest into an EIS fund before the end of this tax year? Our survey responses were positive, suggesting that a more concerted push from advisers could see more EIS business written ahead of tax year-end. Almost half (49%) think their clients are ‘very’ or ‘somewhat’ likely to invest in ElS in the current tax year, with 35% suggesting it’s somewhat unlikely and only 17% very unlikely. Certainly the autumn budget offers advisers a useful entry point into conversations about tax-efficient investing.
Last, the survey revealed some of the factors currently preventing more of their clients from investing in an ElS portfolio. For 75% of advisers surveyed, the biggest barrier for clients is a ‘low appetite’ for EIS risk, so it’s key to ensure the mitigation that loss relief offers is fully explained. More than 40% feel the complexity and the admin associated with ElS portfolios puts clients off. Meanwhile, 22% said a previous negative experience may deter investors, and 12% consider finding an interesting underlying theme to an ElS as an impediment to greater investment.
Given all the other taxation changes announced in the budget, and the fact that the tax-efficient status of ElS was extended to April 2035 prior to the budget, client conversations around ElS are likely to become more relevant for advisers. ElS investing offers an attractive range of tax efficient benefits, addressing Income Tax in this and previous years, Inheritance Tax, and deferring a Capital Gains Tax liability.
The findings from Blackfinch’s ‘Understanding EIS’ survey shed some light on the potential misconceptions among clients and revealed ways in which ElS can be better explained to would-be investors.
We would like to once again thank everyone who took part in this survey, and congratulations to the three winners of the prize draw, which all participants were entered into.
The ‘Understanding ElS’ survey was carried out online by GBI Magazine between the 13th-19th November. There were 141 respondents to the survey.