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EIS Technology Investing - The Client Suitability Test

As the end of the tax year approaches, wealth managers across the UK are working with their investing clients on anything and everything to do with tax. Products as diverse as pensions, ISA wrappers and EIS/VCT funds are under the spotlight. Even ahead of this week’s budget, the clear direction of traffic over the past few years has been most decidedly away from pensions and moving increasingly to VCT and EIS funds. In recent weeks, VCT funds have closed to new investors in a mad rush ahead of 5th April and it is looking like a bumper year for EIS funds as well.

It is not yet certain whether we are witnessing the ‘new normal’ for investors who are seeking to minimise the tax they pay to the Exchequer. However, questions of client suitability and how wealth managers construct EIS/VCT portfolios will undoubtedly be of interest to the FCA going forth as this investment sub-sector continues to grow. A few years ago, many wealth managers might have safely ignored the EIS/VCT sector altogether but this is now pretty well impossible for any adviser with wealthy clients who pay a considerable amount of tax.

Typically a financial planner undertakes a complete holistic assessment of a client’s total wealth and investment outlook, including assessing the level of risk that an investor is willing or able to take. Investing in pensions (if possible) and ISA products offer a safe but limited starting point for an investor from a tax perspective, but one then quickly arrives in the riskier terrain of EIS and VCT investments and this is not suitable for all investors.

However, there are investors who are increasingly comfortable with this sector of the market, and investment professionals need to assess them according to the following criteria:

  • Knowledge of the specific investment.

  • Past experience with EIS/VCT investing.

  • Any entrepreneurial or business experience. Have they had experience with other risky assets?

  • Percentage of overall portfolio represented by the specific investment.

There is clearly an Investor Lifecycle approach to client suitability in EIS/VCT investing. As technology investors, Symvan Capital recognises how this sector falls in the ‘high return, high risk’ allocation of an investor’s portfolio. Such funds are probably the last piece of the jigsaw puzzle, but possibly the most important piece of that puzzle for experienced and demanding investors because they offer the potential for the portfolio to generate “alpha returns” going forth.

The question remains – How does the investor get to the point in their tax efficient investing journey where they become interested in generating “alpha” for their portfolio? For many years, the EIS/VCT industry has been utilised by advisers as primarily a tax play and many investment products have been designed accordingly. Investors often have a certain amount of money available each year to invest in a tax-efficient manner, and they might typically have started with some VCT funds for the tax-free income before moving on to more asset-backed EIS funds.

There are, however, two changes in the market that have been opening the market to consider adding growth EIS funds to this portfolio mix.

  • There is a growing investor base that has been using these products for a number of years and has invested with a number of different providers. As they have become more sophisticated investors in this sector, they have become more demanding and are hungry for higher returns for which a growth technology EIS fund, for example, is ideally placed.

  • There is an increasing number of investors who have been active in this type of investing year after year, and are now at a point where they are starting to receive their capital back. These investors are maintaining a solid “asset backed” part of their portfolio but they are using growth EIS funds as an overlay.

On current trends the overall size of the EIS/VCT market seems certain to continue its expansion, and growth investing seems equally certain to comprise a growing share of a growing pie. At the EIS Association’s 2016 Annual Awards held in February, the best fund manager awards went to three growth fund managers – Calculus, Parkwalk and Symvan – so it is safe to say that the industry is interested in the growth message. And long may that continue.

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