What if the introduction of Social Investment Tax Relief (SITR) were to change the current perception of risk? We at Worthstone are always emphasising something we know many of you agree with: client needs must come first. The regulator says it, the providers of risk assessment tools say it and the professional bodies say it. So when it comes to the big ‘R’ (risk), the risk for IFA firms is not so much in offering advice in this area but in not offering advice in this area.
Let’s look at this from two perspectives: the risk in the investment and the risk in the advice process.
1. As far as the investment is concerned, it will be considered high risk because of liquidity risk:
- Your client is locking money away and unlikely to get their money back within three years because of the nature of the entity
- Even if you were able to access your investment prior to the 3 year period your client loses their tax relief
- Although the liquidity makes the investment high risk, the nature of the trade does not necessarily have to be high risk
- However, where the social benefit is concerned it may be difficult to establish a track record.
2. The other element of risk is in IFA practice.
When talking to IFAs, our findings generally conclude that it’s not in the provision of this type of advice that the risk lies, but in the process.In the basic permissions of an IFA firm we do not see anything to prevent them from advising on direct holdings of equity/debt such as we describe for SITR.
Risk means different things to different people and this remains the same for IFAs. If you talk to an expert like Paul Resnick of Finametrica, the leading risk evaluation tool used by IFAs, he’ll tell you that your process should be investor centric and you need to consider the client needs first and the product last.
Too often we are faced with a conversation with an independent financial planning practice who say that a product is not suitable because of its structure. The perspective that risk within the practice may increase in dealing with clients who have requirements outside the regulated retail investment product environment is understandable. However, we should be wary of resigning to this approach without considering the risk to an IFA practice of not dealing with high net worth individuals and sophisticated clients who have requirements and circumstances which are suited to Social Investment Tax Relief: especially when others are starting to show their willingness to step up to the plate.
When SITR was first introduced David Geale (now a Director at the FCA) said that the introduction of tax relief does change the position of social impact investment as an adviser should consider social investment when client requirements might involve the potential use of tax reliefs and they have social goals.
Does this mean the emphasis on clients needing to articulate demands has now shifted to IFAs needing to consider Social Investment Tax Relief alongside other reliefs for tax planning purposes? You decide!