BR Guide FINAL 20 Feb

39 38 DUE DILIGENCE DUE DILIGENCE Assessing and Comparing Estate Planning Services There are some key areas that advisers should look into to facilitate comparison of estate planning services and their providers. Some involve as much subjective as objective assessments, with no explicit right or wrong answer, but the thought process that advisers go through to reach their conclusions should be documented. Other assessments are much more objective and advisers can set their own decision- making criteria for inclusion in their potential product set. One key statistic to look for here is successful application of IHT relief, based on those investments, when investors die. It may also be useful to find out the gross return the provider is targeting at a project level in order to achieve their net target return. The higher the gross target, the greater the risk that investors are exposed to. 4.1 Due Diligence PAST PERFORMANCE For BR products, the key performance indicators are on-target performance that keeps up with inflation (rather than outperformance) and 100% track record of qualifying for BR upon the death of the investor. Also, is the target return proportional to the return that the underlying assets might yield in the open market and does it seem achievable given the nature and sector of the investment without exposure to unacceptable risk? (Also see Gearing). Has the target ever been missed? LEVEL OF CONTROL: SPECIALISTS Does the management team have sufficient skill and experience to ensure the assets perform as expected? Do they rely on outsourced managers for deal origination and/or management? This requires extra fees to be paid to third parties rather than when it is all provided in-house within the disclosed fees. So, BR providers using a third party for deal origination and/or management are likely to require a higher level of risk to be taken to achieve the same net investor return. Does manager ownership of underlying investee companies present potential conflicts of interest and, if so, how robust are the conflicts of interest policies? LEVEL OF DIVERSIFICATION (DIVERSIFIED PORTFOLIOS) Is the service investing into multiple BR trades or simply multiple sectors? Bear in mind some BR services invest in multiple sectors but only via a single BR trade of lending. Having a broader range of BR trades as well as exposure to different underlying sectors should reduce risk. Do the underlying investments have a secondary market beyond incoming tax efficient investors? Certain sectors such as renewable energy investments and secured property lending have significant liquidity in the institutional markets which should provide comfort. INVESTMENT RISKS, RISK MITIGATION AND MONITORING How are the underlying investments valued? Do the shares in the portfolio company trade at net asset value or on another basis? Is insurance offered? If so, how much cover is offered, are there any exclusions and is payout made outside the estate? What monitoring activities does the manager undertake of the investments, including for continued BR qualification? LIQUIDITY Within what period does the manager pledge to provide liquidity? How is liquidity achieved – matched redemptions and investments, cash buffer, liquid assets held to easily generate cash? Has the targeted liquidity level ever been missed? Consider asking the BR provider for their withdrawals history including the timescale from initial client request to cash receipt. THE INVESTMENT PHILOSOPHY What is the firm’s research process, including investment criteria and the filters applied? How much can they raise and deploy in a given year without having to compromise their investment criteria? Do they invest in the same assets for institutional clients or are they reliant on tax efficient investors for liquidity, especially in the event of a change in BR rules? Consideration also needs to be given for the survival of the firm in this instance, if it is largely dependent on revenues from tax efficient assets. DEAL FLOW Can the investment manager identify a suitable number of BR qualifying investment opportunities, in order to deploy funds as quickly as required so as not to delay the start of the BR clock? What is the manager’s record in terms of speed of successful allocation of BR funds? Financial Services Compensation Scheme BR services do not provide their investors with access to the FSCS in the event of failure of the product; like any other service where investors hold direct equity in a company, the investment itself doesn’t have FSCS cover. The only route to the FSCS is if investors take professional advice and that advice is faulty. Note that the managers are FCA authorised and may participate in the FSCS (check their terms). THE FIRM How experienced and stable is the management/ investment team? Do the balance sheets, current revenues, their profits and exposure to debt suggest the firm is financially robust enough to survive for at least the investment period? What trends are there in AUM, market share and growth? What external recognition have they received, e.g. independent research reports (see section 4.3 below)/industry awards? RISK RETURN PROFILE A low target investor return doesn’t necessarily mean low risk underlying investments. A BR service investing in assets with single digit project level returns (i.e. before any fees are taken into account) with no gearing is considerably less risky than one with double digit gross returns or those using gearing. Is there a maximum ceiling for investor returns, no matter how well underlying assets perform? PRODUCT Ts & Cs What are the costs - are the initial charge, annual management charge and performance fee clear? There are often other fees earned by the manager (such as deal or arrangement fees) that may not be openly disclosed as they are charged to the investee company or a third party. Consider asking your BR provider for a total of how much these fees represent annually. The higher the aggregated fees, the greater the level of gross return (and therefore risk) that needs to be taken to achieve the net investor return. How do aggregated fees compare from BR product to BR product? Are fees postponed if performance targets are missed? GEARING Is it used in the BR product at any level in the underlying structure? Providers are not required to disclose gearing levels in marketing literature and therefore advisers would be wise to ask this question. Investors need to be reminded that, if asset values fall, gearing will magnify any losses, and control of the assets could be lost in the event of a covenant breach. What follows are some bullet points designed as memory joggers for advisers looking at due diligence considerations when comparing specific BR products: