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ADVISER CONSIDERATIONS
First the adviser must understand and assess the client’s individual circumstances. This includes documenting
their tax and planning needs. Do they earn a level of income or pay sufficient tax to warrant EIS investments?
Then comes the appropriateness test. Does the client have the necessary knowledge and experience to understand
the investment? Questions to ascertain this would typically be around the charges, the T&Cs, the liquidity and
the risks. The appropriateness test is really designed for non-advised, execution only investments – if an investor
is receiving regulated advice then these issues should be covered as part of the wider advice process.
The suitability test centres around whether the investment meets the client’s financial objectives
– it starts from the premise that the client has a financial plan or some financial objectives and
the adviser’s role is to ensure that the investment is well-placed to satisfy these.
SELECTION
The process for selecting the correct EIS investment should go through the following steps:
Look at the clients’ entire investment portfolio to see how this currently meets their requirements
Highlight opportunities or circumstances where EIS investments will be appropriate to their needs
Select a range of products that fit the investment objectives
Reviewing the investment manager’s track records
Look at the underlying investments and overall investment strategies
Obtain and review independent investment reviews where they are available
Review the costs
Select the most appropriate product
Advisers should be conservative when assessing underlying company investments – there is a tendency to
overestimate potential revenues and underestimate costs. Check what they are raising funds for and if the funds are
really being used to deliver business growth
RISKS
As noted
in the report, small company investing is inherently risky – but advisers should not make the
mistake of assuming that all EIS investments are equally risky. Well established and AIM listed companies
both qualify for EIS status and should be lower risk than start-ups. Funds aiming for capital preservation
should, in theory, be lower risk than those aiming for growth – although changes made in the 2014 Budget
will impact the type and range of capital preservation opportunities available in the market.
Investors in EIS must have the right attitude to risk – in all likelihood, it will be a more aggressive
approach to risk than the catch-all ‘balanced’. They must also have some capacity for loss. EIS investing
is not necessarily only about risk capital, but investors must be able to absorb losses.
CLIENT DISCOVERY
Picking out the right clients from a client bank should not be too hard – the focus should be on high net worth
clients with enough investable assets to allocate to an EIS portfolio. Solutions for the majority of ordinary retail
investors will likely focus on ISA’s and pensions before EIS really comes into the picture. The FCA has been keen to
point out the ‘tax tail should not wag the investment dog’, however, with tax breaks such a big part of the rationale
for EIS investment, it would be difficult to justify extensive use of EIS investments if more mainstream tax solutions
have not been implemented first. Overall the EIS benefits are stacked in favour of more wealthy individuals.
As with any investment, the advice process is all about
ensuring the product is appropriate and suitable for
the client, and that they understand the investment
objective and the risks associated with it as well as the
investment itself.
