EIS 2018 report (web)

40 MARKET RESEARCH If the fund manager only returns 1.5% per year for the investor (as opposed a 6% per year target for a normal balanced portfolio), not only are they taking all of your investment return, but they are eating into the the government’s 30% tax rebate for investors. WOULD YOU LIKE TO SEE FEES STANDARDISED TO MAKE IT EASIER FOR INVESTORS TO MAKE LIKE FOR LIKE COMPARISONS? AA: We are seeing a move towards that, certainly in terms of the independent reviewers in the marketplace now seeking to disclose and compare what is charged to the investor and what is charged to the investee company. Ultimately, what a manager charges an investee company and the value they add to a company isn’t linear. We take a proactive role with our investee companies whereas some managers purposefully take a more passive approach. The confusion around fees then becomes an issue as it isn’t necessarily a like-for-like comparison between managers. KD: This is one of those counter- intuitive questions, because your first response is yes, of course. However, I don’t want to compare apples to oranges. I want to know who charges the most fees, then I can look at their performance and say, that guy’s really good, I’ll pay those extra fees. From an adviser point of view, fees get right to the very essence of client suitability and MiFID II. From a client suitability point of view, surely if a manager charges investor fees and someone else doesn’t, you’ve got to be able to rationalise why that’s more suitable for your client. Is the performance a lot better? Because if it’s not, how do you rationalise client suitability having that client pay fees? IS CHARGING FEES TO INVESTEE COMPANIES LESS TRANSPARENT THAN CHARGING FEES TO THE INVESTOR? AA: No, not at all. From our perspective, as long as you are disclosing what you charge investee companies, then I think it’s fully transparent. The sector is a lot more transparent now than what used to go on. Historically, it was always deemed that fees to the investee company didn’t need to be disclosed to the investor, whereas we have always disclosed our investee company fees. DO YOU SEE JUSTIFICATION FOR INCREASING EIS FEES? IF SO, WHY? KD: I suspect that, to an extent, the larger providers are being disrupted and there will be more medium sized firms and small firms in the EIS space. The smaller players would tend to have higher fees because they don’t have the economies of scale that some of the larger players do. It’s much easier if you have a £200m fund to bring the fees down, than if you have a £2m fund or a £10m fund. If there’s a movement towards fees going higher, eventually people will be saying - “how can you justify that? How can I justify the fees to my client when I do a client suitability report? Why am I recommending someone who charges fees that take away 70% of the performance over 30 years because of their ongoing fees?” 1. MANAGERS VALUE FLEXIBILITY ON FEES On the basis of our fees debate, both managers who charge investors fees and managers who charge investee companies fees, greatly value their flexibility on how they impose fees. On the other hand, there are concerns about lack of transparency leading to regulatory intervention. 2. FUND MANAGERS ARE LAGGING ON TECHNOLOGY REQUIREMENTS Some providers appear to be using dated resources (such as Excel spreadsheets) to manage EIS funds. 3. INCREASED KNOWLEDGE INTENSIVE HEADROOM WILL HAVE LITTLE IMPACT Very few investors will be able to take advantage of the extra £1m investment limit into knowledge intensive companies. Investors that will be able to take advantage will mostly be limited to the UK’s modest cohort of ultra high net worth individuals. SECTION CONCLUSIONS “Ultimately, what a manager charges an investee company and the value they add to a company isn’t linear. We take a proactive role with our investee companies whereas some managers purposefully take a more passive approach.” — ANDREW ALDRIDGE, DEEPBRIDGE