EIS 2018 report (web)

47 46 WHAT SORT OF CLIENTS ARE YOU USING EIS WITH, AND WHAT’S THE PRIMARY DRIVER FOR USING IT? JC: Mostly high net worth clients. We’re probably looking at people with stakes above a million pounds. The primary driver is capital gains tax deferral, and to enable clients to release funds as part of inheritance tax planning arrangements. DH: The primary driver is that it’s an itch clients want to scratch. Our portfolios generally have a smart passive approach – but there’s an awful lot of clients who say, I think I want something else. For clients who’ve got a substantial amount of money, who like a bit of complexity - they want to go up the risk ladder a little bit more. They like the idea of some tax relief, but for them, it’s a little bit more of the thrill of investing. SJ: We go all the way up from retail clients where they are investing quite a small sum, like £25,000. They might say - I want the opportunity as a speculative investment. But it goes from there up to people who are very high net worth. The amount of clients using EIS is not quite single figures - but a very low proportion of our client bank has not had at least one discussion about them. What I find interesting, we very recently acquired the CEO of a FTSE 100 company. He had only heard of EIS conceptually. He had no real practical understanding of it. When I was running through facets of EIS, he was saying, “why did I not know about this before?” I think we, in the profession, think EIS is more widely known than it actually is. WHAT ALLOCATION DOES EIS HAVE IN YOUR CLIENTS’ PORTFOLIOS? FS: All of our clients have net wealth of at least £10m. In terms of EIS allocation, it’s typically below 5% of clients’ net wealth, so it’s really about helping them to access venture capital, which most of them are interested in. It may be because they’re entrepreneurs. When they get liquidity from their business, they’ll often have an eye on putting money back into early stage businesses, so we can help them to access venture capital using competent and experienced managers with useful tax breaks. And generally speaking, it acts as a diversifier to other parts of their wealth. SJ: It varies enormously. I was with a client recently who’s got about £1.2m in a mix of VCTs and EISs. He’s got about £4m in what I call mainstream investment portfolios. He now wants to allocate his whole portfolio into EIS and VCTs. He’s not interested in mainstream portfolios. He’s got other wealth besides mainstream investment portfolios, including property and a company business. We have established beyond reasonable doubt that if he lost every penny in VCTs and EISs, he would still meet his lifetime cash flow requirements. AT: I set a benchmark where I would not look to exceed an upper ceiling of 10% of a client’s liquid investable portfolio in this kind of space. Then within that 10%, it would not be with a single provider, it would be in a portfolio of providers. I set a limit to every EIS that I recommend to a client. EIS tends to be the surplus money in the pot where high net worth clients are looking to put a bit of sparkle and excitement into their portfolio - something different from a traditional growth portfolio with a DFM. ADVISER ROUNDTABLE INSIGHTS FROM EIS ADVISERS ATTENDEES MODERATOR: JOHN SCHAFFER INTELLIGENT PARTNERSHIP This is not a situation where a client says, “I’ve got £100,000. That’s all my money.” - I wouldn’t say, “Let’s put £10,000 of that into an EIS for you because the tax breaks are really good.” The client would sign a high net worth client declaration to say:” I have liquid assets of this. I am capable of losing this amount of money without having an impact on current lifestyle or future income requirements.” HOW DO YOU COMMUNICATE AND QUALIFY THE RISKS OF EIS TO YOUR CLIENTS? FS: What we’re trying to communicate to clients is to think about EIS as a series of investments in individual small companies. Every single one of them could fail. If you took every company in isolation, you could make a case for why it’s not going to work out and could fail. Which then would only leave the loss relief in the absolute worst case. Even then, we warn clients that in extremes, government regulation can change. We try to bring to life what it would mean for this to go badly wrong, rather than just saying, “oh, it’s risky.” DH: Most of our clients would be classified as high net worth, but it’s not suitable for all of them. We just understand that when we talk to clients about risk profile, those people that are balanced tend not to want to experience a loss. We approach everybody that we think could afford a loss - but not everybody’s comfortable with it. It’s not really us screening them out, we give them enough information for them to screen themselves out. WITH THE CHANGES IN THE BUDGET, HOW HAS YOUR APPROACH TO EIS CHANGED? FS: Our approach has not changed. We welcome the continued focus by the government on deploying genuine risk capital, that’s the way we’ve always viewed it and positioned it with our clients. A primary driver of doing this investing is the venture capital side of things, not - “let’s bank the tax relief as quickly as we can.” DH: It hasn’t. Although the budget has increased the maximum amount that anyone can put into a particular account - we’ve never had anyone put in the maximum each year. I think the most I’ve ever had anyone put in at any one time is £250,000. SJ: I am aware that quite a lot of advisers have decried the loss of asset-backed investments, but I don’t care. To my mind, all it’s done is clarify the picture. We always emphasise - this is a higher risk area, you can’t guarantee returns, you shouldn’t compare it to even the higher risks of mainstream OEICs. ARE INVESTORS PREPARED TO TAKE ON THE RISK AND ILLIQUIDITY OF EIS, ESPECIALLY AFTER THE MOST RECENT BUDGET WITH THE CRACKDOWN ON CAPITAL PRESERVATION SCHEMES? FS: The main way we address those particular risks is always making sure they have more than enough capital to cover several years of their likely expenditure, so that whatever happens with these particular investments, their lifestyle is not affected. Secondly, we pay close attention to the different strategies employed by different fund managers, including such things as the expected number of years to a typical exit from any fund. We also encourage our clients to repeat EIS and other venture capital investments every year to build up a ladder of cash flows. JC: We’ve always told our clients that EIS are higher risk funds. As part of the portfolio, we usually balance the risk by reducing the risk with other assets. The fact that EIS has become more risky is more a case of reverting to what EIS should have been in the first place. DO YOU FEEL THAT EIS IS UNCORRELATED FROM MAINSTREAM ASSET CLASSES? JC: Certainly, because it’s giving access to the sort of investments which we just could not access in any other way. SJ: Ultimately, it’s a business, which is why I don’t think it can be completely uncorrelated. AT: Yes, personally I do. When you’re looking at true, young EISs where they’re relatively small firms in niche particular areas, such as a company that’s sponsored by Cambridge University doing research and development into new technology around batteries for cars, for example - the impact of whether the FTSE goes up or down today or tomorrow is going to have no real, immediate impact on that company. “EIS tends to be surplus money in the pot where high net worth clients are looking to put a bit of sparkle and excitement into their portfolio.” — ANDREW TUSTIN, PARTNERS WEALTH MANAGEMENT JOHN SCHAFFER INTELLIGENT PARTNERSHIP STEPHEN JONES (SJ) CLEAR SOLUTIONS FAISAL SHEIKH (FS) MONMOUTH CAPITAL ANDREW TUSTIN (AT) PARTNERS WEALTH MANAGEMENT JOHN CORNELIUS (JC) WARWICK BUTCHART DENNIS HALL (DH) YELLOWTAIL “Our approach has not changed. We welcome the continued focus by the government on deploying genuine risk capital, that’s the way we’ve always viewed it and positioned it with our clients. ” — FAISAL SHEIKH, MONMOUTH CAPITAL “I think we, in the profession, think EIS is more widely known than it actually is.” — STEPHEN JONES, CLEAR SOLUTIONS