VCTs on Platforms

It is estimated that platforms have over £350 billion in assets under administration and up to 80% of new retail investments are now made via an investment platform. Today almost all advisers use at least one platform, and in surveys both advisers and consumers cite the functionality, ease of use and ability to get a consolidated picture of their total portfolio as key benefits.

However, to date it has not been practical to hold VCTs on platforms. It IS possible to transact in VCTs in the secondary market via a platform, or to purchase a VCT off-platform and then transfer it onto the platform, but it has NOT been possible to purchase VCT shares in the primary market – which of course is what most VCT investors want to do in order to obtain the upfront tax relief. This is major headache for advisers, and resolving this issue would remove a significant source of friction in the investment process and pave the way for increased inflows.

The situation has begun to change. Changes announced in the 2014 Finance Bill allowed shares in VCTs to be bought by a nominee and still qualify for the tax reliefs. Nominee ownership is a key requirement in enabling financial advisers to manage their clients’ investments on platforms and in April 2015, Octopus announced that it had completed a development with Transact to enable shares in its VCTs to be brought and held on the platform.

This was a relatively big project for Transact and Octopus, but it may be that now they have undertaken much of the heavy lifting, it will be easier for other platforms and providers to follow suit.

Intelligent Partnership held a round-table discussion between Transact, Octopus and small group of VCT providers in September 2015 to discuss the issue. Transact were of course keen to get more providers on board as (perhaps counter-intuitively) were Octopus: they both want to see this become a genuine route to market for VCTs.

The other VCT providers were also very keen to get onto platforms, recognising the benefits that being able to transact in this way would bring. As Brendan Llewellyn of Adviser Home (who gave a short presentation on the topic) put it, when it comes to winning over new advisers “business process empathy is crucial.” The providers see acceptance on a platform as not only a way to make life easier for existing IFAs, but also as an opportunity to engage new IFAs. If the market grew, the platforms would presumably invest in developments such as publishing NAVs as well as share prices, and reminders that five year minimum holding periods are coming to an end. It’s easy to see how this could be a positive evolution for the VCT industry.

There are some logistics to iron out as well: providers and platforms need to work closely together to manage their pipelines to ensure that offers are not oversubscribed (an issue for all closed funds on platforms); the distribution lists for ongoing communications to investors will be impacted now that the central share register cannot be relied upon; the process for selling shares in the secondary market has to be closely monitored to ensure investors are getting the best possible price; and Dividend Reinvestment Schemes are harder to administer. These are all logistical issues that will be overcome as we see more take up of VCTs on platforms.

Often the process will hinge upon the interactions between the platform, receiving agents and registrars, rather than between the platform and the VCT provider. With little commercial interest in this development, there may be some inertia on the part of these third parties that also needs to be overcome.

However, perhaps the biggest stumbling block is the time and effort involved. As the market leader, Octopus can afford to put resource into these projects (and kudos to them for doing what a market-leader should do and leading the way). Many other VCT providers do not have big teams with the spare capacity to attack these projects in the same way. (Although of course, some of the other big VCTs are also distracted by the recent rule changes as well).

Nevertheless, we’re confident that as more platforms and VCT providers work together, any friction in the onboarding process will be minimised and it will be easy enough for the small guys to follow suit. We think there could be a handful on Transact in 2015/16 and a lot more VCTs across a couple of the most flexible platforms (not the old fund supermarkets) the following season

Now, most of these issues are for the industry to work out. From advisers’ point of view, they simply want the convenience of being able to access VCTs in the same way as the majority of other retail investment products. There are two deeper issues that advisers would be wise to cognisant of as well though.

Firstly, the issue of suitability. This was a fear expressed by some providers (and some advisers we spoke with). They see platforms as a mass-market product and VCTs as a niche market product and therefore feel uncomfortable with VCTs listing on platforms. Ultimately of course, suitability is something that will sit with the adviser and not the platform or provider – so it must be hoped that if VCTs do become commonplace on platforms, it doesn’t lead to complacency or mis-perceptions about what these products are on the part of some advisers.

There will also be a responsibility on providers to market themselves honestly as well. Of course, with a new audience of IFAs (and potential investors) to try and reach, some of the providers may well be tempted to position their product as close to mass market as they dare…

This brings us onto the second issue: if platform acceptance does potentially open up a new cohort of advisers to market to, the providers with the biggest marketing budgets will be the most successful. They will bring in more customers, but one hopes that this is not at the expense of the smaller VCTs who have some of the most interesting (and best performing) offers. Advisers who are coming to VCTs for the first time should keep this in mind when they are being bombarded with marketing messages in the near future.

Thanks

Dan