How to overcome challenges of recommending EIS

How to overcome challenges of recommending EIS

Senior industry figures have highlighted challenges advisers face when embedding enterprise investment into their business models.

During an EIS event hosted by Intelligent Partnership, Andrew Melville, risk management adviser at Ernst & Young, said adopting a process that assesses suitability is “critical” when it comes to advising clients on enterprise investment schemes.

He said it is important for advisers to understand the types of clients they are recommending the particular EIS product to, and to ensure the “right product is being distributed at the right time”.

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Advisers, he said, will need to ensure they have got the right product mix for clients.

“If you look at distribution: a lot more scrutiny is going to be placed on providers as to how they distribute,” he said, adding that technology in particular is going to play a big part in how these products are distributed.

Ian Shipway, director of HC Wealth Management, suggested some firms are not comfortable going down the high-risk investment route.

He also pointed out that many firms have adjusted their business models to be platform-centric as a consequence of the Retail Distribution Review.

Mr Shipway said: “Once you have gone platform-centric all of your processes and procedures are around making that as efficient as possible.

“EIS therefore comes like a bit of sand in the cogs because it is outside that normal procedure.”

The growing use of model portfolios was also cited as an issue stopping advisers from using EIS.

Mr Shipway said: “The consequence of that is clients are getting less personalised portfolios than they are used to, so if advisers are not asking what should be in a client’s portfolio on a regular basis, then EIS may just not come into it.

“The advice firm has got to be sophisticated enough and have sufficient flexibility to identify the requirements of a particular category of client and give the advice on EIS.”

In another presentation, Simon Ruthers director of Oxford Capital, encouraged advisers to ensure client portfolios are diverse, but warned against spreading the investment base too widely.

He said: “It is key to avoid taking diversification to such an extreme that you have diluted all the returns simply through the application of charges.”

Expanding on this point afterwards, Mr Ruthers said diversification overkill happens when there is doubling up on companies that are doing similar things in similar sectors.

“By doing that you’re not diversifying risk because you are effectively doing more of the same,” he said.

“As soon as you start getting to that point where there is commonality, then adding that company to the portfolio could potentially drive returns down without risk reducing as a result.”

Andy Marris, chief executive of MICAP, finding the right EIS product can often feel for advisers like they are “groping around in the dark”, particularly as investing into a fund that hasn’t yet been deployed means it is difficult to do large amounts of due diligence on the investing companies.