Should Independent Financial Advisers Recommend Peer to Peer Lending Companies?

Peer to peer lending is growing in popularity among borrowers and investors alike, offering a flexible alternative to traditional investment products. In particular, peer to peer lending is catching on among property investors, with companies offering attractive returns without the associated hassle and risk of traditional buy to let investing. But where do financial advisers fit into all of this? Some IFAs we talk to currently feel cautious about recommending peer to peer to peer lending companies to their clients.

For them, peer to peer investment products such as Innovative Finance ISAs (IFISAs) seem too risky. And it can be difficult to see how peer to peer lending companies fit into traditional investment advice, since peer to peer lending providers often seek to do business directly with investors and borrowers via crowdfunding loans through their online platforms.

But, at the same time, peer to peer lending companies may represent an opportunity for IFAs to provide clients with alternative investment options offering the potential for higher returns. Consequently, advisers cannot afford to ignore the place that peer to peer lending has in the modern financial landscape.

 In order for IFAs and peer to peer lending platforms to work together there has to be an effort by the platforms to make the investment potential as obvious and accessible as possible.

 IFA friendly

 Until recently, most peer to peer lending platforms had been happy to cater to an audience of sophisticated, risk-conscious, self-directed investors. For such people, the potential returns offered by peer to peer lending have made it a natural choice. If peer to peer lending platforms do want to reach a wider client base via the IFA community, they will need to let IFAs know that they want to do business. The key here is sharing information and overcoming a natural caution IFAs may have for alternative investments outside of their traditional sphere of expertise.

Peer to peer lending companies must work to ensure that IFAs understand the products on offer, along with the associated risks and rewards so that they can relay details to their clients to make an informed decision. Importantly, this information has to be clear and assume no prior knowledge of the asset class. As IFAs may also be new to this form of investing there will be a natural level of caution, and a need to understand the relationship of risk and reward bench marked against the other investments they can potentially offer their clients.

That way, investors benefit from the expertise of IFAs. IFAs benefit from the opportunities and flexibility offered by peer to peer lending companies, and the companies benefit from the established relationships that investors have with their advisers. Platforms need to provide IFA-specific portals, with in-depth information and analysis of peer to peer lending investment opportunities. Ideally, these should include systems for IFAs to compare client’s needs, objectives and appetites for risk judged against the peer to peer lending investment products available. Ideally an IFA-specific portal would also:

  • Provide education and training opportunities for IFAs
  • Offer quick access to detailed investment information
  • Allow advisers to complete due diligence faster
  • Enable an automated investment process and ongoing performance monitoring

Automated advice

Millennials in particular are increasingly seeking out their own investment opportunities, relying on apps and automated services that offer a quick and easy investment experience, and innovative ways to save. But IFAs can and still do add value, especially with investors that have larger sums to invest. Given the increasingly large choice of investment products on the market, people need objective, expert advice now more than ever. The IFA community obviously has a wealth of experience relating to each of these types of investment that the general public does not have, and it’s critical that they remain.

Future relationships

 Peer to peer lending is here to stay. And as the market matures and more people realise the opportunities it offers, the investor need for expert advice will grow. Lending platforms and the peer to peer lending community will first need to decide how closely they want to work with IFAs, and then, based on this decision, will need to provide all of the information and insight required for their shared clients to prosper. With some of the bigger robots already hiring human advisers to supplement their online services, there’s a natural opportunity for the rest of the market to align and the remaining peer to peer lending lenders and IFAs to work together. Get it right and the business potential could be huge, get it wrong and we simply move forward in a fragmented fashion.

Please read our important information page and risk warning for more information.

Article written by Paul Stallard, Commercial Director, The House Crowd

 

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