One of the most common questions we get asked here at MJ Hudson, is: “How do I select the best tax-advantaged products to invest in?”. The vast array of products on offer is both a benefit and curse to investors; by way of illustration, we see over 100 different products, spread across EIS, VCT and BR, each year. Faced with so much choice, it comes as no surprise that investors are in need of advice on how to narrow the field into a shortlist and then, subsequently, require data and tools to conduct the necessary due diligence, a convenient way. Of course, whereas some advisers and end-investors may be looking for a single, perfect product, others may be seeking to identify a selection of products, to act as a “whitelist” or “panel”, saving advisers and clients alike valuable time by restricting choice to a pre-approved pool of preferred products. Pretty useful.
This process can be particularly daunting for investors less familiar with this space. However, this is where the research team at MJ Hudson comes to the fore; as independent, third party due diligence providers, we are perfectly placed to lighten the burden. Through the use of a well-defined methodology, we have the resource and capability, not usually afforded to individual investors, in order to undertake in-depth market research, across the majority of products in the tax-advantaged market.
The starting point for investors and advisers alike, should usually be to make a list of the characteristics and qualities that they are looking for in the perfect tax-advantaged product. One framework to lean on is that of the Five C’s:
Client Suitability – This helps eliminate products based on the investor suitability requirement (beyond the initial consideration of the risks associated with investment in tax-advantaged products). Some suitability requirements might include: risk consideration (appetite and capacity to take on risk) and type of investor (professional v. advised only).
Characteristics – In most product searches there will typically be “must haves” (or “must NOT haves”, for that matter), hopefully identified as part of the client suitability assessment. Examples include, but are not limited to: sector exposure, diversification requirements (minimum number of investee companies), income generation (in relation to VCT and BR), deployment rates, investment size restrictions, liquidity and targeted investment horizon.
Credibility – There are some important questions to ask: Does the manager and/or product have a demonstrable and relevant track record? How long has the manager been operating under the same investment strategy? Is there really enough information available to make an informed opinion? Is there any independent research available? And what about the sector, asset class or market in which the manager is investing? Any red flags in any of these areas will likely preclude investment.
Compliance – Tax-advantaged Investments are complicated, and by nature tend to carry a high level of risk (especially for investments into younger unquoted companies). As such, this gives rise to a number of compliance and governance considerations. This might include elements such as financial and business stability, established governance policies and procedures in place, and regular valuation reporting. Most importantly for advisers, it will need to be possible to provide a record of an adequate fact-finding procedure, in order to back-up the final selection for each individual client circumstance.
Commerciality – Clearly, making an investment also needs to make commercial sense. More specifically, fees must be reasonable, representing good value for money. Of course, it is also important to understand the likely level of tax relief available.
Having articulated the investment criteria, these must then be applied: in AdvantageIQ, MJ Hudson’s research system, subscribers are able to apply investment criteria through a top-level filter, and subsequently access in-depth research on each product, supporting and enhancing the selection process.
However, the proliferation of products in the market means that an individual, having applied the relevant investment criteria, may still be left with too many tax-advantaged products to properly research, within the timeframe available. Many will be familiar with the fact that MJ Hudson offers a fully bespoke panel selection service to support those facing this issue, or wishing to hire our research team to focus specifically on the needs of their clients, rather than viewing the market through a generalist lens. As part of this service, we sit down with each client, establish the most relevant selection criteria and produce a unique panel, monitoring the selections therein, on an ongoing basis.
But what if, having established that additional support beyond the standard research subscription is needed, there are not sufficient resources available to hire the research team for a bespoke panel service?
That’s where our new service, Advantage Select, comes in. We now have a solution that provides additional research and selection support to subscribers, without the necessary outlay for full panel services.
This product, available to anyone with a professional subscription, is a new, bolt-on service, which provides subscribers with enhanced, curated analysis. Initially using our Tax-Advantaged Ratings Methodology to narrow down the investable universe of tax-advantaged investments, we have added pre-defined categories and criteria in order to segment these funds further. We have multiple selections available to clients, with additional tools to help each client make an informed decision on the best product available to them. This tool is designed to enable clients to focus less on the investment screening process, and more on the client advice piece, taking comfort in the fact that an experienced and independent team of analysts, has already done most of the heavy lifting. Importantly, the entire research and selection process is fully documented.
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