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Trends among investment advisors mirror developments in P2P lending

New research reveals a shift towards prioritising more consistent outcomes for investors.

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Recent attempts to simplify the process of investing in P2P loans have been met with some disenchantment; yet they seem to mirror trends in the wider investment management space.

New research from Equifax Touchstone, an intermediary database provider, illustrates an enhanced focus among investment advisors on delivering consistent investment outcomes to customers.

Of 141 surveyed investment advisors, 82 per cent were found to have a centralised investment process, meaning that a consistent approach to allocation and monitoring exists for all clients.

However, 76 per cent use model portfolios, which are bespoke to a customer’s risk-reward preferences, and which are automatically rebalanced regularly to bring returns in line with expectation – even if the broader approach to investment management is the same for all clients. These model portfolios are comprised of a diversified pool of mutual funds that invest in a variety of assets, ranging from large and small stocks to REITs.  

“Centralised processes and the use of model portfolios ensure that a client’s attitude to risk is reflected and maintained on an ongoing basis, as these portfolios are managed according to strict risk criteria, and re-balanced regularly,” said John Driscoll, director at Equifax Touchstone.

“We’re witnessing a shift to a more structured investment process, with centralised processes a key foundation for investment advice. This approach helps strike the right balance between risk and return, particularly important in a world of increased market volatility.”

Driscoll went on to explain that the FCA is driving this shift, and that it is increasingly important for advisors to demonstrate that risk is “managed, monitored and maintained” to a level that is appropriate for clients.

These changes closely mirror developments with the UK’s budding peer-to-peer lending sector. In times past, the norm was for platforms to allow investors to manually select which loans to invest in, and the onus was on those investors to diversify.

Today, the P2P sector is experiencing a broad shift towards passive, automated investment. Funding Circle, the UK’s leading business loans marketplace, withdrew its manual bidding process a few weeks ago, and will instead funnel investors into one of two Autobid accounts. Manual selection has long-since been withdrawn from Zopa, and was never possible for RateSetter investors.

Furthermore, Funding Circle has upgraded its Autobid tool in order to bring returns more closely in line with those advertised to investors, with less cash drag. The smarter engine will now prioritise the allocation of funds for investors whose returns are underperforming expectations.

But in its shift to passive strategies, P2P is perhaps less closely aligned with investment advisors. Equifax Touchstone’s survey shows that advisors still very much value active investment vehicles. While passive investing plays a part for 82 per cent of advisors, the majority invest 25 per cent or less in passives, with11 per cent of advisors investing more than 50 per cent in them.

Certain enthusiast investors, who have enjoyed free reign hand-selecting P2P loans en route to premium returns over the past decade, have threatened to withdraw their funds from platforms that have shifted towards passive investment accounts. Instead, these investors may look to smaller peer-to-peer lenders, many of which still offer manual loan selection.

But if consistency is the will of the regulator, as reflected by trends among the largest P2P firms and investment advisors alike, then manual P2P investors may become hard-pressed to find a home for their money. 

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