This article was written by Jordan Stodart, Chief Marketing Officer at Orca Money.
There’s only a few weeks left in 2016 and given the tumultuous year we’ve had in the UK, and further afield, deciding where to invest your capital is something we should all be seriously considering.
Brexit, interest rate cuts and global economic turbulence have left a volatile and low-yield environment. Some glimmers of hope shine however, in the form of peer-to-peer lending (P2P) and robo-advice.
Let’s evaluate the benefits of investing your money in these innovative investment models.
Retail Investor Benefits (P2P Lending)
Peer-to-peer lending has an established investor-base. Namely, retail investors. The average deposit across a platform is around the £5,000 mark, however, with minimum investments of £10 in several cases, you could be lending capital and earning rates in the region 5% p.a plus in no time.
High Yield Returns
With a peer-to-peer investment you can expect returns significantly higher than those on offer from a high-street bank. With a record-low base saving rate of 0.25%, it is little wonder people are searching for an alternative. And with interest rates ranging 3-19% p.a, P2P lending could be that alternative.
The major P2P lending platforms, such as Zopa, RateSetter and Funding Circle (£1 billion+ lent by each), tend to return 3-7% p.a, depending on the platform and product. More risky platforms, where you are expected to select your own loans with potentially fewer protective measures, can return 10%+. It’s down to your risk appetite, fundamentally.
All major P2P platforms implement risk mitigation procedures, some more robust than others, but here are the typical security measures implemented to protect your capital.
This is especially common with property and SME lending platforms, where asset debentures (eg: 1st charge and 2nd charge) secure the loan with typical max. Loan-to-value rates of c.75% ensure that should the markets decline and the asset depreciates in value, there should be a reasonable percentage buffer. This is never a guarantee, but LTVs tend to be of an acceptable level.
RateSetter established the first provision fund in the UK P2P market, and many platforms have followed suit, including Zopa, Wellesley & Co, Assetz Capital and others. This fund, or ‘safety net’, will usually take a portion of borrower repayments, store them, and use them at the directors’ discretion to repay any loan defaults. The fund tends to sit at a percentage of the live loan book, but if a large quantity of borrowers default simultaneously then the fund may not be of sufficient value to cover all losses. Loan book stress tests do well to prove the robustness of a platform’s provision fund.
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Peer-to-peer lending platforms Zopa and RateSetter spread your capital between dozens of borrowers, in some cases up to 100. This ensures that, should one borrower default, it shouldn’t impact your investment drastically. Conversely, some more bespoke platforms, where you manually select loans, dictate that you are responsible for your own diversification, i.e. you need to be fairly knowledgeable and arguably less risk averse.
Innovative Finance ISA (IFISA)
One of the big perks in the industry that grabbed major headlines was the launch of the Innovative Finance ISA in April 2016. The government has put its cards on the table, giving peer-to-peer lending the stamp of approval.
- £15,240 annual allowance (any amount) can be subscribed to one IFISA per year.
- Funds can be transferred from old ISAs to an IFISA with no limit.
- 3rd party IFISA providers allow you to invest in multiple P2P products from different platforms.
- No tax on interest earned from your P2P investments stored in an IFISA.
It’s very important to remember that peer-to-peer lending is not a savings product and is not covered by the FSCS, but is regulated by the FCA.
Mass-Affluent Investor Benefits (Robo-Advice)
Robo-advice is the new kid on the block and one of the hottest buzzwords in fintech just now. Nutmeg established the UK market in 2012, but in 2016 European robo-advisers Scalable Capital and MoneyFarm emerged on the scene. With Nutmeg currently managing c.£400 million AUM and the likes of Scalable Capital receiving weekly deposits of c.€3 million there is serious competition for top spot.
Digital investment management may be a difficult to get your head around, given that your portfolio is allocated and managed by an algorithm, essentially. But, for the experienced investor who is fed up of their IFA, or for the digitally savvy person keen to get into stock-market investing, robo could be a great option.
Investing through an IFA has been reserved for the wealthy for years. Charging 2-3% Assets Under Management (AUM) is just not economical for many who want to start making more money from their money.
Most robo-adviser charges fall under 1% AUM annually, with some waiving their own fees for first time investors.
An online questionnaire process determines your risk profile. You are then allocated a risk portfolio, corresponding with your risk score. A secure online dashboard allows you to view your portfolio (top 3 robo-advisers offer this) and alter aspects, but not the overall risk. You can view your portfolio’s performance 24/7.
Once funds are invested, the robo-adviser manages the portfolio for you. It will rebalance your asset allocation within the portfolio automatically, depending on market performance. You are not required to have any active involvement in the investment process, unlike with an IFA.
So, whether you are new to investing or a seasoned pro, peer-to-peer lending and/or robo-advice can cater to all and provide you with those long-awaited returns. It is critically important, however, that you thoroughly research the platforms and products (P2P and robo) on offer, as some are riskier than others, and there is always a chance you could lose money.