How The Clients of Independent Financial Advisors and Wealth Managers Can Benefit from P2P Lending
This is a financial promotion and is intended to provide information, not investment advice.
What Is Peer-to-Peer Lending?
Before examining the benefits, it's important to understand the basics of P2P lending. Peer-to-peer lending allows individuals and businesses to lend money directly to borrowers, bypassing traditional financial institutions like banks. In return, lenders earn interest on their investments, typically at rates higher than those offered by conventional savings accounts.
For financial advisors and wealth managers, incorporating P2P lending into a client’s portfolio can offer unique advantages.
Key Benefits of P2P Lending for Clients of IFAs and Wealth Managers
1. Attractive Returns
One of the most significant benefits of P2P lending is the potential for higher returns compared to more traditional savings and investment products. While the return rates depend on the risk profile of the loans, many P2P lending platforms offer target returns ranging from 5% to 10% per annum (as per September 2024). For example, easyMoney offers returns of up to 10% on property-backed loans (as per September 2024). These returns can substantially outperform traditional asset classes like government bonds or savings accounts, which often struggle to outpace inflation.
2. Diversification Beyond Traditional Asset Classes
Diversification is key to managing risk in any portfolio, and P2P lending can provide an excellent way to diversify beyond stocks, bonds, and other conventional assets. By lending directly to businesses or individuals, investors can add an asset class that is less correlated with the performance of the stock market. This lack of correlation can provide a cushion against market volatility, reducing overall portfolio risk.
Additionally, platforms like easyMoney focus on secured lending, where loans are backed by UK property. This adds a layer of security while allowing clients to diversify their investments within the P2P lending space itself by spreading investments across multiple loans or property-backed projects.
3. Steady Income Streams
For clients who prioritise regular income, P2P lending can be an ideal solution. Most P2P lending platforms, including easyMoney, offer monthly interest payments. This regular income can be particularly attractive to retirees or clients with a more conservative approach, as they can use the interest payments for ongoing expenses or reinvest them to benefit from compound interest.
How P2P Lending Fits Into Broader Investment Strategies
For financial advisors and wealth managers, integrating P2P lending into a broader financial strategy requires careful consideration. While P2P lending offers high returns and diversification, it should be part of a balanced portfolio to mitigate risks.
1. Balancing Risk and Reward
All investments carry risks, and P2P lending is no different. However, independent financial advisors can mitigate these risks by selecting loans secured against assets like property, choosing reputable platforms, and spreading investments across multiple loans to reduce the impact of any single borrower defaulting.
Clients with a higher risk tolerance may choose to allocate a greater percentage of their portfolio to P2P lending, while more conservative investors might view it as a smaller portion of a broader, diversified strategy.
2. Flexibility and Liquidity
Liquidity is an important consideration in any investment. While some P2P lending platforms require investors to lock their funds into loans for a specific period, others offer more flexible terms. Some platforms also provide secondary markets where loans can be sold to other investors, offering a level of liquidity that can be attractive for clients who may need to access their funds earlier than expected.
3. Tax-Efficient Investing
For UK-based clients, P2P lending can be incorporated into a tax-efficient strategy using Innovative Finance ISAs (IFISAs). An IFISA allows individuals to invest in P2P loans while benefiting from tax-free interest. This makes P2P lending a valuable tool for independent financial advisors and wealth managers looking to maximise returns while minimising the tax burden for their clients.
Platforms like easyMoney offer IFISAswith property-backed loans, providing tax-free returns and a higher degree of security compared to unsecured loans.
Understanding the Risks of P2P Lending
While P2P lending can offer significant benefits, it's essential for financial advisors and wealth managers to thoroughly understand the associated risks to ensure it's suitable for their clients.
1. Borrower Default Risk
One of the primary risks in P2P lending is the possibility of borrower default. While platforms like easyMoney mitigate this risk by securing loans against UK property, there is still a chance that the borrower may fail to repay the loan. This can lead to delays in recovering the capital or, in rare cases, losses. However, secured lending platforms
provide more protection as the underlying asset (in this case, property) can be sold to recover the funds.
2. Liquidity Risk
As mentioned earlier, liquidity can be a concern for clients investing in P2P loans, as the investment is often tied up for the duration of the loan term. In cases where the funds are required sooner, the availability of secondary markets is a crucial factor to consider. Not all platforms offer a secondary market, so it’s important for advisors to select platforms that provide this option if liquidity is a priority for their clients.
3. Market Conditions
While P2P lending is not directly correlated with stock market performance, the broader economic environment can still affect borrowers’ ability to repay loans, particularly in the event of an economic downturn. Financial advisors should assess the macroeconomic risks and ensure that their clients’ P2P investments are balanced with other more secure asset classes.
Why Financial Advisors Should Consider P2P Lending for Their Clients
For financial advisors and wealth managers looking to maximise client returns while maintaining a diversified portfolio, P2P lending offers a valuable tool. The attractive interest rates, diversification potential, and regular income streams make it particularly appealing for clients with a balanced risk tolerance.
Moreover, integrating platforms like easyMoney—which provides secured, property- backed lending—offers an additional level of security, making P2P lending more accessible to a wider range of clients. The option to use IFISAs to invest in P2P loans provides a further incentive, as clients can earn tax-free interest, maximising the potential returns on their investments.
P2P lending offers a powerful way for clients to diversify beyond traditional investments, combining the potential for higher returns with a reliable income stream. By carefully choosing the right platform and balancing risks, financial advisors can help clients maximise the benefits of this innovative financial tool. However, it's also crucial to acknowledge the potential risk of declining property prices, which could reduce the value of property-backed loans and impact overall returns during a significant market downturn.
As the financial landscape continues to evolve, P2P lending is emerging as a key component of a well-diversified investment portfolio. For clients of independent financial advisors and wealth managers, it offers the potential for attractive returns, diversification, and steady income. By integrating P2P lending into their strategies, advisors can help clients achieve their financial goals, while maintaining a careful balance between risk and reward.
Whether through secured loans, tax-efficient IFISAs, or flexible investment options, platforms like easyMoney make it easier than ever for clients to benefit from the advantages of P2P lending. With the right advice and a prudent approach, P2P lending can be a game-changing addition to any investment portfolio.
Past performance is no guarantee for future results.
Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.