With a multitude of Innovative Finance ISA (IFISA) products on the market, choosing the right one for your portfolio requires gaining an in-depth understanding of what each has to offer.
You must find an IFISA that fits with your wider investment portfolio, considering the asset held and its core features and performance.
This involves finding an IFISA with an underlying asset that fits with your wider investment portfolio – considering its core features and performance – through to assessing the IFISA provider in order to gauge their trustworthiness and determine whether their track record and expertise is of a high standard.
Whilst seeking advice from an independent financial adviser before choosing an IFISA is crucial, here are four questions to consider to get you started.
1. What is the underlying asset and does it fit with your wider portfolio?
One of the most important factors to consider when comparing IFISA products is its asset. Whilst the IFISA wrapper aids in maximising returns by rendering them tax-free, it’s the asset held that is doing the core work to generate the target return on offer.
Therefore, when comparing IFISA products, look for an asset that will fit with – and enhance – your current investment portfolio.
Are you looking to increase the ESG weighting of your portfolio? For this, consider an IFISA that facilitates investment into property bonds or environmental projects – both allowing investors to make positive impacts with their capital.
And assess whether the asset is resilient. Whilst the IFISA is uncorrelated with the volatile equities market and low-yielding cash due to its alternative assets, some may have still fared better than others during the Coronavirus pandemic, showing resilience and strength during uncertain times.
As an example, the housing market boomed in the aftermath of the easing of Coronavirus-related lockdowns. This – alongside the UK’s ongoing, chronic housing shortage – results in confidence that demand for the much-needed new homes delivered by the alternative finance that property bonds provide will only continue to grow.
2. Does the IFISA provider have a proven track record with the necessary expertise to offer the product?
When comparing IFISA providers, look for those who are transparent about their processes and have a proven track record of delivering target returns.
Speak to the team – this is the best method for understanding their knowledge and expertise, and also gauging the quality of their customer service.
Ask questions about their risk mitigation processes, as well as their processes for originating and screening investment opportunities.
But delve deeper than just conducting due diligence on the IFISA provider. If the asset held is an SME loan, look at the team behind the business receiving the loan, as well as their track record.
If it’s a property bond, ask to see bond documents such as an Information Memorandum and case studies on the success of past developments. Discover more about the builder behind the developments – does the IFISA provider work with one strategic partner or multiple builders, and what is the quality and specification of their builds?
3. What are the target rates of return on offer?
Though tempting to opt for the provider with the highest headline rate when comparing IFISA products, it’s important to consider whether the rate of return offered is realistically achievable – and never decide based on the target returns alone.
Whilst potential returns are one of the most important factors when comparing and choosing investments, they should always be looked at alongside the trustworthiness and track record of the provider and the quality of the asset. It’s crucial to bear in mind that a higher target return doesn’t always equate to a better investment.
An IFISA’s target returns will differ depending on the asset held and also on a provider-to-provider basis. Most will be between 4% and 8%, and any in excess of 10% should be approached with particular caution as these can suggest an unusually high level of risk.
As an example, an IFISA offering potential returns of 7% with a team who boast demonstrable experience, a track record of delivering said returns and can detail how the target returns are generated would be preferable over an IFISA offering potential returns of 12% with a team who have little to no experience and knowledge with no proof of past deliverables.
4. What is the risk/return profile?
In general, the IFISA is considered to be a mid–high risk investment, but the exact risk profile will be dependent on the asset held.
Some IFISA products are asset-backed. For example, most – but not all – property bonds are secured on assets of the borrowers such as properties or land, offering an element of downside protection for investors.
But even with IFISAs that are asset-backed, returns are not guaranteed and capital is at risk. It’s imperative to seek advice from an IFA before making investment decisions to ensure you are not taking on a higher level of risk than appropriate. Then, when comparing IFISA products, look for one that fits your appetite for risk.
Again considering the provider’s track record and understanding their risk mitigation processes is important here, as these will also have a large influence on the associated risk.
Choosing an IFISA product
The value of the IFISA has become more and more apparent in recent times. Hitting the £1 billion in inflows milestone in 2019/20, investor confidence in the product is evidently on the rise.
And for experienced investors looking for the best IFISA product to invest their capital, considering the underlying asset and how it will fit with their portfolio, the provider’s track record and expertise, the potential returns on offer and whether they’re achievable, and the risk/return profile is critical.