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17 May 2023 | 2 min read
This article is for professional investors only, and not intended for retail investors.
Traditionally, financial plans are considered through the lens of agreeing an objective at the outset. In the BR world, most customers approach the investment seeking a clear objective: mitigation of the impact of Inheritance Tax (IHT) on their investment upon death. If a client sets out this objective, failing to mitigate the effects of IHT on death would mean, at least in part, failing to achieve a good outcome.
In addition to the primary objective, the emphasis on considering the specific client’s needs means financial plans must consider the bigger picture. So what should this look like for BR clients? In addition to considering investor risk tolerance and the general suitability of an investment, this could be summarised in the following way:
This approach raises the bar for manufacturers, financial advisers and research firms and might require advisers to consider different solutions to those previously advised.
As with any investment, inherent risks are associated with an investment in a BR-qualifying service. The Consumer Duty guidance puts further emphasis on the importance of proactively avoiding foreseeable harm to an investor and assessing the limitations of an investment.
An inherently unpredictable risk for BR customers is that of an investor dying before IHT mitigation is achieved (BR investments must be held for two years before they qualify for IHT relief). Many investors considering BR investments are older, and with this, the risk of dying within the qualifying period becomes higher. It is an obligation for all parties, including investment managers, financial advisers and research firms to consider how this foreseeable harm could potentially negatively impact a financial plan, resulting in a poor investor outcome. The question then arises as to what can be done to protect the client against this eventuality. A possible solution is to consider insurance that covers the IHT liability for the first two years of the investment before it qualifies for BR. However, this would need to be weighed up with the impact of potentially higher charges, looking to find an option that protects growth while keeping costs and charges at a reasonable level, ensuring the best possible outcome for the investor. This is explored further in the next section.
Thinking about fair value of BR-qualifying services, how comprehensively is the best possible outcome met, relative to the cost, and how can this be evidenced? In the case of the outcome specified earlier, the checklist could include the following:
If a service provides a better return for investors than other services with comparable investment strategies, this is a reasonable indicator of whether the service is of fair value.
The same method can be used to assess the insurance value mentioned above. This might be prohibitively expensive, thus eroding the value of assets to the point that it is not worth it for an investor to gain the desired IHT mitigation before the two-year qualifying period. However, if that cost is kept to a minimum or even included at no additional cost to the investor, offering immediate IHT mitigation, then this becomes a key consideration in assessing the fair value of a service.
