In many of my readings, I often encounter articles about several asset classes and their respective market commentaries describing the movement of financial markets. However, not much is said about how it will benefit you as an investor. Also, not much space is given to how you can apply this to your investment portfolio.
After many years of consulting with several investors, I have come to realise that many investors have no idea of where to start their investments and are simply letting capital pile up in their bank account. Not that there is anything wrong with money in a bank account, but there are other avenues to grow capital over time.
This brings me to the discussion about linked investment services providers (LISP for short) as an alternative way to invest your capital rather than letting your capital accumulate in your bank account at a modest interest rate. LISPs are an investment that allows you to have access to multiple funds from different fund managers under a single platform. Additionally, LISPs offer a multitude of different investment products, but I would like to focus on the basic discretionary (as in non-retirement related) multi-unit trust investment.
The benefits of investing in a LISP Investment (I will refer to this as “LISP Investment” for short because many of the LISP companies refer to these investments by different product names even though they are all essentially the same) are as follows but not limited to:
- No regulatory compliance such as Regulation 28;
- There is no minimum term;
- Provides a wide range of investment options;
- Provides a single view of your investment portfolio;
- Facilitates switching between funds;
- Funds can be invested as a lump sum or via a debit order;
- Withdrawals are unrestricted and can be taken as a once-off. or a regular withdrawal
As a result of the above-mentioned benefits, LISP accounts can be used for multiple reasons and in many ways.
One of the flexibilities is that the investment does not need to comply with Regulation 28 of the Pension Funds Act as this only applies to retirement funds. Regulation 28 limits the exposure that you can have in certain asset classes.
Assuming that you would like to reduce or increase your exposure in an asset class such as equities, properties, bonds and cash based on market conditions, the unit trusts that make up the underlying portfolio can be switched to reflect your current preference often at no or at a small fee (some LISP service providers charge for switches).
As mentioned above, LISP Investments do provide a regular withdrawal option, this withdrawal can be structured from all the underlying unit trusts or from a single unit trust in your portfolio. Suppose the latter applies; this allows you to select a single unit trust for the withdrawal whilst leaving other unit trusts in your portfolio to grow undisturbed.
As an investor in this type of product, you have a wide variety of unit trusts to include in your portfolio, such as single asset class unit trusts or multi-asset class funds (like a balanced fund and feeder fund), thereby diversifying your risk.
The benefit of mixing different unit trusts from different fund managers is that you can reduce your risk concentration thus creating a portfolio that suits your investment objectives. Blending your portfolio into several asset classes allows you to tap into offshore markets without using your regulated offshore investment allowances.
One question that comes to mind is, what are the downsides of LISP Investments? A brief touch on the drawbacks of this product is there are tax implications (such as capital gains tax and tax on interest earned) and capital is not guaranteed, furthermore, you cannot nominate a beneficiary.
Regardless of the vast advantages posed by this investment, many investors simply feel they do not have the level of knowledge required to select the right combination of unit trusts to meet their investment objectives, liquidity, or unique needs. For these types of investors, I would urge them to consult a knowledgeable independent investment advisor to help structure this investment and manage this investment from time to time as markets are constantly changing. An investment advisor will help you tweak, rebalance, or switch your investment portfolio to suit:
- Your investment objectives;
- Your investment strategy;
- Liquidity needs;
- Regulatory and tax requirements;
- Unique needs; and
- Risk tolerance and willingness to take risk.
I have presented this article in generic terms, however, should you want more information on how to invest in this product please contact us at Global & Local or speak to your own trusted investment advisor.