Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
In today’s low-interest-rate environment, advisors must add value to fixed-income allocations. Unfortunately, some of the higher yielding segments of the fixed-income markets – such as peer-to-peer (P2P) investing – don’t fit into the typical financial advisor investment platforms.
But that may soon change, as NSR Invest, a P2P analytics and management solution, prepares to launch the first integration of P2P investment platform Lending Club to Orion Advisor Services, a traditional portfolio analytics solution. The ultimate goal is to make it feasible for financial advisors to manage client investments in P2P loans, including allocating capital into individual loans (in a diversified manner), managing cash flows in and out of P2P investment accounts and consolidating performance reporting of P2P investing with the client’s other portfolio investments. Advisors can even bill for their services.
Of course, the caveat is that P2P investing still has significant risks that accompany its higher yields, from a material risk of default (which can only be partially diversified away) to significant illiquidity. Nonetheless, the demand from yield-starved clients and NSR Invest’s technology may finally make it feasible for, at least, independent RIAs to allocate client dollars to P2P investment opportunities!
The problem with P2PP2P investing (for advisors)
Most financial advisors are restricted to mutual funds and ETFs that can be traded on a custodial platform, purchasing market-traded securities like stocks or bonds directly, or for those with a broker-dealer relationship “selling” other alternative forms of registered securities (e.g., non-traded REITs). Investments that aren’t available to advisors under traditional broker-dealer or custodial relationships typically aren’t made available to their clients either.
Accordingly, when it comes to investment opportunities like P2P lending (or rather, P2P investing as a prospective lender), advisors have had little to no exposure to the marketplace, despite its arguably rather appealing fixed-income returns (albeit with significantly more risk and potential volatility).
Technically, an advisor has long been able to encourage clients to open an account directly with P2P investing platforms like Prosper or Lending Club, but helping clients invest there is tedious at best. The importance of extensive diversification (given that even the highest quality individual loans still have a material risk of default) is crucial, but manually allocating investments across a wide range of P2P loans is time consuming. Automated tools from the platforms (e.g., Lending Club’s Automate Investing, and Prosper’s Automated Quick Investment [AQI] solution) that help diversify P2P loans help, but the relatively simple automation algorithms may not be best for deploying client assets. Of course, an advisor just having clients’ login names and password credentials to do this on their behalf could trigger the SEC custody rule for advisors as well.
Even if these dynamics are navigated, it has still been difficult for advisors to help manage the overall process for clients. Client account balances at P2P lending platforms generally don’t aggregate into traditional advisor portfolio accounting and reporting tools, making it difficult for advisors to actually “manage” and report on the assets as part of the total portfolio. And if it’s impossible to effectively report on the assets, it’s also daunting to capture the information necessary to bill on them, even if the advisor is helping to manage them.
In other words, even if advisors wanted to allocate client assets towards P2P investing strategies to pursue higher yields than other fixed-income alternatives, the available technology solutions have made it impossible to do so.
But that is about to change.
NSR Invest rolls out platform for advisors
To plug the technology gap, NSR Invest is building the first integrations to connect P2P lending platforms like Prosper and Lending Club directly into advisor technology tools.
For those who aren’t familiar, NSR Invest was created earlier this year from the merger of two separate platforms – a site called Nickel SteamRoller (now NSR Platform) that was one of the first online resources to analyze the loan history of Lending Club and later Prosper, and a second site called Lend Academy Investments that packaged together some of the early versions of separately managed accounts and pooled funds for investing in P2P loans. NSR Invest’s goal is to offer a wider range of full-service managed accounts for P2P investors, expand the pooled investment funds for accredited investors allocating dollars into P2P loans, and build out an order-management and reporting platform for institutional investors.