Size and scale are increasingly being seen as crucial qualities for a SIPP business but, argues Graham Muir, those two factors alone do not necessarily equate to adviser and client satisfaction.
Survival of the fittest – the dictionary definition of this Darwinian concept is “those best adapted to particular conditions will succeed in the long run”. So, as the tectonic plates shift in the self-invested personal pension (SIPP) world, are we likely to see ‘natural selection’ prevail and the behemoth SIPP operators take over the world?
This ‘accepted wisdom’ seems to gather more and more traction with each sale and merger that is announced. The strength – and therefore quality – of a SIPP operator seems to be measured by some in terms of spurious metrics, such as scheme numbers or assets under administration and great store is placed by size and market share.
So does size matter? Well, yes and no. What is certain is that size and scale alone do not necessarily equate to adviser and client satisfaction. It is important to regularly engage with advisers in an effort to understand both what is being done well and, most importantly, how service can be improved.
This dialogue is a vital part of a firm’s DNA but can be sadly lacking in business’s who blindly pursue growth at the expense of service. What is important is for a firm to adapt its proposition to the changing market conditions and remain focused on the core value of service delivery.
The introduction of the new capital adequacy requirements in 2016 has already seen many SIPP operators run for the hills or be swallowed up by larger firms. The FCA has recently disclosed that four SIPP operators failed to meet the new capital adequacy requirements and it is suspected many more could struggle to do so going forwards.
The size of a firm’s capital adequacy bill will be determined by a number of factors – two of the principal ones being assets under administration and the extent to which ‘non-standard assets’ are held within the book. Those firms with a high ratio of non-standard asset plans to standard plans and with high levels of AUA will be faced with the highest capital adequacy bills.
So size may in fact be a mixed blessing – particularly for those firms that went for growth in SIPP numbers at the expense of monitoring the quality of the underlying assets they allowed into that book.
The focus on targeted due diligence on SIPP operators has never been more pertinent than now. Advisers should be drilling down into the make-up of a SIPP operator’s book to understand the ratio of standard to non-standard plans, exposure to ‘toxic’ investments and so on.
Tier 1 or Tier 2/3?
Most importantly, advisers should understand how the firm will fund its capital adequacy bill. Is this ‘Tier 1’ capital (essentially its own resources) or is it heavily subsidised by ‘Tier 2/3’ capital (essentially external funding)? A heavy reliance on Tier2/3 funding may be indicative of a wider malaise and further questions should be asked to establish the quality of the underlying covenant.
The SIPP market continues to polarise with many of the larger players doggedly pursuing a platform-based product range and moving further and further away from the ‘pure SIPP’ concept that originally underpinned their business models.
Some SIPP operators are essentially morphing into insurance companies or platform providers and are purely seeking light-touch, volume business while disregarding their roots in the pure SIPP market.
So a vacuum emerges whereby the very small SIPP operators no longer have sufficient scale to be in the game and the large ones have no appetite for providing a hands-on service, dealing with ‘pure SIPPs’.
For advisers this causes an issue, will the firm remain committed to the market and continue to support the adviser community and their clients while delivering a timely, personal and cost-effective solution. Or will they continue to evolve and, in true Darwinian style, adapt without compromise?
Graham Muir is a director at Talbot and Muir