As I travel around the country presenting and speaking to advisers and paraplanners, I hear all sorts of feedback from them on their experiences of various self-invested personal pension (SIPP) and small self-administered scheme (SSAS) providers. Sadly, the feedback is often negative about the provider. This is against a backdrop of an industry which is also suffering in the mainstream media and which is the subject of several high profile court cases, the outcomes of which are still unknown as I write this article.
SIPP seems to be a four letter word currently. Of course, it does contain four letters, but it’s an acronym rather than a word. Regardless, SIPPs are under attack at unprecedented levels and the most recent Financial Ombudsman Service (FOS) data bears this out.
However, advisers and paraplanners recognise that SIPPs have their place in financial planning and new SIPPs continue to be written in large numbers – be these simple platform-based offerings or full bespoke SIPPs offering a broad range of possible investments to meet clients’ ever changing and diverse needs.
So, how does a financial planner undertake the task of reviewing a client’s current SIPP provider or selecting a SIPP provider which both meets the client’s needs and represents a ‘safe pair of hands’ into the future?
It’s not an easy task, given that there is still a large number of SIPP providers out there. However, the necessary due diligence work might be easing slightly as consolidation of SIPP providers rumbles on, albeit more slowly than many had anticipated.
With consolidation comes a smaller number of providers to review (in theory, anyway). Beware, however, of those instances where a provider has been acquired and remains intact as a brand, but which changes its proposition and permitted investments. I was involved in a case very recently where a client could not acquire a further commercial property through his SIPP after the SIPP book had been acquired by a well known consolidator. Through no fault of his own or his adviser, he now has to transfer to another SIPP provider to achieve his goals.
Pointers for due diligence
Advisers and paraplanners might find the following broad headings a useful starting point for the initial and ongoing work in this area:
- Capital adequacy position of the provider – is it readily available and easily accessible? Is it merely meeting the benchmark of 100% or is it a much more healthy figure?
- Profitability of the provider – does the provider have a consistent track record of profitability and does that profit arise from core administration fees rather than being heavily reliant on bank interest payments from the default bank account?
- Financial stability – does the provider have a strong balance sheet and positive cash flows to help it to meet ever-increasing industry costs such as professional indemnity insurance cover? Does it have the resources to continue to offer a broad range of investments to clients – including non-standard investments, which carry a higher capital adequacy requirement?
- Management and structure of provider – is there a strong, stable and capable management team at the helm of the business? Is the management team top-heavy with people whose roles seem to have little place in the day to day running of the business and who are remote from the needs of advisers and clients?
- Reputation and service – does the provider have a proven track record of delivering high quality and client-focussed service? Does the provider ensure that a dedicated and named administrator deals with a client’s SIPP on a day to day basis?
- Size of provider – does the provider’s size and scale indicate that it might be the subject of an unexpected acquisition? Does it have the scale to offer face to face support nationally to advisers and clients and does it have technical support on hand?
- Asset acceptance processes – what are the provider’s process and information requirements in relation to assessing acceptability of potential investments? Does it have a robust process which has been in place for many years, or has its process only been changed in light of recent court cases and the Financial Conduct Authority’s ‘Dear CEO’ letter? To what extent is the provider exposed to a worrying level of distressed / toxic assets?
Due diligence on SIPP providers has never been more important and the choice of provider is key in a highly challenging environment.
Stephen McPhillips is technical sales director at Dentons Pension Management