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MARCH 2012 |www.opp.org.uk WORDS | Lee Smith


BUSINESS


INVESTMENTS | 37


genuinely believe that personal pension plan investments have a lot of life left in them. However, the way in which SIPPs are used and sold by some of the advisors in our sector has simply got to change. SIPPs are not suitable for everyone, especially clients who want to do their own personal pension investments themselves. A lot of the time, suitability comes down to cost. SIPPs are simply a relatively high-cost solution for those looking to unlock the power of their pension. After all, there are much more cost-effective ways of supporting your clients with smaller pension funds. You do not have to advise investing via a SIPP. But how many of us really know enough about the alternatives available to be confi dent in saying don’t go down the SIPP route? We all know that SIPPs are a big part of the alternative investment industry and certainly a strong way in which to access additional investment options. There are also those that have used alternative, and sometimes more benefi cial, routes to invest. We would always want to have more than just a SIPP option in our armoury. One such route is via investment platforms. Investment platforms are often a lot more cost-effective, allowing users to transfer small pension pots in a viable way. Time is up for those who mis-sell SIPPs. It has been reported that the Financial Services Authority (FSA) clampdown on SIPP mis-selling could spark an infl ux of pension money onto platforms. I wrote about the way in which regulators are beginning to act on the FSA review of small SIPP providers in my column last month. A large SIPP provider, who took part in the review, recently told Kudos that the FSA had indicated that it wanted clients with less than £250,000 in SIPPs to transfer their funds into cheaper arrangements. “There is no doubt that a transfer


SIPPs versus platforms L


The industry has reached the point at which regulators are starting to ask if the widespread use of self- invested personal pension plans (SIPPs) is a good idea. Are they really suitable for the way in which they are


being used and sold? OPP investment columnist Lee Smith has been asking a few searching questions.


ast month I wrote that “SIPPs are here to stay”, and I am sticking to that assertion. I


out of SIPPs for smaller clients is something they want to see,” said the provider in question. “The big concern is that there has been mis-selling at the bottom end of the SIPP market.” From my experience this is true, but it is not my place to preach to those that have transferred small pension funds into costly SIPPs in order to help the client make an investment in a particular product such as residential property overseas. I would simply advise that, whatever the objective, if we are to adhere to the client’s best interest, there is a better way to do things for these smaller clients. And that is to invest via a cost-effective investment platform. The FSA’s stance could have a dramatic impact on the UK SIPP sector, which currently operates an estimated 800,000 schemes. They have an average fund of £100,000. You don’t have to be a mathematician therefore to work out that more than half the market must have a question mark over its cost viability. It has been said that a portfolio of at least £250,000 is the ideal starting point for a traditional, high-charging SIPP. The fund has to be at least this big for the SIPP route to look viable. More often than not, a platform solution would represent a better deal. It is arguable that some lower-cost SIPPs could be viable from £100,000, but I am sure most investors need more money in the kitty to make the maintenance cost of most SIPPs hard to justify. The key difference with an investment platform is that they remove the layer of administration fees usually charged by a SIPP. With the SIPP wrapper, there is usually a layer of regulatory costs that jack-up the annual administration fees and make running the pension portfolio expensive. An investment platform admin fee is a much cheaper option. The SIPP provider helping with


the FSA review added: “Any provider or adviser that fl outed this direction from the FSA is adopting a high-risk


strategy. Its spotlight will eventually be focused on them.” They also said that independent fi nancial advisor (IFA) clients from a recently acquired SIPP fi rm had admitted to them that many of its smaller clients would have to be moved out of even low-cost SIPPs into personal pensions held on platforms because the fees involved were diffi cult to justify. I don’t think that it is unreasonable to say that there are a vast number of clients out there who should never have put their money into a SIPP in the fi rst place. They couldn’t


“Your business will depend on being as fl exible as it can, on as many platforms as possible”


afford the investment routes offered by a SIPP and shouldn’t have got involved. Platforms should have been considered, and in many cases used instead. We forecast that SIPP costs could


rise further as the FSA implements more reforms, imposing higher capital adequacy requirements on providers. One provider that looks set to buck the trend, however, is LV (London Victoria). LV is reportedly


looking to release an ‘ultra low cost’ SIPP aimed at covering the issue of transfers of smaller pensions into non cost-effective SIPPs. I doubt many of the SIPP providers in today’s market could deliver such a product. It will be interesting to see the market’s reaction to this and the ongoing use of such SIPPs.


So, what can we make of the options available to us today? By using SIPPs for larger clients and considering investment platforms for smaller clients, this would enable you to support your investors compliantly, help you justify your position more easily, and provide your client with the most suitable investment vehicle. However, with under-performing regulated market products not always coming through as an attractive option, I am sure your fi rst question will be: “Do the investment platforms you are describing allow the sort of alternative investments we are used to, and which work well for our clients?” So, maybe it’s time to review your tool bag and consider things for the future. One thing is for sure … your business is going to depend on being as fl exible as possible, on as many platforms as possible.


Multiple choice | Will having more strings to your bow help your future business?


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