Sipps: Alternative investments - Discovering new ways to strike it lucky
While many investment advisers are preparing for the FSA’s Retail Distribution Review (RDR) and trying to keep up with all the new developments in technology, more and more are being approached by Sipp clients wanting advice on alternative investments instead of just traditional fixed interest and equity investments. The advice being sought ranges from being about private equity and hedge funds to overseas holiday resort property and revenues from oil wells.
It is sometimes tempting to try and steer these Sipp clients back into the comfort zone of insurance company funds, unit trusts and Oeics, on a well-established funds platform for ease of administration, but would this really be in the clients’ best interests? Especially as many investors feel let down and disappointed not just with these collectives but also with many other investment traditionally considered ‘safe’, such as shares in banks.
All Sipp clients should know that in order to get a higher return a higher risk must be taken. However, investment advisers with a working knowledge of the ‘efficient frontier’ theory have a distinct advantage over other advisers and can respond to their Sipp clients with a much more professional approach.
These advisers are able to explain that by adding alternative investments to a traditional fixed interest and equity portfolio that total returns can often be improved without too much additional or increased exposure to risk.
This knowledge is appreciated by clients who, in many cases, often have some personal knowledge or a keen interest in the alternative investment they would like to be purchased for their Sipp, for example carbon credits or an overseas resort. Also advising on investments outside those of the large insurance companies or fund supermarkets is becoming far less of a problem for those advisers who have already, or who are currently in the process of moving to, ‘adviser charging’, in the spirit of the RDR, rather than waiting for the FSA’s 2012 deadline.
The range of alternative investments coming to market is rising and there are now plenty of choices for all Sipp investors looking for other options to fixed interest and traditional equities in order to further diversify their portfolios and help manage risk with both good asset allocation and in line with the efficient frontier theory.
In addition to private equity funds, hedge funds and funds of hedge funds, which give Sipp investors access to areas previously the domain of the very wealthy, there are many other alternative investments of interest.
These include beaches, carbon credits, carbon offsetting, climate solutions, currency funds, farmland, football funds, managed futures, overseas property resorts, property recovery and bridging finance funds, residential property funds, student accommodation funds, traded endowment funds, trees in tropical forests, waste treatment and many green and specialised investments, all of which are suitable for Sipps.
Alternative investments are also bringing more people back to saving for their retirement in an enjoyable and interesting way. Oil revenue income from a ‘nodding donkey’ not only provides a good return for a Sipp investment but also makes for interesting conversation at dinner parties which encourages more people to save for their retirement using Sipps.
A Sipp is also an ideal vehicle in which to hold alternative investments alongside traditional fixed interest and equities. Remuneration for advice can be paid to the adviser direct on an adviser charging basis from the Sipp itself. However, investment advisers do need to work with a Sipp provider that accepts all HM Revenue & Customs (HMRC) permitted investments in order to offer this true ‘whole-of-market’ advice.