Future belongs to platform providers

A “lost decade” for equity markets post-1999 was a further reason why pension investors lost faith in traditional personal pension plans and moved their funds into Sipps over which they wished to have greater direct control.

For many investors the desire to take advantage of the flexibility provided by a Sipp may simply have been to have access to a broader range of the investments than might otherwise be available from a personal pension plan provider.

A further, and significant number of Sipp investors have opted for the flexibility to purchase commercial property, to invest directly in equities or in some cases take advantage of the option to invest in unquoted shares or esoteric investments like hotel rooms.

The success of some of the larger online, execution-only, fund supermarkets in attracting a significant market share with their low cost Sipp wrappers, combined with access to a wide range of investment funds, has had a huge impact in shaping the development of the Sipp market.

The execution-only Sipp offerings have used platform-based technology to drive down the cost of purchasing investment funds and the plan charges for Isa and Sipp wrappers.

In recent years we have seen a growing movement from across the provider spectrum towards the provision of Sipp wrappers which are built around open architecture access to investment funds based upon an underlying transactional platform. Typically this platform will form the foundation upon which a wider wrap service is offered and will often have the functionality to be linked directly to an adviser’s back office software and offer online access to the Sipp member.

Funds supermarkets have integrated Sipp wrappers into their offerings, either by offering their own low-cost Sipp wrapper or by partnering with a Sipp provider. Typically the Sipp wrapper will include a low-cost option, which while a relatively limited investment universe will offer investors competitive terms when purchasing funds.

At the core of these offerings platforms have the potential to provide an increasingly integrated view of an investor’s combined investments whether held directly or in Isa and Sipp wrappers. For those planning for their retirement the financial modelling that can be provided by platforms producing projections of future income and fund values, from an aggregation of investments, will be an attractive reason to opt for a platform-based Sipp option. In my view, this is going to be a key factor driving growth in platform-based services to investors, whether this is on an execution-only, limited advice or full advisory basis.

For advisers, portfolio management needs to be based upon a robust risk-profiling process and the ability to provide for clients an appropriately matched asset allocation. The days when advisers could simply recommend a collection of funds, without first providing a structured approach to risk profiling and asset allocation should now be a distant memory.

Unless clients wish to take a particular interest in selecting individual investments in their Sipp, then being able to consider asset allocation in a co-ordinated way across all of their platform assets is a far more attractive option than attempting to manage funds held in separate wrappers.

It is the drive towards this co-ordinated approach to asset allocation across all assets held on a platform which will be a further reason why platform-based Sipp solutions will become the increasingly dominant solution.

Over the last decade, in response to the threat from fund supermarkets, some of the larger insurance companies who have provided a Sipp option have made access available to funds on an open-architecture basis. Clearly there has been a blurring of the previous roles played by fund supermarkets, wrap providers and insurance companies and it seems certain that being a larger player in the Sipp market will rely on having a competitively priced fund platform to support the purchase and on-going monitoring of investments.

While some of the larger Sipp providers have tended to focus on open architecture, collective fund investments, a group of typically smaller Sipp providers have sought to offer a more specialist and personal service to those investors seeking to purchase commercial property and invest in more esoteric investments such as the shares of unquoted companies.

Reflecting the diversity of investments available within a Sipp wrapper, stockbroking and asset management firms have targeted more sophisticated investors who are wishing to invest in individual equities and fixed interest investments.

While the UK Sipp market may have grown significantly as investors seek greater control and flexibility, Sipp providers themselves are facing an increasing number of challenges.

Increasingly investors are expecting product providers to provide wrappers on a low-cost basis. The growth in the popularity of the execution-only Sipp market has laid down a challenge to those traditional providers of pension contracts who may in the past have expected to generate worthwhile revenue both from delivering the wrapper and access to investment funds.

We are seeing increasing pressure on providers to offer Sipps with a more limited range of investment options at very low cost. Clearly Sipps are more complicated wrappers than Isas and require greater administrative support, but the fees Sipp providers can expect to receive for the additional services associated with operating drawdown are unlikely to offer much in the way of additional profit margin.

The decline in interest rates on cash deposits has significantly reduced the opportunity for providers to take a turn on the interest paid to Sipp investors, a further challenge to making Sipp administration in itself a profitable activity.

The City regulator’s recent proposals for increased capital adequacy requirements will have a significant impact on smaller, less financially robust, Sipp providers. We will see a reduction in the number of providers and this is likely to further strengthen the position of larger players who are able to subsidise the cost of providing the Sipp wrapper from the income they receive from their wider fund platform business.

How will Sipps be provided in the future? I would suggest that we are likely to see three principal offerings:

• Sipps which are exclusively platform based with very low charges. Integrated within a wider wrap platform service.

• Sipps offered by providers who are able to offer a competitive wrap and platform offering but are willing to allow investors to have access to non-platform investments by paying additional charges. The range of non-platform investments will often be limited to a simple menu of commercial property and publicly quoted investments.

• Sipps offered by specialist Sipp providers, with a focus on flexibility, in-depth technical support and high quality service.

Given the City regulator’s concerns about the financial strength of smaller Sipp providers, it seems certain that the number of specialist players will reduce. The majority of specialist Sipp providers will also need to be able to provide access to a fund platform to facilitate the purchase of investments and will be under pressure to go some way towards giving their clients a relatively high degree of online functionality.

If the recent proposal contained in the Budget to consider allowing Sipp investors to hold residential property converted from previous commercial becomes a reality then there is likely to be growing demand for the specialist Sipp providers. As for the longer term trend, for both advisers and their clients, I see the future belonging to the platform providers. Increasingly the Sipp will be a low-cost silo within a wider platform-based wrapper offering. It would be both premature and simplistic to think that the more flexible specialist Sipp offering does not have a sustainable future, but the inescapable demand for functionality and efficiency will mean that the Sipp will increasingly be one of a subset of integrated wrappers based upon a core platform-based solution.

Jonathan Fry is private client director of Jonathan Fry

Key points

Sipps have grown in popularity as an increasing number of investors have chosen to move beyond the constraints of a personal pension plan.

Over the last decade some of the larger insurance companies who have provided a Sipp option have made access available to funds on an open-architecture basis.

If the recent proposal contained in the Budget to consider allowing Sipp investors to hold residential property converted from previous commercial becomes a reality then there is likely to be growing demand for the specialist Sipp providers.