I was asked the question “how do advisers manage more complex investments that are not compatible with platforms?”, I was somehow immediately reminded of ‘Educating Rita’, even though it must be 30 years since I saw the film. Fans will have to excuse any minor inaccuracies – and the fact that I saw the film, not the play – but there is a scene where the English literature professor, played by Michael Caine, set an essay along the lines of “How would you overcome the difficulties of staging a production of Ibsen’s ‘Peer Gynt’?” Rita, played by Julie Walters, gets right to the point. Her entire essay is just five words long: “Do it on the radio.”
Like Michael Caine, Money Management wanted a thorough examination of the issues, not a shoot-from-the-hip “Do it off-platform”, admirably succinct though it may be. An alternative, even glibber (although not quite as pithy) response might be: “If it is not compatible with platforms, why not rule it out? Problem solved!”
We are not going to test our thinking if we leap in with solutions, particularly not if we let the tail wag the dog. The above question arises due to advice models, certain types of investment and their characteristics, and clients themselves. There are some interesting reflections and parallels of issues the bespoke Sipp market is dealing with. Let us start at the beginning.
There is no telling what the next client might bring. The circumstances and needs of many will have similar themes and often not require anything particularly unusual in the solution. It should be relatively efficient to deal with such clients – so much so that they may be more prone to online guidance and self-directed approaches to investments.
Demanding customers
However, some clients will be different. They may bring unusual circumstances or ideas of their own. Dealing with them may be less efficient and more risky. Of course, advisers are not obliged to deal with them but rather than turn down clients or accept lower profit margins, they could potentially charge a premium.
If the advice model is independent, then all investments are potentially in scope, from the bespoke Sipp stalwart commercial property to structured products, term deposits and, more unusually, unquoted shares, non-mainstream funds and other esoteric investments (such as gold or loans).
None of those will frequently arise – some may never – but clients may look for them and advisers may not want (or be able) to rule them out before the start. Of course there are greater risks associated with recommending or allowing such investments than the more routine cash and collectives approach, both initially and ongoing, to ensure they remain suitable.
Whether on- or off-platform, Sipp operators can potentially provide what I might, slightly tongue-in-cheek, refer to as a ‘second line of defence’. Their due diligence on investments can never guarantee non-failure, but nonetheless it should be a valuable check and filter. It should also be noted that, despite three regulator thematic reviews, it still does not go as far as individual suitability – quite rightly, as Sipp operators do not hold the relevant permissions and the distinction between adviser and provider should not be muddied.
It is the characteristics of the more complex investments which can raise issues for both adviser and client. They are often illiquid, indivisible and, arguably the most persistent ‘thorn in the side’, hard to value.
Advisers are running businesses and, as with any business, time is money. Recurring reviews, often annual but perhaps more frequent, are part of the client proposition and that means, among other things, arranging an up-to-date valuation of clients’ assets (particularly at the point of crystallising benefits). So the less time that is required to produce that valuation, the better – the clock is ticking and profitability is at stake.
That makes it pretty clear what one of the basic requirements of Sipp providers is: easy to obtain valuations. The degree of sophistication with which this requirement is met varies. An annual statement is part of the package with any Sipp and often suffices. It may be possible to look up values at any time online – easy when everything is held together on platform, but not that much harder if a Sipp provider’s portal has to be accessed as well. There may even be IT integration, so that automatic data feeds into advisers’ back office systems occur.
Whatever the method, the issue is not so much obtaining the valuation as how assets are valued when they do not float on an exchange. With cash and collectives it is easy, but how do you efficiently value a commercial property each year without commissioning an expensive valuation, or a structured product or an Unregulated Collective Investment Scheme (Ucis) that has a five-year term?
These are issues Sipp operators have long had to deal with and the more they can help, the more practical it becomes to advise on hard-to-value investments. Complex investments are also being looked at afresh by operators and regulator alike, in readiness for the forthcoming capital adequacy regime.
It should be kept in mind that the regulator’s requirements for calculating quarterly valuations of more complex Sipp investments are for the underlying purpose of calculating capital adequacy, not for advice. Nonetheless, the regulator would surely not want to impose massive and expensive duplication by demanding different standards for two complementary purposes.
Two obvious questions to ask are: what does the client want? And what does the adviser need? They do not necessarily match up and so some accommodation may be needed. A sanguine client might think a valuation is never needed, unaware that the regulator demands at least a current, formal valuation at each benefit crystallisation event (BCE). Of course, advisers need to know if client’s plans are on track well before the first BCE, although that does not have to mean a formal valuation.
It helps to have an agreed, in-house policy and it makes sense to align the policy with client expectations and how Sipp operators work. The frequency of valuation for capital adequacy purposes should more than meet adviser and client needs. There may also be room for innovation, provided regulatory requirements are met.
Limited options
The illiquidity, indivisibility and difficulty of valuing more complex investments can also limit the financial planning options that are available. Phased vestings – say, a small monthly tranche of drawdown or uncrystallised funds pension lump sum – can provide a tax-efficient combination of tax-free lump sum and taxable income. However, it would be wrong to assume that is always needed.
Some clients may be willing to trade some flexibility in retirement planning; placing a greater emphasis on an investment that they wish to keep. Others will see the solution as moving out of these more complex investments, prior to retirement.
But for many it will simply never be an issue. Between defined benefit pensions, annuities and Isas, their income needs are taken care of. Their main interest in the pension freedoms, if they have picked up the message, is the opportunity to pass the fund on to their next generation. Like Warren Buffett, their ideal investment time horizon may have become “forever”.
The inherent characteristics of more complex investments can have advantages, too. Unlike the cash and collectives client, they will not be logging on at frequent intervals to check their fund value; there is no point. This is highly significant as such clients can be less demanding and lower cost in some regards. Those invested in collectives need proactive managing and communication. Despite this, I wonder how many logged on during the recent market turmoil, got spooked and contacted their adviser?
Platforms have been a phenomenal success, beyond even the headlines. Not only do they take the lion’s share of new Sipp business, they are not uncommon as part of a broader set of investments in bespoke Sipps.
However, the greatest opportunities to add value in financial advice may lie outside “plain vanilla” investments and there are ways of making complex investments more manageable.
Andy Leggett is head of Sipp business development at Barnett Waddingham
