Choosing a Sipp can be tricky enough, but choosing one to recommend for property is particularly so. There is no common format for due diligence – any provider will tell you that no two questionnaires are the same. Various surveys and adviser research tools help narrow the market, especially by product features. Then, of course, there is the question of cost – one many clients are quick to ask.
Finding the ‘cheapest’ is a fool’s errand. Life is sufficiently unpredictable to scupper any model. Besides, Oscar Wilde warned us all about knowing “the price of everything and the value of nothing”. Nonetheless, an assessment of value includes an understanding of price.
A lot of the work involved in running non-property Sipps is covered by fixed fees. Though illustrations do not enable cost comparison due to regulation shunning standard growth (or cost) assumptions, some third parties have built tools intended to do projections on a like-for-like basis. They still cannot guarantee you the cheapest Sipp but they should give a good indicator of relative cost – at least if your time horizon is reasonably accurate. (As time passes, the relative competitiveness of recurring fees matters more than initial ones.)
Property Sipps have had to sit somewhat outside the scope of such efforts. Providers generally dealt with the variability of commercial property cases by charging time-based fees; solicitors did likewise. The cost of a case was therefore likely to depend on a combination of the nature of the property, as seen in Table 1, the experience and skill of the provider (and solicitor) and their hourly rate. Often, this was true not just for initial purchase-related fees but also ongoing charges. In predicting costs, the above factors needed weighing up, although there was no precise, mathematical formula for doing so.
The drawback of time-based fees, particularly for clients who are not experienced property investors, is that they create uncertainty as to cost – and there is a weighty body of psychological research showing most of us dislike uncertainty. It can be partly tackled by the client providing details of the case in advance and estimates being given in return but these inevitably have to be caveated. Some clients still fear they are writing a blank cheque.
Doubtless
A growing band of Sipp providers have responded by developing fixed-price options. These vary in terms of qualifying criteria (based on the features of the case) and conditions (for example, obligatory panels of third parties which may include solicitors, lenders, surveyors, property managers and insurers, depending on the provider).
The first step is to consider whether these fixed-price options meet the client’s needs. Some clients may find certain limitations unacceptable – there are advantages to using a local surveyor’s local knowledge, say, or the ‘best’ mortgage offer on the market may not be available from a lending panel. The biggest factor may be the solicitor: the client may wish to use their own. With hindsight, this sometimes proves to be a mistake where the solicitor is unfamiliar with the peculiarities of a Sipp buying a commercial property or the provider’s own specific way of doing things.
In fact, understanding the provider’s perspective is very useful in weighing up when to encourage a client down the time-cost route and when to suggest using a fixed-fee package.
Fixed fees pass uncertainties back to the Sipp provider. This is potentially compounded by fixed fees acting as a magnet to more complex cases.
Of course, providers have advantages in dealing with this. There is an information asymmetry whereby the client typically only buys one property whereas some providers have bought thousands. This is invaluable in setting fees. And while the provider will want a margin of comfort to cover the unforeseen, it does not have to make a profit from every property bought through its fixed-price option in order to make a profit overall. It is a situation not unlike that with insurers, longevity estimates and the annuity pool.
Complicated, clearly
You might think a fixed-fee packaged solution for Sipp property gives the opportunity to bundle fees for simplicity. However, in practice the effect is the opposite as each extra element – a mortgage, VAT, multiple owners, multiple tenants and so on – adds to the cost. They would all need building in to a bundled fee or the provider would attract too many loss-making cases. So fixed-fee options are always likely to be more complicated compared to time-cost, which can expand as much or as little as needed, but offer the reassurance of definitive amounts, which time-cost cannot.
Of course, the actual purchase price and stamp duty aside, the biggest cost of purchase is usually not the Sipp provider’s fees but the solicitor’s. They face very similar considerations to Sipp providers. A small but growing number, likely with a dedicated team experienced in Sipp (and Ssas) property cases, have developed fixed-fee offerings of their own in response to the very human aversion to uncertainty over their fees. In setting the level of these, they find themselves in a position akin to Sipp providers and are likely to have a relatively complicated but explicit menu of fees.
This potentially opens up the possibility of ‘mixing and matching’. For instance, the provider could allow the use of a solicitor who operates on a fixed-fee basis, providing certainty over one of the main costs of purchase, in conjunction with a more ‘open-architecture’, time-cost approach to purchase and ongoing administration fees. This might mean, for example, the client doing their own rent collection to reduce fees but, say, using a block insurance policy, benefiting from the Sipp provider’s buying power. The exact blend would depend on the client’s needs and what the market offers.
Based on a sample of providers known for Sipp property that we used for research, we found clear divisions in approach with a near even split between fixed-fees and time-cost. If indicative of the whole market, this may represent a missed opportunity.
Modelling fees
Using three different property scenarios we deemed to be ‘simple’, ‘average’ or ‘complex’ (see Box 1 for explanation) based on their characteristics, we found the percentage difference between the lowest cost and highest cost providers working on a fixed-fee basis in our sample group grew with the complexity, with a difference of over 100 per cent for the ‘complex’ scenario. While sale costs were much lower, the degree of difference was greater.
Our research also examined our own time-sheets for over 100 completed Sipp property cases, yielding a trove of stats such as average fees for different property-related work, the standard deviations of time spent and where time gets written off. Unsurprisingly, property purchase is the biggest single area of work and the one where one standard deviation translates into the largest number of hours (crudely speaking, two thirds of cases will fall within one standard deviation and 19 out of 20 within two standard deviations). Property sale, by contrast, took significantly less time and was less variable.
Property is, of course, a long-term investment so ongoing costs are likely to be more important in the end. Our modelling again used the three, increasingly complex scenarios. Contrary to what you might expect, this time we found significantly less variation in fixed fees with the exception of one outlier in the complex scenario, which was over 60 per cent more expensive than the average.
Without hindsight
There is no neat answer to the fixed-fee versus time-cost conundrum, nor a simple formula for comparing fees. However, our research suggests advisers at least need to filter out the more expensive options. Fixed-fees offer a form of guarantee, but guarantees cost money. Some clients can afford, and are willing, to take a risk – and the simpler the case, the lower the hurdle. Others are made of different mental stuff. Fixed fees offer the risk-averse, certainty-seekers another advantage: protection from regret. Those opting for fixed fees will never know whether time-cost would have been cheaper.
Andy Leggett, head of Sipp business development, Barnett Waddingham
