Increased regulatory scrutiny of the self-invested personal pension market over the past 12 months has ensured that suitability has remained a hot topic for financial advisers.
Last year, the Financial Conduct Authority wrote to parliamentary Work & Pensions Select Committee chairperson, Frank Field, to outline the suitability questions that providers must answer before allowing customers access to a Sipp.
As well as reiterating its well-worn ‘treating customers fairly’ mantra, the FCA said that it has been “particularly concerned” with some of the non-standard investments held in Sipps over the past 10 years.
It also had issue with the quality of the due diligence that had been undertaken in some cases, prior to customers opening their Sipp.
So, with the regulator openly stressing its concerns about suitability, how can advisers ensure that their product recommendations are right for their clients?
The most important starting point is to match client investment objectives from the initial fact-find with the Sipp provider’s abilities.
Modern comparison tools are increasingly intricate and can assist advisers seeking to put together a comprehensive provider shortlist.
From here, intermediaries are advised to look more closely at each individual provider.
“Advisers should be thorough in their due diligence, making sure they understand the corporate structure and governance, the ultimate controller, and the financial strength of the provider,” says Wendy Eastwood, managing director of Walker Crips Pensions.
“They should check the FCA register for appropriate permissions and carry out an analysis of the permitted investments list.”
If an adviser’s initial research suggests that a provider’s financial strength, governance and corporate structure look good, they should then look more closely at the history of the provider, say market experts.
Research houses such as Defaqto produce regular reports on the Sipp market, as does FT Adviser’s sister publication Money Management.
“Choosing a Sipp provider with a good track record, competitive fees and the ability to carry out the specific investment objectives of the client is fundamentally important,” says James Lindley, a financial adviser and founder of Castell Wealth Management.
“With a number of poor decisions historically made by some Sipp providers, it is important to choose well-capitalised Sipp providers that don't have a book of ‘dangerous’ investments to clear up.”
Mr Lindley says that Castell has an investment committee that assesses potential Sipp partners on these metrics to ensure that an appropriate level of scrutiny is applied.
“With a recent uptick on the number of Sipp consolidations, clients should ensure they have done thorough due diligence.”
Counting the cost
One vital factor in assessing suitability is cost. Walker Crips’ Ms Eastwood says advisers need to fully understand the charging structure so that their client knows the costs they will have to pay, both now and in the future.