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.
The most important starting point is to match client investment objectives from the initial fact-find with the Sipp provider’s abilitiesIt 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?
Objective matching
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.
“Transparency around fees is paramount,” she says. “Clients should check if the charging structure is a flat annual fee, or a percentage of the invested amount, to find a solution that works best for them.
“Sipps should be clear about any one-off charges. Some schemes charge a one-off fee each time an investment is made. Clients should also keep an eye out for extra charges that apply for drawing benefits or transferring funds.”
Tom Francis, an investment adviser at Wealthsimple, agrees, stressing that choosing the wrong product could cause a client to suffer significant comparative loss, by the time they reach retirement.
“Cost is critical when it comes to retirement planning,” he says.
“Fees compounded over the long run can make a huge dent in people’s retirement savings if they aren't careful. Advisers should make sure their clients understand what they will be paying over the long term.
“Most importantly advisers should make sure that clients are matched to the right portfolio, or mix of funds, depending on their long term financial goals.”
Not for everyone
Sipps, by their very nature, are not suitable for every client. When these products first came onto the market, it was initially thought that such accounts would only be suitable for those with funds exceeding £100,000.
Since then, however, products billed as “low-cost Sipps” have emerged, but advisers should consider whether there is a more appropriate personal pension available.
“As with any financial product, the fees, structure and investment strategies mean that every provider needs close scrutiny before any recommendation is made to the client.
“Typically, we find that those clients most suitable for a Sipp are those individuals who wish to accumulate pension wealth, but are not readily catered for via an employer-sponsored pension scheme,” says Anthony Carty, group financial planning and business development director at the Clifton Asset Management Group.
“We also find that those who may wish to consolidate various historic pension arrangements into one easy to administer environment are suitable.”
