Since the new capital adequacy rules came in, advisers will have to probe their clients' Sipp providers a little deeper when it comes to non-standard assets.
According to Mike Morrison, head of platform technical for AJ Bell, “advisers need to know the Sipp company they are using has sufficient legacy capital and a sustainable business model to ensure this continues for the long term.”
But on top of this, they will also need to know the “company’s attitude to non-standard investments and how this [access to non-standard assets] fits with the sustainability of the provider’s business model”, Mr Morrison adds.
Moreover, clients may be in legacy non-standard assets, or assets which have been reclassified by the Financial Conduct Authority, and they may not be aware how the provider’s response to the capital adequacy rules may have affected their ability to continue to invest or trade in such assets.
In many cases, this might equate to higher administration/trading costs, but for others it could lead to problems if they wish to continue to invest in non-standard assets, as some providers may have restricted their offering.
“Advisers need to be aware of the possibility the assets may not be accepted by the Sipp provider, as well as the possibility of increased costs, which may not be immediately transparent.
“We would recommend all IFAs look at the fine print covering any increase in costs if a standard asset becomes non-standard”, says Stewart Davies, chief executive of Momentum Pensions.
While some providers may refrain from offering non-standard investments, others may specialise in these, says Chris Jones, founder of the Rock Consultancy.
Provided the adviser has dutifully assessed the suitability of a given non-standard investment, these providers could take on such an investment – although he warns prices will reflect the additional cost involved.
Elaine Turtle, director of DP Pensions, comments: “It is really important advisers are aware that, in the new capital adequacy landscape, most Sipp providers will need to complete even more due diligence on the investments they accept and will have strict criteria that has to be met.”
Due diligence is of course important – as the recent furore over such non-standard investments as some property investments has highlighted.
Further warning bells should sound if the Sipp operator simply buys into whatever is being touted by non-standard investment providers. For example, Dentons was approached some months ago by an investment fund purporting to give investors a great return from agricultural land in Eastern Europe.
When the team queried this with the fund manager, the land was discovered to be near Chernobyl. “Don’t worry”, the manager told the team at Dentons. “At the time [of the explosion in 1986] the wind was blowing in the other direction.” Needless to say the investment proposition was not included in Dentons’ Sipp offerings.