Sally Hamilton looks ahead...
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Fasten your seatbelts, 2014 is going to be another bumpy year for the Self Invested Personal Pension sector.
Providers, Financial Planners and Sipp customers are still absorbing the fallout from the thematic review into the market a year ago, when watchdogs found evidence among some Sipp firms of poor compliance and weak systems and control, including over some of the investments held in their plans. Meanwhile, the sector remains in the dark over exactly what will be expected of firms when new capital adequacy rules are announced next month.
With this backdrop, players are being reminded that they need to wake up to the needs and demands of Financial Planners or lose vital business, according to a recent survey carried out by provider Liberty SIPP.
Highlighting that half of planners believed the reputation of Sipp providers had taken a knock in the past year, LibertySIPP's research concludes that clearly the market has some work to do now and into 2014.
Already adverse influences on the market have sparked an exit by some providers, who have sold out to others; such as Origen Investment Services, which offloaded 400 Sipps to Suffolk Life, while RSM Tenon sold its book to Dentons. All of this activity can be unsettling for planners and their clients - and more is predicted in 2014. Fears over whether Sipp providers are profitable enough and have enough cash put aside to support the new capital adequacy rules - which may ask firms to at the very least quadruple their cash in the bank to £20,000 - are starting to make planners much more thorough in their due diligence efforts.
In addition, says Liberty SIPP, they are looking for higher levels of service as well as picking a provider with financial strength and a likelihood of being around for the long term. Plus they want more openness on fees and charges. Despite these pressures, driven by last year's thematic review by the Financial Services Authority (now the Financial Conduct Authority) and the nervousness over whether some providers will cope with the new capital demands, LibertySIPP's research revealed that Sipps are increasingly important to planners.
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John Fox, managing director of Liberty, says that image problems should discourage firms from using tactics that irk planners, such as retaining interest on client cash and using opaque charging. Mr Fox, whose firm advocates fee transparency, said: "The days (of using these) are thankfully numbered." He said: "Within 18 months I hope that the Sipp industry will learn the lessons of the thematic review, adjust to whatever capital adequacy regime we end up with and be able to offer the planning community the transparent, responsive and flexible services it wants.'
Matt Ward, wealth management consultant at Defaqto, which compiled our Sipps tables (see right), said providers were already busy deciding which non-standard assets they will accept and administer in the future as non- standard assets will face the brunt of the new rules. He said: "Some providers may choose not to accept certain non-standard investment types in future, while others might be inclined to increase the level of fee and/or the process required to accept and service specific non- standard investments."
Curtis Banks has already raised fees on commercial property holdings in the Sipps it took over last year from Alliance Trust from £200 to £395 for commercial property, according to a report in the Financial Times.
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And some providers will inevitably decide that enough is enough and escape the market. Mr Ward added: "Some providers have already decided to cease Sipp activities and we have started to witness some of the long-anticipated market consolidation. Early activity has been on the fringes with financial advisers which ran Sipp administration functions as part of their wider proposition now seeking to de-risk their business with the sale of their Sipp book."
Much of the buying activity has been among providers 'cherry-picking"just parts of a Sipp's book. He believes takeover activity is likely to continue next year. But while that kind of business will be relatively brisk, product development has been on the back burner. He said: "The majority of activity has been concentrated at a corporate level and product innovation has been limited."
Hopes had been raised in the last Budget that Sipps would finally be allowed to accept residential property - albeit homes that had been converted from commercial property - but these were dashed recently when the government decided against it.
Mr Ward reckons business activity will be busiest in the development of relationships between Sipps, platforms and discretionary fund management services. He said: "This is aligned to the fact that more advisers are using platforms and outsourced investment solutions." He also suggests there will be pricing pressure on propositions that involve Sipps, platforms and discretionary managers.
Mike Morrison, head of platform marketing at AJ Bell, says his firm certainly plans to focus on upgrading rather than introducing more products. He said: "Rather than introduce further product types over the coming months, we are instead looking to enhance the functionality we currently offer online. Most recently we have introduced bulk dealing and model portfolio construction and we continually add to our investment range; with additional investment trusts and exchange traded funds most recently being added to our regular investment range."
Patrick Connolly CFPCM of firm Chase de Vere, says that he believes the further anticipated consolidation in the market could be a positive development - so long as it improves the quality of offerings. He added: "But the danger is that we see a reduction in the number of providers to the extent that it detrimentally limits adviser and client choice."
Chase de Vere typically recommends third party providers, which Mr Connolly says the firm's technical teams research thoroughly first.
It also offers its own Sipp product for clients looking to purchase commercial property or land or who want to benefit from the full range of allowable Sipp options. He said: "Our current capital adequacy reserves are greater than those expected under the proposed regime and we don't envisage any problems for our Sipp complying with the new rules."
Adrian Shandley, CFPCM of Financial Planner Premier Wealth Management, is concerned that the looming changes will be "counter- productive." He said: "The will inevitably play into the hands of larger providers. It will also probably lead to an increase in fees for clients, but then every change in regulation or legislation always leads to one person paying - that being the end user client." Mr Shandley believes that a network could develop, allowing an umbrella organisation to provide the capital back up to providers, reducing the burden on smaller players. Mr Shandley added that due diligence on Sipps can be a challenge. He said: "It's a tightrope we all walk, you only know they are no good when it's too late. We tend to get our clients involved in the process of selecting a provider and we often leave the end decision to them. We are paid for our advice, not for the selection of the provider and so it is important to get the client involved at an early point."
Mr Morrison said: "For me the biggest issue is not the number of Sipp operators who leave the space, but the quality of the operators left behind. Ensuring that we minimise any risk of consumer detriment is vital."
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He predicted that planners will put capital adequacy high on their list of due diligence activities. Mr Morrison said: "They should spend time addressing how to review the Sipp operators they use and ensure their processes are watertight, looking specifically at (the new) capital adequacy requirements."
John Moret - known as 'Mr Sipp' in the industry for his in-depth knowledge of the wrapper - runs independent consultancy MoretoSipps. He believes that the looming capital adequacy changes are not the main drivers of consolidation. He said: "I believe the merger and acquisition activity to date would have happened regardless of any capital adequacy proposals. However, I am convinced we will see even greater activity in this area as there is an oversupply of providers, although the changes will amplify it."
He said there had been "big changes" in the last year, with "an increasing divergence between the platforms and other large providers and the rest of the market." Mr Moret added: "I think we'll see this develop further in 2014 as providers large and small grapple to cope with the new capital adequacy rules along with other areas of increasing regulatory focus such as rebates and interest margins. This will lead to further increases in costs and erosion of profit margins leading more providers to look at how they can reduce costs, such as through better use of technology. I think we will see prices rise as they have been pretty static for some years."
It is his prediction that 2014 is going to be the "year of the platform."
He said: "We will continue to see them strengthening their grip on the Sipp market with increasingly high proportions of new business being placed via a platform.
"I don't see a lot of product development - this is now a mature market - although depending on what comes out from the FCA on capital adequacy, we could see some products emerge that might just cater for specialist investments.
"Where I do think we will see development is in the 'at retirement' market, with increasing
focus on decumulation options. Given that around 20 per cent of Sipps are already vested at least partially using drawdown, it's just a matter of time before the other 80 per cent work their way through to vesting."
The 'at and post retirement' market will be something that planners should be paying more attention to, Mr Moret advised. He said: "They need to look at how they cater for this market, particularly pensions and drawdown options -and not just with Sipps. I think there will be
increasing demand for advice in this area from workplace schemes, from employers and their corporate advisers. There could be some big opportunities here."
Mr Shandley also expected platforms to dominate. He said: "For the clients that stick mostly to mainstream investments, we try to move them to a wrapper, or a platform based Sipp, which is generally much cheaper. Equally, the costs of trading investments on a platform or wrapper based Sipp are far lower.'