When considering a potential SIPP partner, a broad-brush approach is best avoided, says Lee Halpin, as he highlights three business areas specialist providers might be challenged on over the next 12 months
While thankfully not on the same scale as the Brexit negotiations, self-invested personal pensions (SIPP) operators are facing their own challenges in 2017. Just like the UK’s future economic prosperity, however, the success of SIPP operators could hinge on how successfully – or otherwise – they play their hand over the coming months and years.
Quite rightly, advisers now assess SIPP operators with increased scrutiny. After all, they are looking for a stable, long-term partner that can service not just their client during their lifetime but, potentially, their beneficiaries too. The introduction of a new capital regime for SIPP operators last September, however, continues to call into question both the ability and the appetite for firms to remain in the market in the longer term.
Four SIPP operators have already been identified as not holding sufficient capital under the new regime. As such, these firms are operating on borrowed time. Consider further that market consolidation has led to a 25% reduction in the number of SIPP operators in an 18-month period, highlighting the difficulty facing advisers in distinguishing the committed and capable providers from those less so.
In the extreme, where sufficient care is not taken, this could put the adviser in the unenviable position of having to rehome a SIPP. Ultimately, this could mean additional cost for the client if, for whatever reason, the initial recommendation needs to be reversed. Hardly the foundations for building long-term client relationships …
The diversity of the SIPP market – ranging as it does from the life office colossuses to smaller SIPP specialists – can often further complicate matters. On closer inspection, however, there is a further clear diverging line between those offering SIPPs streamlined with an investment platform and those offering the traditional, service-led, bespoke SIPP.
So, a broad-brush approach when considering a potential SIPP partner is best avoided. Instead, a more precise list of requirements could help shape the research criteria that should be used. A list of preferred platform SIPP providers would, for example, look different in composition to that of a list of preferred property SIPP providers.
In keeping with this focused approach, let’s consider those business areas that specialist SIPP providers might be challenged on over the next 12 months.
Unsurprisingly, financial strength is the first suggestion. This is, typically, the first item on every due diligence checklist. Yet, as 2017 has already shown, SIPP operators must now publish their financial statements and lay bare the impact of having to set aside additional capital reserves in the final quarter of 2016.
It should be easy to differentiate between those who have taken this in their stride and those who have not. There is then the financial strength conundrum – they will never match the financial might of the life office colossuses, so how do they best demonstrate their proposition?
SIPP operators are also likely to be challenged on their service offering. After all, this is essentially what is promised in return for fees charged. But specifically, how do they set themselves apart from those who are destined to over-promise and under-deliver?
Last, but by no means least, is the SIPP operator’s ability to withstand regulatory scrutiny. With the Financial Conduct Authority’s reviews of non-advised drawdown sales and non-workplace pensions market announced, how can providers demonstrate they are in good shape? And how can open, transparent, best-in-class SIPP operators respond to these ongoing challenges?
In terms of financial strength, being able to demonstrate a double-digit pre-tax profit margin is certainly a good starting point. The ability to continue to make capital investment to increase market share and improve the client experience is also a clear demonstration of longer-term commitment to the SIPP market. A position reserved for the fortunate few!
Standard of service
To obtain some comfort on the standard of service being delivered, gauging the views of existing clients offers the best benchmark of where a SIPP provider truly stands. Ideally, this would be in the form of a client survey rather than a few hand-picked testimonials. The absence of such a survey would rightly lead you to question how they monitor client satisfaction.
As a gauge of a SIPP operator’s regulatory compliance and governance, meanwhile, previous interactions with the regulator could be examined. What, for example, was their experience of the third thematic review? How compliance spend has changed over the last few of years can also identify the equivalent of a boat taking on water at an alarming rate.
As the process of the UK withdrawing from the EU gathers pace, so does the ‘survival of the fittest’ race currently taking place among SIPP operators. While advisers have no control over the former, their recommendations will shape the destinies of the latter.
Lee Halpin is technical manager at @SIPP
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