What are the benefits of real SIPPs?

Tony Hales of Stadia Trustees examines the merits of different types of SIPPs.

The goliaths of the SIPP industry are mainly owned by large UK or international listed companies. They have other operations such as stockbroking, fund management and banking so it is impossible for the main board of directors to put their SIPP customers at the top of the list. The SIPP clients of one large company have seen the company ownership pass from British, to Spanish, to Irish and must be wondering “where next?”.

Most large providers limit their SIPP choices to ‘mainstream investments’ e.g. funds managed by themselves or other companies on their platform. The FTSE 100 is over 20% lower today than nearly eleven years ago in December 1999, and the journey in between has been a nightmare roller coaster ride for many. Clients are becoming exhausted at hearing the same old story from their advisers that the market has gone down by 20% but the fund we have chosen for you has outperformed the market and is only down by 15%.

Many investors have lost faith in our regulation and consumer protection and do not understand why the major institutions have been allowed to escape with such financial mismanagement.
Many of these investors are now looking more closely at what SIPPs can do to help them build up a retirement pot rather than just sticking to funds investing in stocks and shares and the increasing volatility that goes with such a strategy.

Quite simply, HM Revenue & Customs allow a SIPP to invest in anything. However, if the investment is in residential property or a tangible moveable asset, such as machinery, fine wine, or works of art then it is deemed taxable property. In other words if it gives you pleasure or you can live in it, you can’t put it in a SIPP!

Impartial advice

Without doubt the Retail Distribution Review (RDR) is helping massively. Those advisers who are working in the spirit of RDR no longer rely on initial and trail commission. They are not waiting until the deadline of 2012 and their business models reflect this with adviser charging to the SIPP for both initial and ongoing advice.

This is allowing advisers to give much better impartial advice, and they can now better help those clients who do not want to be limited to just mainstream investments. For example, many advisers can competently explain the principles of efficient portfolio construction and how alternative investments can add greater value and diversification alongside fixed interest and shares.

A well constructed efficient portfolio gives the lowest possible level of risk for a desired level of expected return and lays on the efficient frontier which can graphically describe the relationship between the return and the risk or volatility involved.

Many ordinary SIPP providers will say that Real SIPPs are expensive and should only be offered to high net worth clients. This is simply not true. Most Real SIPP providers, such as Stadia Trustees, have a single investment option which can include a low cost share dealing account.

Virtually every managed fund or unit trust can now be replicated by using exchange traded funds (ETFs). So this means that a SIPP with fund of £40,000 with, say, four ETFs can cost less than 1% p.a. and that for a SIPP with a fund of £100,000 the cost would be less than 0.4% p.a. including all SIPP charges, VAT at the new 20% rate, and share dealing account charges.

Adviser charging

Clients have no objection to adviser charging when they have previously been paying £1,500 in annual management charges on £100,000 of collective investments and are told it can all be done for £400 with an equally, or even better, constructed efficient portfolio. This is leading to true professionalism and those advisers who don’t convey this to their clients sooner rather than later will loose out to new ones that will.

At the other end of the scale we recently received a SIPP application investing 100% in a cash deposit with the Ipswich Building Society. Not unusual for a SIPP you may say, but this was not received direct but through an independent financial adviser on an adviser charging basis.

Without the worry of whether commission can be earned or not, IFAs are now free to construct solutions with potentially higher total returns and more appropriate to the levels of volatility or risk their clients are willing to accept.

With this enormous sea change in what clients want in their SIPPs for their retirement and the RDR Adviser’s ability to increase consumer awareness of what is available in the Real SIPP space, combined with better risk management there is one other important matter to consider, namely “due diligence”.

Real SIPPs can invest in unlisted securities. In many cases the SIPP member has far more knowledge about the business than she, or he, may have about the stockmarket, but a level of due diligence is still needed as a SIPP provider. Likewise there are many more Unregulated Collective Investments (UCISs) being launched. It is only natural that there is a big market developing in this space because of the 20% or more loss in the FTSE 100 since 1999 and the astonishing levels of volatility since then.

Many are UCISs are SIPPable in that they are not taxable property as defined by HM Revenue & Customs. Many also offer very good investment opportunities which investors feel comfortable with such as royalties from oil production or plots in land banks. But there some UCISs which may not be what they say on the can.

Real SIPP trustees and administrators should at least be aware of how UCISs can be promoted to investment professionals, certified high net worth individuals and certified sophisticated investors as well as the eight categories of investors given in COB 4.12. All SIPP applications for UCISs that are received direct or through an IFA should have been promoted on this basis.

It is hard to lay down any set format or principles for undertaking due diligence, especially when some SIPP providers take completely different approaches. As an example I have come across a football fund accepted by one SIPP provider as a genuinely diverse commercial vehicle but rejected by another as an investment in tangible moveable property. I know of a property fund rejected because it did not use the panel valuers or solicitors.

Added value

Some real SIPP providers are offering even more value. At Stadia Trustees, for example, we have introduced an alternative investment platform, where each alternative investment will have had the due diligence undertaken by me as a Chartered Fellow of the Chartered Institute for Securities and Investment (CISI). This is not intended to endorse suitability or investment performance but simply to give a degree of comfort that an appropriate level of due diligence has been carried out.

Those IFAs already working in the spirit of the RDR are finding a whole new world with clients appreciative of better consumer awareness and improved levels of risk management. All these benefits plus more choice and lower costs are just some of the many benefits to be found working with a ‘David’ rather than a ‘Goliath’.

Tony Hales of Stadia Trustees