Making the right choice

Tony Hales at Stadia Trustees says IFAs are vital for providing the right advice on investment suitability

To the vast majority of people who have been saving hard for their retirement it is not surprising that mainstream investments are losing their appeal.

Since the start of the century it has been a rollercoaster ride for anyone in a typical equity fund.

In December 1999 the FTSE closed just short of 7000. Recently it rose 5% to the 6000 level but this still leaves many long term investors 15% worse off.

During the last eleven years there have been falls greater than 20% in 2002 and 2008. Only a fool would stand up and say there will never be another stock market fall of 20% or more.

Everyone knows it’s going to happen. It is not if it’s when!

Alongside this background there have been considerable demands for the limited supply of the world’s commodities primarily due to the insatiable economic expansion of China and other countries combined with a growing world population.

Natural resources, minerals, agriculture, forestry, fishing and petroleum, in particular, have all been particularly buoyant in the commodities markets and gold has once again become the much sought after safe haven for investors as a result of weaknesses in currencies.

Even to an unsophisticated investor it appears to make sense to be in commodities.

Most of the mainstream investment providers have become acutely aware of this trend and set up their own multi asset or specialised funds in an attempt to stop the ever increasing flow away from the mainstream.

However, they have competition and it is getting stronger day by day with the increasing number of unregulated collective investment schemes (UCIS).

In addition there are many products that do not come within the Financial Services and Markets Act 2000 but they are acceptable by HMRC for pensions.

Many existing plan holders have been particularly targeted and have turned to SIPPs as a place for their money so that they can get direct exposure to non-stock market investments.

In theory, investing in oil, forestry, wheat farmland, biofuel cultivation and overseas commercial land developments seems sensible for medium to long term retirement planning but these are sophisticated investments and they do require a customer to make a sophisticated decision regardless of whether the underlying investment is regulated or not.

Impartial advice

For SIPP providers it is a challenging time. New business from IFAs is wonderful.

The trustees know that there is a high level of professionalism and in the spirit of the RDR their SIPP members are being invoiced for the advice they receive on a totally impartial basis.

Sometimes, however, potential SIPP members have responded to direct marketing campaigns extolling the virtues of moving away from lacklustre performing and volatile stock market investments to this new wave of direct investments.

That is not to say that there is not a degree of professionalism among such providers. Many schemes are well thought out, with experienced technical support staff and do aim to give a respectable return as long as the right conditions prevail.

Often the downside risk is infinitely lower than with equities or other mainstream investments.

The question is“Do investors know exactly what they are doing?” In some cases the answer is “No” and it is very difficult for SIPP trustees to monitor and control such applications without putting in systems and controls to ensure that all clients are given the opportunity to receive independent financial advice, if they come direct and/or wish to invest in an unregulated investment product.

The systems and controls at Stadia Trustees are now in place to ensure that every new client has access to IFA and is aware of the level of risk involved and how this may affect returns.

If the investment may not be easily sold is the member aware of the effect this could have on crystallisation.

Also if the investment does not receive the protection of the Financial Services Compensation Scheme any legal costs have to be at the member’s expense if making a claim.

Also, the member should be made aware whether or not the investment is a genuine diverse commercial vehicle. This list is not exhaustive.

Stadia Trustees also undertakes due diligence at its own expense to visit some of the underlying investments to make sure that they are acceptable for a SIPP and that they are not scams or Ponzi schemes.

This due diligence also looks at the depth and experience of the management team on the ground to deliver the investment returns.

Until the range of FSA regulated investment is the same as HMRC permitted investments, the help of the IFA is needed to give sophisticated advice to potential investors as to suitability and investment returns.

By working together we can all help many retirement savers make wiser choices.