Stewart on SIPPs post-RDR

In the beginning, nearly 21 years ago, Self Invested Personal Pensions (SIPPs) were a niche product aimed at mainly high net worth individuals with specific and often complex investment requirements. Flexibility and quality of administration were top priorities for buyers.

SIPPs, if not exactly mass market, have certainly entered the mainstream financial planning consciousness. The dawn of the low-cost variants and insurance company SIPPs may have done nothing to add extra functionality, but has certainly raised awareness and driven sales to a wider range of clients. The response to this broader appeal has been regulation of SIPP operators and increased scrutiny by the watchdog by means of tactics such as thematic reviews.

Next up is the Retail Distribution Review (RDR), the government’s answer to the problem of how to stop independent financial advisers from being rewarded by providers when their first responsibility should be to the client. By the end of 2012, IFAs will need to have reached higher benchmark qualifications and remuneration will need to be agreed with each client.

‘True’ SIPPs – that is, those that seek to give maximum investment flexibility – have mostly evolved so that the fee charged by the provider for administering the scheme is kept separate from the cost of buying or holding the assets within the scheme. This makes true SIPPs ahead of their time in terms of the forthcoming RDR.

The key principle is that the scheme member knows exactly how much they are paying to the SIPP provider for the service received. The fee is separate from the amount they pay their adviser, or any other expertise they bring in, such as stockbrokers, solicitors or fund managers.

Different types of SIPP

Low cost SIPP providers tend to operate a similar, but more restricted fee menu to reflect the fact they offer a more restricted range of investments, perhaps just those that can be bought through a stockbroker or platform. RDR will probably pass by many of these providers, on the basis that they are often truly member-directed with no adviser remuneration needed because there is no adviser.

It is in the insured and hybrid world that matters are likely to become more complicated. Assuming no major changes to what we know about RDR – and the issue seems far from settled given recent events in the House of Commons – it will no longer be possible for the provider to pay commission to the adviser for selling the SIPP.

This has been standard payment practice for many years by insurance companies but has always made advisers vulnerable to allegations of provider bias – how can the adviser call the tune when the provider controls the purse strings and is paying without knowing how much work has been done? The RDR is designed to remove any adviser influence by forcing the adviser and client to agree a payment for the work undertaken.

This can be paid either as a fee or as a direct payment from the product. Where payments are being made from the product the adviser must show evidence of an ongoing service. It is worth mentioning that the RDR rules will only apply to sales after the new rules come into effect so it will have no impact on existing, commission-paying products.

Lack of transparency

Clients with insurance SIPPs also face the problem of what they are paying for. On one level, bundling charges into one makes life easy. On another, it personifies a total lack of transparency. It becomes impossible to compare charges for individual activities such as holding the funds and administering the SIPP (and paying the adviser).

There are parallels here with the holiday market – package holidays ruled until the dawn of the internet age made us realise it was often cheaper to buy each individual component separately. This is particularly true when trying to add a bespoke or non-standard item.

As well as imposing higher qualifications and the commission ban, the RDR will bring onerous new requirements on advisers to be able to demonstrate the suitability and independence of the advice given. Transparent menus and unbundled charges give true SIPPs an advantage in helping advisers provide the proof they will need, while also being ‘future proofed’ to enable clients’ needs to continue to be met within a single wrapper and provider as their circumstances change throughout the working and retirement years.