Nick Bladen discusses the importance of segmentation when assessing whether a SIPP is the best solution for your client
At one time a self invested personal pension (SIPP) was considered to be a niche product. It was for the sophisticated investor typically with a large portfolio whose needs couldn't be met by mainstream personal pensions. With October bringing the ability for protected rights to be held in a SIPP, the high level of adviser anticipation confirms the growing popularity of the product. It seems a prudent time to ask - does the rise to fame of the SIPP justify more frequent recommendations or are investors at risk of paying for features and benefits they may not fully utilise?
While the SIPP has been building its glowing reputation, the more traditional personal pension has been undergoing a transformation of its own. It's no longer the inflexible product it once was chaining its investors to a restricted range of in-house managed funds. The emergence of the fund supermarket and the expanding platform market has enabled the personal pension to evolve. You could argue that the investment flexibility available through some of today's platform based pension plans is adequate to meet the majority of client retirement planning needs.
It's not uncommon for platforms to offer hundreds of funds that cover a broad range of asset classes. Providers are aware of the trend toward diversification, choice and investment flexibility and so are keen to continue to expand and develop their offerings. For example, the creation and introduction of risk-rated funds demonstrates the dedication of platform providers in striving to offer varied fund choice as well as a willingness to listen to feedback given by advisers using platforms. As the funds available on the platform are usually accessible via a pension wrapper, the scope for meeting a client's retirement planning needs with a 'fit for purpose' portfolio is broad and continuing to grow.
Fund selection is just one consideration that forms part of the overall planning and it has become more important than ever to ensure that the retirement solution offered to a client is the best fit for their goals and objectives. Multi-manager personal pensions are able to meet most needs, and could still be considered a solution to suit the majority, while the SIPP typically appeals to a smaller and more specific client base because of the sophisticated nature of the investor. With platforms offering tools to help advisers tailor asset allocation and fund selection and investors having access to up to date valuations it's clear that the personal pension now has the potential to satisfy a broad range of investor requirements.
For any adviser firm, there are likely to be a host of very different types of investor in their database. It's also likely that firms will have some method of grouping or segmenting these clients. For some it will be preferable to segment in terms of investment amount, for others perhaps product split offers the most logical way to group clients together. In its platform paper, the Financial Services Authority (FSA) looked at how some adviser firms were selecting platforms for clients. Though there was no standard approach or process identified, the amount invested often appeared to be the driver behind whether or not a client was added to a fund supermarket or a wrap style platform. So segmentation can help ensure that the financial solution (including the type of platform) recommended is the most suitable for the client. Segmenting a client base by the sophistication of the client's investment strategy is another option.
Consider the client who visits an adviser with a straightforward requirement and a modest budget. They know what they want and might say "I've been wondering what I'm going to live on when I retire, perhaps I need a pension?" The adviser will conduct the fact find to get to the bottom of what the client's attitude to risk is, talk about their objectives and goals, consider affordability and make a suitable recommendation. It would be expected in a straightforward scenario such as this for the financial solution to be as straightforward as the client's need. The FSA has made it clear that consumer outcomes need to be the primary focus for advisers going forward. Before the eventual outcome is arrived at, there will be a long period of client expectation and the adviser will need to carefully manage that expectation. The client in this example is not a sophisticated investor and has a straightforward objective - to secure an income in retirement - and so will expect the eventual outcome to be just that. It's likely that a stakeholder or personal pension product is going to be appropriate to meet the clients' needs in this instance.
Generally speaking, the more sophisticated the investor, the more sophisticated the financial solution is likely to be. For example, if the client in our scenario was recommended a SIPP but only requires very limited investment in several funds and intends to purchase an annuity at retirement then a personal pension could offer an appropriate solution. In selecting any wrapper, the client and the adviser should fully focus on suitability not just at point of sale but also by assessing likely future needs. Advisers need to ask to what extent their client will use the flexibility of the wrapper being recommended and how much they will pay to access that flexibility.
Historically a transactional approach, where you simply address the need your client has identified has been an accepted way of giving and receiving advice. However, more and more advisers are starting to look at moving their business model toward a more holistic, big picture approach. It's this more holistic style of advice that is making waves in the financial services industry as it would appear that 'advice' is being defined as this holistic, whole of market approach in the Retail Distribution Review (RDR) interim report which advocates separating 'advice' and 'sales'. In the paper, advisers are only recognised as such if they take into account and give advice on the client's entire financial position. Not all clients will want to consider the wider view of their financial position in detail. They may only be prepared to plan to ensure they have an income in retirement.
Regardless of how the RDR may ultimately change the financial landscape, what will never change is the focus of the adviser on recommending the most suitable product to achieve the best outcome for the client. Undoubtedly, for many investors, a SIPP can be the perfect solution, allowing all the choice and flexibility they demand from an investment. But for other investors it's possible that they will never make use of all the features offered by a SIPP and so their needs may be better met by a personal pension offering a wide and varied fund range.
Though segmentation can give an indication of the right solution for a client, a recommendation will ultimately be shaped by the progression of the fact find. The client's attitude to risk must be identified; the price they are prepared to pay for the recommended solution should be discussed. Their requirements will have to be considered and how the proposed solution can meet these in terms of features and benefits be disclosed. Whether the client ends up in a stakeholder, personal pension or SIPP will depend on which solution can help achieve the best outcome for the client. Furthermore all other solutions that could also provide the desired outcome (i.e. an income in retirement) need to be equally considered.
Long term assessment
Retirement planning is normally viewed as a long term investment and is going to have a far better chance at meeting the client's objectives if it is nurtured and tended to over the years. Expertise allows advisers to interpret portfolio movements and recommendations are made as a result. Keeping an eye on things ensures that attitude to investment risk remains in line with the investment strategy in place which ultimately helps to better manage expectations. Also, Treating Customers Fairly must fundamentally include the stakeholder vs. personal pension vs. SIPPS debate and underlines the need for all advice to ensure that the recommendation of a solution is the appropriate fit and will optimise the outcome for the client.
As both multi-manager personal pensions and SIPPS have become more popular choices for clients investing in a pension, the lines between a SIPP and a personal pension have become blurred. Advice remains a fundamental aspect to ensure the client gets the right recommendation to meet their needs, and crucially not just at the point of recommendation but throughout the entire lifecycle. We all eagerly await the conclusions and recommendations from the FSA's project looking at SIPPs, personal pensions and pension transfers.
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