Ian Naismith looks at how advisers should assess client suitability for a SIPP
The FSA review of pension switching, and the subsequent publication of a suitability assessment template, has highlighted that transfers into SIPPs are going to be firmly under the regulatory spotlight for the foreseeable future. The FSA has concluded that as many as one in six pension transfers could have been through bad advice, with a significantly higher proportion for a minority of adviser firms. This raises the issue of how advisers can establish which clients could benefit from self-investment facilities. Such an assessment may be required in identifying clients needing a discussion about SIPPs and in arriving at appropriate advice for individual clients.
It is fairly straightforward to segment a client bank and find some who may be particularly suited to a SIPP. It is important that they have fairly large amounts invested in a pension already, or at least the ability to accumulate large amounts quickly. They may also have investments spread over different pension arrangements, and so could benefit from consolidating assets and achieving economies of scale. Some of the investments may be in places that would no longer be considered appropriate, such as closed with-profits funds. And they may have shown some willingness to engage in discussions about investments, rather than just looking for a straightforward or very secure option. A fairly quick segmentation could provide a good list of clients to talk to.
When discussing options with an individual client, a more detailed suitability assessment is clearly needed. It may be worth considering the FSA's key reasons for why a transfer is inappropriate, and if none of these applies, that gives an indication of suitability.
The biggest issue the FSA identified with transfers was that extra costs were being incurred without evidence of a benefit to make this worthwhile. Choosing a SIPP instead of a stakeholder pension or fully-insured personal pension may not lead to extra cost for the client, especially if the fund value is large or there is a long period before retirement. In many cases, it appears that advisers have been unable to make a sensible cost comparison, so it is very difficult to judge whether clients are getting good value or not. Unfortunately, many SIPPs are still unable to provide projections on an individual basis, but if a particular provider is being recommended regularly it is very important that an adviser understands how its costs compare with a personal pension for a range of typical client scenarios. If the cost is significantly higher, other factors must present a stronger case for SIPP investment than if there is not much either way in cost.
The next issue identified by the FSA was unsuitable investment choices, and this gets to the heart of SIPP suitability. By their nature, SIPPs are best suited to clients who need more than that offered by standard life office pension funds - bearing in mind that these include an ever-expanding range of options. This does not mean that SIPPs are only for those who are more adventurous investors, because one of the skills of discretionary managers is in de-risking a portfolio where that is appropriate. Whatever the individual circumstances, a SIPP is unlikely to be appropriate where standard insured funds would meet the client's investment needs.
The third area of concern to the FSA was where no process for regular reviews had been put into place following a transfer. That is a very important consideration, because a SIPP should never be bought on the basis that it is a once-and-done transaction. A client who is a suitable candidate for a SIPP will be happy to meet for regular reviews, and of course that will also give the opportunity for wider financial planning.
The last key FSA issue with transfers, was clients giving up valuable benefits in an existing arrangement without good reason. These could be defined benefits in a final salary scheme, or perhaps with-profits guarantees including guaranteed annuity rates. If these are lost on transfer, the client must understand the issues and be prepared to accept any extra risk. Those who value highly the certainty provided by these guarantees may not be well suited to SIPPs.
We have here a basic picture of a typical SIPP investor - someone who is looking for greater investment flexibility, is likely to be willing to pay for the flexibility but needs to understand the cost. The final thing to bear in mind is that SIPPs cover a wide range of products from those that are industrial-strength insurance products with the ability to access specific self-investment options through to niche providers who will offer access to any authorised investment, at a cost. The adviser's job is not simply to identify whether SIPP could be an appropriate option for a client, but where on the spectrum of available SIPPs would be most appropriate.
Start with customer requirements
To ensure creditworthiness assessments compliant
Avoid broad-brush strokes
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