Learning to love due diligence
What due diligence questions should advisers be asking of SIPP providers? At this key point for the market, Lee Halpin, technical manager, @SIPP, says the firm’s new guide, produced by the lang cat, has been designed to help
While ‘we’re learning to love due diligence’ is not a phrase we might hear advisers readily volunteer, we wanted to show how this could be done with our new guide in association with the lang cat.
But why produce a guide now you might ask? Firstly, and justifiably so, the SIPP market is currently facing a greater degree of scrutiny than it ever has.
There is the ongoing polarisation between platform SIPP and full range SIPP providers. 2017 has already seen one of the larger SIPP providers (50,000+ SIPPs under administration) announce that non-standard assets are no longer for them. And this is just one example in a trend of narrowing provider propositions, and a further reduction in the sub-set of specialist SIPP providers.
Add to this the backdrop of a market shrinking at a rate of knots. From the start of 2015 to just over 12 months later a quarter of the market players have exited. Continued consolidation, while not at the same rate, is certainly not out of the question during 2017 either.
Advisers, when making a product recommendation, naturally want to avoid product providers who may not be committed to the market (and the same could probably be said for providers who may not be committed to the depth of their proposition).
It is no coincidence that both these market trends have emerged at a time when the regulator has not only increased the capital reserves SIPP providers must hold, but also, imposed a capital reserve surcharge where a SIPP providers permits non-standard assets. This has inevitably brought the financial strength of SIPP providers sharply into focus.
But a financial strength list ranking life offices at the top and the specialist SIPP providers below definitely falls into the stating the obvious camp rather than any insightful analysis. And when you consider that the majority of specialist SIPP providers do not file plc style financial statements, you can’t help but wonder how some of these ‘rankings’ are determined.
Crucially, this is an area where advisers have an advantage. Rather than just being limited to historic, often limited, financial statements, advisers are best placed to directly query a SIPP provider’s current financial performance as well as its plans. Advisers can reasonably expect answers to questions such as ‘What is your current SIPP growth rate?’, and ‘How does this compare with your peers?’ Along with questions about capital such as ‘What capital investments have you made in your business? It is exactly these nuances and level of detail, in combination with sound historic financial performance, which will provide a more balanced way of assessing financial strength.
This brings me neatly on to the second motivation behind our new guide and a full disclosure. Along with many others in the SIPP market, we have found ourselves questioning the validity of some of the paid for SIPP provider analysis. Not only limited in scope, but also rather one dimensional it typically paints a limited picture of the market by choosing to focus on financial strength, product charges or product features in isolation. This is further compounded by advisers being expected to pay hundreds (or sometimes thousands) of pounds for a “solution” (did I mention that our guide is free) which at best is limited in helping them with their due diligence process.
Unlike the process for selecting a platform, the regulator has not issued any guidance for selecting a SIPP provider. There are however, as you would imagine similarities in terms of what to consider. The platform market regulatory guidance outlines nine areas to consider. However, the quandary of which precise facets of a SIPP provider should be assessed has been left to the adviser to figure out.
Added to this is the potential danger, that to which some advisers could fall foul, of simply relying on a third party’s analysis. Let’s not forget the classic, although admittedly extreme, example of Lehman Brothers maintaining their “A” credit rating until six days before their collapse.
What questions should you be asking?
But rather than get mired in frustration, we decided to put our money where our mouth was and, in partnership with the lang cat, outline what advisers should be asking of providers and what SIPP providers, in turn, should be sharing.
First and foremost, our guide suggests (a more than one dimensional) best practice framework for adviser due diligence, along with some practical advice in terms of do’s and don’ts. While we suggested areas we felt were particularly relevant for scrutiny, from a SIPP provider’s perspective, we passed over full editorial control of the question set to the lang cat, who assumed the role of an advisory firm.
In addition, the lang cat was also charged with putting our business under the spotlight against those suggested criteria. If you are familiar with the lang cat platform guides, you will appreciate that they don’t pull any punches. Instead, they call it as they see it, and having been around for long enough they will quickly give any answer which doesn’t meet their expectations short shrift.
While this microscopic approach left us with nowhere to hide, we were determined that the guide would offer something different and stand apart from the marketing and PR driven material that exists. Ultimately, we were even more determined to deliver a tool that could help in providing advisers with a consistent assessment of the SIPP market.
Advisers will determine if this objective has been achieved. In the interim, we are more than pleased with the result which we think reflects the time and effort put into creating the guide (and not just by us).
Even if we do not manage to get advisers to learn to love due diligence, we’ll happily settle for our guide encouraging advisers to embrace SIPP due diligence.
The @SIPP guide, How I learned to stop worrying and love due diligence can be downloaded for free at http://www.atsipp.co.uk/about-us/due-diligence/