There is an old adage in the computer industry that a standard program is one that is designed to suit everyone but actually suits no one. I have often thought the same about life company managed funds. Many of them represent glorified tracker funds which are probably only right for market conditions on very rare occasions. Even if the spread of assets is perfect, some of these funds can be very expensive and only right for 20 or 30 per cent of their investors at any one time, some requiring greater exposure to equities and others requiring less.
I have thought for many years that the self-invested personal pension could be an answer to this problem. In fact, it could be more than the answer for IFA clients, it could be the start for advisers who want to transfer their business over to a fee basis.
It strikes me that it would not be unreasonable for an IFA to charge a fee for proposing one of the low-cost Sipps that many of the fund supermarket platforms offer. Not only would it attract an initial fee but it would be sensible to structure the arrangement with an annual fee. This would be a good reason to see the client and discover whether any other financial advice was necessary at that time but also to review how much new funding should go into the Sipp and whether it was appropriately invested, based on how many years the client was from retirement.
During the early funding period, mainly equity-based propositions should be pursued. As a saver gets closer to retirement, stockmarket peaks could be used to lock in profits by reallocating the investments to less volatile areas and even cash. For bigger clients, the Sipp could be retained to enable them to benefit from drawdown.
It surprises me that many IFAs think of spurious reasons for not recommending Sipps. Sipps are not suitable for all clients and stakeholder plans or personal pensions all have their place. However, the days of high-cost Sipps are over. Today, Sipps can provide a flexible and low-cost option to allow clients to hold funds that are well within the stakeholder charging criteria. All IFAs who want to claim they are independent and providing whole-of-market advice should be exploring the Sipp as a real alternative to a life company managed fund and a real opportunity to start moving over to fee-based business with good trail commission earnings.
Many IFAs shunned selling Peps in the early years and this gave the deep discounters a golden opportunity. IFAs should not let the same happen with pensions. They should be at the heart of the Sipp revolution. They should not still be automatically pulling out the same old high-cost, inflexible, regular-savings arrangements with application forms 12 pages long. If they do, they may find that the pension shake-up has passed them by.
The advantage of a pension to an IFA is that the sums concerned are much bigger than Peps and Isas. This means that if funds selected offer fund-based commission (renewal, trail or whatever you want to call it), the ongoing income can be worthwhile. More important, within a Sipp it can last for many years.
It strikes me that IFAs are between the devil and the deep blue sea over the use of Sipps. The managed fund route might be viewed as safe but it should never be the only route considered. It is almost certainly not the best choice for many wealthy clients who want control over their retirement planning.
We had a very irate investor who, after examining the benefits of a Sipp, took his entire business away from the IFA that recommended regular savings into a costly, inflexible managed pension plan. The problem is that the IFA had not been in a position to provide real investment advice and had taken the default option when, in all honesty, the client’s pension should have been dealt with by a specialist.
Now that Sipps are readily available, it could be a situation where you are damned if you do and damned if you don’t.
Peter Hargreaves is chief executive of Hargreaves Lansdown