Decisions around budgets in the SIPPs industry used to be simple, but today’s world is more complicated and difficult than it once was. Accordingly, a lot of care has to be taken to get the best value from expenses: the simple application of a sharp knife is not as effective as it might have been in the past.
The early years of the SIPPs industry were pretty straightforward: no advice was being given so regulatory overheads were low and there were no legacy issues - so costs could be kept low to match low fees.
Increased complexity
Since then the world has changed enormously for SIPP providers. It started with the pensions freedoms introduced by George Osborne, which not only stimulated a boom in sales but also a boom in poor advice from financial advisers and questionable recommendations from investment managers – closely followed by a ratcheting-up of regulatory attention on the sector. Public concern was raised even more by pensions issues at Carillion and British Home Stores, reinforced by regulatory focus on bad advice regarding transfers from defined benefit schemes.
SIPP providers saw themselves purely as responsible gateways to pensions, but have inevitably been caught in the regulatory backwash. As we have written elsewhere, concerns about non-standard investments have escalated - culminating in the recent Berkeley Burke judgement which makes SIPP providers liable for the appropriateness of investments that they played no part in recommending.
So the current world is far more challenging. Regulatory costs have already risen and look certain to continue to increase. Meanwhile prices are still low, and the ability to raise them seems limited by competition and the arrival of new low-cost/low-price entrants who, like Vanguard, offer restricted investment choices.
Impact on costs
The overheads of managing complex relationships have also increased. SIPP providers are now effectively required to vet the investment advice given by financial advisers and investment managers, both historically and continuously into the future. If poor advice has been given, the SIPP company is likely to be the ‘last man standing’ and forced to carry the can.
This has knock-on implications for the pricing and availability of PI insurance, with insurers requiring more intrusive underwriting and, inevitably, raising prices. SIPP firms who want to get insurance at all will have to raise their game in terms of assessing risk exposures – or face the prospects of either enforced self-insurance or business closure. And waiting in the wings are claims management companies who, having made a fortune from PPI, see SIPPs as their next target: simple information requests can escalate costs massively.
On top of all this, day-to-day relationships with regulators need to be actively managed in order to maintain their confidence and limit the risk of expensive remedial action and penalties – and also to keep step with their ever-changing requirements.
Change the cost paradigm
SIPPs still have a strong market proposition in a world where there is higher than ever demand for flexible investments in retirement, but the business paradigm needs to change. A SIPP is a gateway to pensions flexibility, but that gateway can also be misused by unscrupulous players and the SIPP industry needs to respond. Increasing fees to cover the cost of all this looks difficult, but is essential as the wider market gradually adjusts. Firms who ignore the new realities are certain to go under.
Tight control of budgets is a classic business tool that has the merit of simplicity and apparent certainty. But in this new more multifaceted world it can have massive unintended consequences if done crudely. Complex problems and relationships require higher skills and experience, and these cost more. An early investment in them is no longer a luxury – in the modern world it has a rapid pay-back and can even be a life saver.
