The market in alternative investments is still immature and SIPP investors need to exercise care
There has been a marked increase in consumers choosing to purchase alternative investments with their SIPPs over the last three years.
With an average SIPP size of £70,000 to £80,000 and over 800,000 SIPP investors out there (and the number is growing at 20 per cent to 30 per cent a year), this represents a significant new and enticing market for advisers.
It is not just the growth in SIPPs driving this. The flow of dreadful macro-economic news has shaken consumers’ faith in traditional stock market-based investments just at a time when many people are realising that their pension provision may be inadequate. For these reasons investors are increasingly considering putting their wealth into directly held alternative investments, tangible assets that promise uncorrelated and often high returns. In fact in some cases, alternatives are directly responsible for driving the growth in SIPPs as investors become more aware of their benefits.
Some pension conversion specialists are witness to a 69 per cent increase in clients transferring their preserved or under-performing personal pensions into a SIPP. As part of the advised process they must establish why clients wish to go down the SIPP route – the desire to get into alternatives is one of the most often cited reasons, alongside under performance and consolidation.
However, the market in alternative investments is still immature. There are many ‘me too’ opportunistic products on offer that range from investments that have been rather naively put together to outright scams. In 2007 there were around 50 directly held alternative investments being distributed that could be held within a SIPP – today there are nearly 300 and a good number of them are poor quality.
Many investments offered to specialists are rejected, and some are completely unsuited to the retail SIPP market and should never form part of a robust retirement plan. It would be completely irresponsible of us to assist in bringing them to market. Consequently some advisers still view alternatives with suspicion and view their non-regulated status as a risk for both them and their clients.
Steps have been taken to try and improve this situation, for example the FSA has been very publicly clamping down on advisers who have been promoting UCIS investments to the wrong audience and significantly, SIPP providers have now been asked to take more responsibility for product governance. It is now no longer acceptable to just verify if an asset is SIPP acceptable – SIPP providers now have to undertake their own due diligence over an increasingly exotic range of investments.
Over the last couple of years the demand placed on SIPP operators has grown immensely and some new products aim to provide in depth analysis on alternative investments on behalf of SIPP operators so that there is at least some form of product governance audit trail.
Further security can be built into alternatives through the use of trustee or bond structures. Under these types of structures the product provider submits to having investor monies paid into a trustee client account and only released to the provider upon adherence to strict criteria as laid out in the Investment Prospectus.
Similarly, all of the revenues the asset generates are paid directly to the trustee with investor returns extracted before the balance is forwarded onto the provider. The Trustee will also typically take a first charge over the project and its assets so that, in the event of an unresolved default, the project can be liquidated with the investors reimbursed from the proceeds.
Finally, alternatives can really resonate with consumers. Clients “get” the concept of investing in farmland to feed an ever growing global population or in green oil to help meet the demand for clean, renewable sources of energy – it is a much more engaging conversation with clients when you can talk about these concepts instead of “balanced managed funds” or the usual bonds and Isas.
Clients ‘get’ the concept of investing in farmland to feed an ever growing global population or in green oil.
The rise of the SIPP is creating liquid investors – or those that can be made liquid when their frozen pensions are consolidated – and with the widely predicted growth in SIPP numbers the demand for ‘alternatives’ as a hedge against traditional pension investment offerings will no doubt continue. Advisers should take notice and consider if these are something they would like to include in their offering to clients.
Peter Robinson is a former director of Intelligent Partnership
This article was originally published in FT Advisor