Taking a Turn
Unsurprisingly SIPP fees and their transparency interest me and are something that I will talk about on a daily basis - rock and roll lifestyle choice I know. Our recent newsletter looked at the implications of the RDR on SIPP fees which is one issue but the conversations I have will tend to be driven by a variety of factors; whether down to the ever increasing consumer awareness of SIPP products and fees, ongoing FSA noises about SIPP suitability or IFA's simply wanting the best deal for their clients.
What is less clear and perhaps needs some thought is the issue of the provider earning from the SIPP client bank account. Like most SIPP providers, we retain a margin on the rates earned in SIPP client bank accounts. This has started to be portrayed by some as a heinous crime, with the suggestion that the FSA will look at it and take action.
The FSA may well look at it and form a view, but it is not as simple as it looks, and there are a number of issues to consider. For a start, from the client's perspective, the important thing is the rate they earn, not the turn taken by the provider. The two are related, but the competitiveness of the bank being used is another factor. If the client earns a good rate and the provider takes a turn, isn't this better than the client earning a lower rate and the provider getting no turn?
FSA issues aside any turn taken by the provider and the impact this has on the headline SIPP fees needs some consideration. With base rate where it is you don't have to get up too early in the morning to realise that any SIPP provider that puts earning from SIPP deposits too central to their business plan will be having some difficult conversations now and in the immediate future. An issue that will put pressure on SIPP providers both big and small and will add to the expectation of a possible contraction of the SIPP market.
The real culprits we feel are SIPP providers who retain large funds in the SIPP bank account. This may be because, in many cases, they do not allow other bank accounts, or because they are lazy about encouraging clients to move funds on. Banning providers from earning interest turns is not in itself going to solve this problem. Our own policy is to allow other accounts and encourage clients to move larger balances to them - there are some good rates available (2% p.a. on instant access) and surely a SIPP (a true SIPP) should encourage choice and flexibility?
A bigger issue is that these accounts should only be for clearing purposes for payments in and out. SIPP funds should be invested and, if cash is a chosen investment, then the money should be moved into other accounts, particularly term and notice accounts, where better rates are available. Leaving SIPP funds languishing in a poor performing deposit account could be costing the client hundreds of pounds a year. IFA's and clients would scream from the rooftops about an equivalent increase in SIPP fees but perhaps are unaware of SIPP funds being lost in such a fashion.
Properly operated, the main SIPP account should hold only modest balances and any turn earned by the provider should be low and immaterial in the overall costing structure. At the risk of sounding defensive, SIPP providers are not the only people taking turns on client accounts. The issue needs to be kept in perspective, and the right points considered, before jumping to conclusions on whether it is right or wrong.
Any thoughts on this topic are very welcome.