Speaking to pension industry figures one message keeps coming up: there is going to be more consolidation by Sipp providers.

The reasons are clear: capital adequacy rules come into effect in September and with it more stringent demands on the amount of cash Sipps hold and their quantity of non-standard assets.

For those Sipp operators in a race to meet the requirements, the options are to either ensure they make it over the line or be taken over by a bigger business.

However, which providers will come out on top? As providers take on more books through acquisitions, is this consolidation positive for IFAs and their clients?

Acquisition trail

One of the biggest deals in recent months was Curtis Banks’ acquisition of Suffolk Life at the start of the year. The £45 million deal saw Curtis Banks take on another 26,500 Sipps accounting for assets of £8.7 billion, giving it a total of 65,000 Sipps and £18 billion of assets.

The size of the deal is considerable, but Rupert Curtis (pictured below), chief executive of Curtis Banks, has signalled his intent to keep on making acquisitions and suggested it would carry on looking, but at insurance companies that have Sipp books rather than smaller providers.

‘In the bespoke Sipp market many deals have been done already, and if you take Suffolk Life out of the equation I’m not sure where you might look next in terms of other big books,’ he said. ‘There is not much there, but on the insurance side there is a lot more potential.’

Curtis Banks is not the only player that has signalled its intent to keep on growing by acquisition.

Following its results in February, Ian Mattioli, chief executive of Mattioli Woods, said he was going to continue looking for more deals.

One Sipp industry figure, who did not wish to be named, felt with players such as Curtis Banks and Mattioli Woods buying firms, pressure had been put on others to try and emulate this growth. 

He singled out platform and Sipp provider James Hay as a firm that would want to keep up with the pace.

‘I think there will be shareholder pressure in James Hay,’ he said. ‘Among that kind of tier of player there is Curtis Banks and AJ Bell, who have delivered incredible value to shareholders, as has Mattioli Woods.

‘So you have this kind of hierarchy, AJ Bell, Curtis Banks and Mattioli Woods at the top that have gone down the route of acquisitions or huge growth, and Rowanmoor and James Hay have been left a bit trailing.’

A James Hay representative stated company policy was not to comment on market speculation.

While the big players jostle over their position in the market, a recent report (see chart above) from FinalytiQ and Sipp industry veteran John Moret (‘Mr Sipp’), found profit pressure could also drive further consolidation.

The Financial Stability Report surveyed 18 providers and found five were loss-making for the year ending December 2014. This compared with 17 out of the 18 being profitable in 2012.

The report also found pre-tax profit margins among these providers had fallen from 29.6% in 2012 to 19.5% in 2015.

This fall in margins ‘will only intensify’, the report said, and this could herald more consolidation.

‘Several providers are operating with low margins, making them susceptible to further market and regulatory pressure; this includes Hornbuckle and Rowanmoor, who, based on their last reports, operate at 0.3% and 7.5% pre-tax profit margins respectively,’ it said.

Size matters

Moret, principal at consultancy firm MoretoSIPPs, said he expected there to be a step-up in market activity in the months leading to September, but felt this growth of some players was not always a positive thing. 

‘Big isn’t necessarily best. It’s not necessarily best for the customer and it’s not always best for business,’ he said.

He said when Sipp providers buy up other players there was a risk this could spread around certain unwanted assets.

‘For IFAs there is [the issue of] due diligence on bespoke Sipp providers and consolidation doesn’t always improve things. There are some books out there that probably have toxic assets, and that’s where due diligence becomes all important.’

Nathan Bridgeman (pictured above), director at Talbot & Muir, said with good prices in the market for smaller Sipp books it was easy to see why so many deals were going on, but did not think this was necessarily in clients’ best interests.

‘From a big players’ point of view and for their shareholders, it’s obviously a good move. They are getting Sipps with reasonable value and they can add value. But I’d question whether it’s good value for Sipp members.

‘[This is] because they didn’t choose to be with that big provider and they are having that big provider forced on them. And from an adviser’s perspective, they didn’t choose that provider.’

He said when Sipp firms with advice arms buy other books, this could lead to conflicting priorities.

‘Let’s say a Sipp provider, which has financial advisers, buys another Sipp provider, then of course there is going to be an immediate conflict of interest,’ he said. ‘So obviously the adviser would then be looking to move that Sipp away from a competitor [after the acquisition]. Turkeys don’t vote for Christmas.’

Bridgeman argued that the large players do not provide the same support and service as the smaller ones, as they have a much lower staff-to-scheme ratio.

Partnership pains

Abraham Okusanya, director at FinalytiQ, said advisers and clients could face ‘disruption’, due to integration issues when big deals were done.

‘Acquisitions mean providers are going to need to spend time and money on integrating their businesses and there is a slight risk it might go wrong,’ he said.

‘This is because these assets are sitting on different CRM (customer relationship management) systems and you need to consolidate them.

‘Advisers and clients can face discomfort that the new provider is coming in and they need to perhaps review their due diligence on the new provider and the new parent company.

‘There will be conversations about the price in the medium term, what happens to service quality and whether that provider is sitting on books of toxic assets.’

While capital adequacy might increase the number of deals being done, Richard Mattison (pictured above), director of the Whitehall Group, said issues might arise over expectations for price.

‘Because of all the capital adequacy, if you acquire a Sipp book you have to put all that capital down, which devalues the Sipp book considerably,’ he said.

‘People have commented that many investors have unreasonable expectations of what their Sipp books are worth. So they think they should get a few million for them, but who is going to do that when you have to put all the capital adequacy down?

‘So it’s a difficult time, some people are trying to sell and some are trying to buy, but on both sides of the deal, the expectations are considered unreasonable.’   

Original story: http://citywire.co.uk/new-model-adviser/news/advisers-warned-as-sipp-consolidation-pace-picks-up/a911782

Author: Jack Gilbert

Date published: 18 May 2016