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
SIPPs 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 alternative investments - 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.
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.