How contingent fees underpin SJP’s shareholder value.

SJP 4.jpeg

The last two days have not been kind to St James Place, on Tuesday it was presented with the FCA’s CP19/25 and PS19/21 and yesterday it had to face the wrath of the market which marked its shares down 5% on results that failed to meet expectations.

British wealth manager St. James’s Place said on Wednesday that weaker client sentiment weighed on inflows of new money in the first half of the year while costs rose, leading it to miss forecasts for operating profit.

Net inflows of client cash were 4.4 billion pounds ($5.35 billion) in the six months to end-June, lagging the previous year’s 5.2 billion pounds and just missing the 4.5 billion flagged in a company supplied consensus forecast of 17 analysts.

Under pressure CEO, Andrew Croft used his analysts conference to get his frustration off his chest. The FCA’s proposed ban on contingent charging and RU64 style benchmarking of ongoing fund management costs against workplace pensions were clearly riling him.

Speaking during an analyst presentation following SJP’s half year results, Croft said he was worried the FCA’s proposals to ban contingent charging would increase the advice gap.

‘Although DB transfers are a small part of our business and we are cautious with them, we will nonetheless be analysing the detail of the FCA’s consultation paper and responding in due course,’   NMA – 30th July.

SJP are not so much concerned about the threat to its transfer business but to its embedded value – arising from its lock-in charging model and high ongoing ad-valorem charges. This point was well made by an anonymous comment to the NMA article.

First there were comments on cross subsidies;

That’s a surprise that SJP are flustered about it. Considering I have dealt with clients that say SJP only charge £300 for the advice. They might do but then they charge you 5% Mr Client when you invest, oh and you’re also locked in for 6 years! But, I’m sure the difference between a £300 advice fee and the £50k they’ll receive on your invested £1m wont impact their advice.

Another comment pointed out that a ban on contingent charging on transfers was only the tip of the iceberg.

I fully support a decision to ban contingent charging which can only ever raise the question of what the advisers motivation is. Working on a truly fee based approach removes any such doubt, My only question is why this is only being applied to DB transfer advice and why it is not considered equally important to all other areas of advice?

While a third comment took the philosophical debate between charging straight fees and fund based charges (ad valorem) a stage further

How can any professional give impartial, I(n)dependant advice, when faced with zero earnings for advising clients not to proceed verses a large commission, for recommending a customer to proceed.

Professionals advise clients, provide a service and charge fees – salesmen, have customers, flog products and earn commission.

How on earth do SJP get away with a totally different set of rules to the rest of the profession???

Some rivals to SJP’s market dominance went so far as to ask whether the poor results might not be more a result of increased consumer awareness of the high costs they were paying for the advice they were receiving


A nervous market or a cracked business model?

I wouldn’t bet against SJP bouncing back. This was the half-year when they took most of their pain for supporting Neil Woodford and SJP’s greatest strength is that they are – to their clients – reassuringly expensive.

This was also a half year full of political uncertainty. It is convenient to blame bad results on external factors unlinked to your business model.

There is however a much larger threat to their share price lurking in the market and I am not sure the analysts have picked up on it. What SJP could do without is regulatory intervention , that is what sank their predecessor Allied Dunbar and it’s what could sink them.

The analysts remain sanguine according to a separate NMA article

(Peel Hunt analyst) Duncan  also pointed out that SJP’s infamous method of valuing pension business, which mean it is not considered ‘cash generative’ for six years after it is recorded as an inflow, means that the company has £38 billion of funds set to bring in £337 million of extra revenue from 2025.

There was no mention of new Financial Conduct Authority (FCA) rules that will ban contingent charging on defined benefit pension transfers, or changes to the way ongoing advice fees will need to be justified in analysts’ notes, although it was briefly brought up at the analyst’s conference.

Nor was there any sign of news on whether the FCA’s plans to ban exit fees on platforms will affect SJP. The company has always resisted suggestions that it will be forced to drop its pension exit charges, and analysts appear to think there is little chance of the regulator forcing this to change.

The analysts may not have picked up on it , but some journalists have.

Jo Cumbo doesn’t stop there

she concludes

SJP look extremely vulnerable to regulatory intervention . Jo Cumbo’s comments are clearly directed at contingent fees in general, not just on transfers and that extrapolation will worry SJP.


It could get worse for SJP – much worse.

The guns are already being trained on the FCA’s papers because they suggest that SJP must justify their charges not by the uniqueness of its proposition but by the standards set by workplace pensions.

SJP do not have a workplace pension against which their clients can benchmark charges, instead they offer a product that sets out to have advice inside and to be incomparable to the advice free workplace pension.

But the conversations I have with the FCA suggest that they are now less interested in the availability of advice than in advisory outcomes. If the cost of advice is a complex and expensive solution, then that solution needs to justify itself as value for money.

I have reported on chapter four of the CP19/25 earlier the week. The FCA introduces the chapter by suggesting that some advisory solutions present further conflicts of interest. The FCA proposes benchmarking these solutions against those arising from workplace pensions.

We are proposing strengthening our existing requirements that advisers giving pension transfer advice should consider an available workplace pension as a receiving scheme for a transfer where one is available.

This is intended to address the conflicts of interest created by ongoing advice charges. It will also reduce the level of transfers involving unnecessarily complex and expensive solutions.

In the body of the paper they are more specific

Total ongoing advice charges of 0.5% to 1% will reduce an average transferred pension pot of £350,000 by £145 to £290 each month in the period immediately after transferring. Similarly, ongoing product charges of 1% to 1.5% will reduce it by a further £290 to £440 each month. So the total deductions on a transfer value of £350,000 would range from £435 to £730 each month. A DB scheme with that size of transfer value might have a current income value of £1,000-£1,200 each month, so the charges represent between 44% and 61% of the current level of that value.

If the long-term intention of the FCA is to use the price cap on workplace pensions as a reference point for all ongoing DC accumulation, then the cash generation model employed by SJP will come under extreme pressure.

SJP has seen this happen before , its analysts may feel it is invulnerable but I am not so sure. I suspect that SJP’s embedded value , on which its share price is built, is under increasing threat.


Shareholder value relies on policyholder apathy

It’s well known that SJP commands high approval ratings amongst its policyholders. Policyholders do not read FCA policy statements.

Analysts continue to believe that SJP is too big to be impacted by price capping. But the threat to its margins from the FCA is everywhere and it now includes the very real possibility that drawdown business will come under the scope of IGCs. SJP – which doesn’t have an IGC, may be forced to convert its current GAA.

That will mean setting up a meaningful governance body which could challenge the current VFM of SJP products.

Slowly the FCA is closing in, if I was an analyst of SJP’s current business model I would be setting share target prices a lot lower than the 5% fall we saw yesterday.


Financial advice for all?

So expect to see SJP and other vertically integrated providers taking CP19/25 and PS19/21 very seriously. The FCA are taking on advisory costs in CP19 21/25 and strengthening the non-advisory market through CP19/25. After 35 years in which the value of taking advice has been unquestioned, I suspect that things are beginning to change.

 

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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