This is enormous news. An exceptional hit of £860m directly attributable to #consumerduty That’s a very large sacrificial offering to the regulatory gods. Every single large FS firm will be looking at this & understand very clearly how seriously this FTSE100 juggernaut took this. pic.twitter.com/y4eexHIEbT
— Holly Mackay (@HollyAMackay) July 28, 2023
Holly is right, SJP are market leading in all respects.
The sharp drop in St James’ Place share price as it lowered its forecast for the margin it takes from investment management fees, indicates the vulnerability of its business model to margin pressure from regulators keen to implement the Consumer Duty and encourage value for money.
It would be premature to say that the consumer duty will clip the wings of this golden goose. But a little lightweight plucking is already under way.
Last week, SJP introduced its own charge cap for clients who have been invested in bonds and pensions for more than 10 years.
The cap will see charges for pensions and investments held for more than 10 years capped at 85 basis points (bps), compared with the 100bps SJP normally charges on these products.
Speaking to investors following the announcement, SJP chief financial officer Craig Gentle said it was a ‘mathematical inevitability’ that the product charge cap would lead to the business making a lower margin on funds under management in the long run.
What was not said by Gentle is that the SJP revenue model is almost entirely reliant on the margin that is achieved between what extremal fund management is bought in at , and what it is sold on at to customers. This margin is justified by the value SJP brings through the utility of its advice (“utility being the quantum of happiness it brings to clients”).
I have argued on this blog that the utility of SJP’s advice is high and shows no sign of diminishing , people like being advised and they like the circumstances the advice is offered in , SJP is the financial equivalent of a country club, its exclusivity bringing value and its price being reassuringly expensive.
But this is to be balanced against the cold reality that the share price is a function of anticipated future revenues almost entirely dependent on the margin for advice being maintained.
SJP are keen to advertise the core strengths of its business
— St. James’s Place (@sjpwealth) July 27, 2023
But he half-year results for the six months to 30 June revealed that SJP now expects the margin range it makes from assets under management to fall from 0.59-0.61% to 0.55-0.57% after the change in fees. The margin cut will result in a post-tax reduction in net income from funds under management of about £12m in the second half of 2023.
SJP shares dropping sharply. On the morning of the announcement, the shares were down 14.7% following the announcement of the charging changes and half-year results, which disclosed the move would cost the company £859m as inflows into funds fell.
In mitigation, SJP pointed to the “gestational” revenues from the five year lock in of customers following their initial investment. Clearly , SJP feel that this is justifiable under the Consumer Duty, but this makes me think of the person who sees his garden falling into the sea as a result of erosion, the house may still be stable but for how long?
SJP’s argument that customer retention might go up as fees reduce, ignores the fact that fees are generally cheaper elsewhere. Any argument for SJP’s fees ought to be based on the value proposition and this is where the vulnerability of the business looks most exposed.
SJP needs to diversify or risk further “plucking”
SJP is the largest and most stable advisory business in the UK. In terms of social utility, it is the advice it gives that matters, the fund management is incidental. But SJP is entirely dependent on the advice translating into funds under management to monetise the value of its expensive adviser-force.
Like Allied Dunbar before it, SJP is still dependent on a product of advice for advice’s monetisation and that makes it extremely vulnerable to margin pressure. It is convenient for the product to pay the advisers, not just because it eliminates the operational necessity of keeping time sheets and costing work for clients by way of estimates and invoices, it means that adviser’s can build an annuity value from their efforts that can be sold on when they leave the business.
So alluring is this model, that it excludes other more time consuming and less creditworthy means of fee collection.
But the undoubted skill and entrepreneurial zeal of the SJP advisers is badly needed in areas of investment not covered by advice currently. For instance , the workplace pension market of over 1.2m employers is underserved by advisers, especially in its mid-market of enterprise clients with between 50 and 1000 employers.
This represents the kind of opportunity that is ripe for SJP’s workforce, with the business owners and boards typically SJP clients. SJP has so far ignored advice to these employers on the choice of workplace pension, the structure of contributions and the maximisation of the employee benefit, all of which might be regarded as “consultancy” revenues. These revenues – due to the abolition of consultancy charging on member funds, must be levied by fees to employers or staff.
There is no natural budget for the payment of such fees, it needs to be created. It cannot be created bottom up individual advisers, it needs a collective approach to the market from the top-down. It is precisely the kind of strategic initiative that SJP is capable of , creating a new market for itself, that creates annuity income through contracts with employers rather than funds under management.
SJP has avoided creating a workplace pension for itself and is therefore unconflicted in offering advice in this market. Advice on the employee benefit is not deemed a regulated activity so SJP is able to advise as easily to employers using NEST as Scottish Widows.
So the workplace looks a logical step for the broadening of SJP’s business and the diversification of its revenue streams.
Will the business change?
Unlike most of my colleagues, I continue to champion SJP as a force for good. I worry however about its inflexibility and its resistance to change. I have seen many advisory businesses atrophy over time as they rely on a successful model in the past, to work in the future.
SJP’s revenue model is not flawed but it is weak and weakening. The garden is being eroded, over time the cliff may collapse the main edifice as it did Allied Dunbar and other advisory businesses that didn’t move with the times.
The Consumer Duty is in its infancy and the drop in share price almost certainly recognises that there is likely to be more pressure on margins, including those from the “gestation period”.
SJP need not panic, the value proposition remains sound, as witnessed by the extraordinarily high retention statistics for its customers, backed by high customer service ratings. It has a sound investment product and excellent governance. It is not the existing proposition that is the problem.
SJP’s issue is that , looking forward, it will need to change to adapt to changing customer demand and that means developing other ways to charge customers than its own funds under management. SJP must develop a fee charging culture and billing employers rather than individuals is its best way of doing that. It has an opportunity in the workplace and it should pursue it.