In an article that will alarm SJP’s shareholders, the FT calls into question SJP’s business model. The concern will be especially felt among the older generations of shareholder who will remember how Allied Dunbar fell from darling to disaster in a decade. All that is left of what started as Hambro Life, is Openwork, an advisory network beset by ownership changes.
A simple business model showing cracks.
SJP is a very simple business which depends for its revenue on initial fees (20%) and ongoing fees (80%). The initial fees are dependent on new business . The increase in new business is projected to fall to 7.5% from 10%. Net inflows in the six months to the end of June dropped 38 per cent year-on-year
The ongoing fees are dependent on markets , client retention and most relevantly today, on regulatory and market pressure. The 1% annual management charge was recently reduced to 0.85% although only those who have been with the firm for at least a decade — about 65,000 — will benefit. It’s a move that is expected to reduce revenues by £40m pa. Although not explicitly stated, this is likely to have been a result of pressure created by the FCA’s Consumer Duty.
The Consumer Duty is about value for customers but here the picture is little better. Whether clients benefit from the arrangement is unclear. SJP’s figures show that 41 per cent of UK clients’ assets under management were in funds that delivered “insufficient value” last year. Last month, six of its funds — with a combined £29bn under management — were included in Bestinvest’s twice yearly “Spot the Dog” report
Shareholder value under pressure
The problem for shareholders is that there is not a plan B. There is no compensating business that produces revenues that aren’t impacted by regulatory pressure, by advice that isn’t driven by new business and by a reputation that depends on external managers delivering superior performance.
So SJP’s share price is falling and falling fast
Why comparisons are made with Allied Dunbar
Strip away the external wealth managers and the extravagant marketing and you are left with what Allied Dunbar has become, a very needy advisory unit and a very large client bank with other options.
I have frequently admired the quality of service that SJP offers its 700,000 clients and that’s based on empirical evidence. The clients love SJP and so long as they do , the majority of the £168bn it has under advice will stay with SJP. Bult Allied Dunbar showed how quickly a bubble can deflate.
Fee pressures on both the 4.4% initial fee and the remaining 1% fee for customers in their first 10 years, still look vulnerable – both from itinerant customers but from self-confidant regulators,
SJP, like Allied Dunbar, is resistant to such pressure.
When the RDR and auto-enrolment arrived, there was no plan B for what was then the Zurich advisory network. The Consumer Duty could have an equal impact on SJP unless they start to diversify their sources of revenue and become involved in mainstream mass market savings operations,
Change or die
So far – SJP has shown no interest in changing.
SJP has avoided becoming a workplace pension provider, has only the smallest footprint in providing employee benefits and has no capability in the mass non-advised market. This is increasingly dominated by low-cost, tech-savvy competitors without the baggage of advice. Vanguard, SJ Bell , Interactive Investor and Pension Bee are all predating the established business of Hargreaves Lansdown and SJP.
Its 700,000 clients are from the professional classes or are socially mobile entrepreneurs. Many are business owners whose businesses have more synergies with their banks than SJP. NatWest recently purchased a master trust (Cushon) with a view to delivering services to consumers through the workplace, Lloyds (Scottish Widows and Embark) has made similar moves .
While it continues to dominate the advisory market, its greatest immediate threat to advisory revenues is the search engine and artificial intelligence,
Market nervousness about SJP is about the concentration of its revenues from a single strategy – advice. But SJP seems to be deliberately avoiding servicing the business needs of its entrepreneurial clients in a hope that the gift that has given for over 30 years will keep giving for another 30. It is as yet showing no answer to the allure of AI which can provide us with unregulated advice to most of our questions.
This seems like complacency. SJP must develop new lines of business and diversify. It can’t allow itself to go the way of the organisation from which it sprang.