Just before 7am on Friday, I was browsing the FT on line -reading the paper as we used to say.
I was drawn to a headline claiming SJP was being pushed by UK Regulators to overhaul fees.
I wrote a blog predicting this would lead to trouble for SJP. Throughout the day Citywire’s Jack Gilbert was updating his story as the shares fell like a knife.
By the end of the day, the FT article had led to a seismic collapse in SJP’s share price which will send tremors through wealth management and beyond.
The FT and SJP
The FT wittily refer to St James Place as a pricey cul-de-sac in Mayfair. It’s where the Rothschild’s London Mansion is. SJP started life as a Rothschild branded company, privilege and a sense of being on the inside – is part of the attraction of the brand.
The FT’s opinion matters in this and today’s Lex column makes it clear
Like Mayfair by-ways, some clients will always see SJP as reassuringly expensive. But its old money fee structure needs modernising.
This is not the tub-thumping of the Times, it is a more insidious approach that is creating change from inside the tent. It is as if the FT were being licensed to speak for the FCA (and the PRA lurking behind them).
Everyone knows that the FCA dislike the SJP charging model and its Consumer Duty challenges SJP’s capacity to justify SJP’s “gestation period”. The gestation period is a six year window when the client is on the hook for high exit penalties if they walk away. Six years is a long gestation period. 30% of client funds are in it. Scrapping it would wipe £1bn off future revenues and might require a cut in SJP’s £300m dividend and a dive into its £800m excess cash, held as a reserve.
SJP has resisted diversifying its income model into more conventional consultant fees, optimising the VAT exemption it achieves for advisory revenues on insured products and minimising bad debts by controlling revenue collection through the FCA. SJP’s model is staggeringly effective – it’s sole weakness is regulatory risk.
Reputation is everything
The financials are one thing, reputation another.
In the mid 80s I worked for Hambro Life/Allied Dunbar. My first branch manager taught me the phrase “reassuringly expensive” , a tag that is still knocking around SJP officeshttps://www.ft.com/content/0f8e74a0-0a3f-40e7-a0b2-872bcee7349e#comments-anchor today.
One comment in the FT described SJP as an outdated 1980’s sect. The FCA is however a very different place from what little regulation pre-ceded A day in 1987. As Lex reminds us today
“reassuringly expensive plays badly with watchdog”
The FT’s short article touched a nerve with the market. 25 years ago, the Equitable Life had an equally dominant position in the hierarchy of wealth management. It over-reached itself in a different way, but the speed with which its reputation disintegrated still haunts wealth management.
The 22% loss in the share price yesterday is more than SJP’s shares lost from the actual tweak to fees announced in July — a 0.15 percentage point cut to the maximum annual product management fee for 65,000 clients who had been with the firm for more than a decade.
UBS estimated then that this tweak alone could alone take 8 per cent off 2024 earnings,.
This is the vulnerability that an “ad valorem” fee model creates for itself. The regulatory risk for SJP is so extreme that the FT only has to suggest trouble ahead for nearly a quarter of the company’s value to evaporate overnight. There has been no FCA announcement nor any comment from SJP.
With such fragility, SJP looks prey to activist shareholders keen to create a more robust model. It surprises me that we have yet to see the governance lobby of ESG questioning the sustainability and social value of SJP’s activities.
But here we enter into an area of deep conflicts. Many analysts work for funds that are dependent on SJP’s patronage. If they don’t depend on SJP’s distribution , they likely depend on the wealth management industry that points to SJP’s charging structure to justify their own.
For wealth managers , the risk of contagion is very real, which is why the 21.79% fall in SJP’s share price has implications for the UK’s wider financial services industry. If there is to be a self-regulated cap on ad-valorem (AMC style) fees, then the City had better draw in a deep breath.
