St James's Place: Why ripping people off is not a good business model

In 2019 I wrote an article about St James’s Place, questioning the potential fallout from a decline in fees. At the time the company was under pressure to reduce the percentage charged for managing client money amid the fast changing dynamics of the asset management industry. Then I wrote, “depending on the level of the decline, the extent of the potential damage falls somewhere between quite bad and disastrous”.

The interim period has seen continued pressure on wealth managers to simplify their fee structure. Countless studies have shown that advisor or fund fees eat into returns to a far greater extent than managers can deliver excess profits. Indeed, advisors and experts frequently underperform the indices on which they benchmark their funds.

The criticism levied at advisers like St James’s Place also questions the value they bring to their clients. These are not fund managers whose skills lie in stock selection, these are wealth managers who help high net worth individuals make sensible decisions about their asset allocation. And yet, with £168bn of assets under management and 958,000 clients on the books, the average portfolio size of a St James’s Place customer is £175,000 - arguably not large enough to warrant expensive advice. Many of these clients are no doubt in need of education, not expensive advice.

But when it comes to fees, St James’s Place has kicked the can down the road. Despite the arrival of cheap robo-advisers and even cheaper share dealing platforms, the company managed to keep its exorbitant initial charges (a minimum of 5% of the total portfolio), complicated ongoing fee structure and ludicrous exit fees (charged for the ‘early withdrawal’ of money) until last October, when management announced a major overhaul.

This weeks financial results show why the company has dragged its heels for so long.

The effect of the new fees will be to reduce the net income margin earned from funds under management by 11 basis points, to a range of 0.43% - 0.45%. Without the hefty initial charges the company will also forgo the sizeable profits made on new business. These changes have already had an impact on profits. In August, the company introduced a charge cap, which sent the income margin down 4 basis points. Net income from funds under management was lower than the previous year.

The publication of these financial results sparked a 33% decline in the share price, wiping over £1bn off the market capitalisation of the company. But where the fallout of the changing fee structure lands on the ‘quite bad to disastrous’ spectrum is still not 100% clear as the numbers are a minefield of adjustments, excuses and caveats.

Adjustments make numbers tough to trust

Starting with the funds under management, which surely shouldn’t be a difficult number to understand. In 2023, FUM rose to £168.2bn - a 13% increase on the previous year. But this figure includes the funds that are in what is known as the ‘gestation period’ - assets which are within the first six years of their management by St James’s Place, which do not contribute any cash to the business.

Under the new fee structure, SJP has done away with hefty initial fees and with it the ‘gestation period’ meaning new client money will begin delivering cash from day one. But the funds currently in the gestation period (worth £47.6bn) will stay there for six years, meaning they won’t contribute profits until they mature. If all of those funds mature they will contribute £270m in additional profits to the business. But without the exit fees, there are now fewer incentives for clients to stay. The FUM number might be due a wobble in 2024.

Then there is the EEV or European Embedded Value - a figure which management say provides “a measure of the total value that might be expected to arise over the lifetime of the existing business.” EEV operating profit was reported at a little over £1bn - 50% lower than the previous year. But take into account the adjustments and the company reported an EEV loss. That means exceptional charges of almost £3bn - an absurd number. Management says this one off hit relates to the impact of the new charging structure, most notably a £2.5bn exceptional charge relating to the re-measurement of future cash flows from existing business.

And that is without even commenting on the fact that EEV adjustments are bonkers. Based on normal IFRS accounting standards the company reported losses for the year of £9.9m.

Reputations taking a hit

There are further black marks. Net fund inflows dropped to £5.1bn, from £9.8bn in the previous year. That’s despite gross inflows of £15.1bn (down from £17.1bn in 2022) suggesting a sharp increase in the number of customers withdrawing money from St Jame’s Place.

The company also reported a significant increase in complaints in the latter part of 2023 and has booked a £426m provision for potential client refunds relating to these complaints. Meanwhile the Financial Conduct Authority continues its, fair, scrutiny into the way advice businesses charge their clients. As one of our subscribers commented following the results announcement this week, “it turns out ripping people off is not a good business model any more.”

There are reasons to question whether at 500p, the shares now present a value opportunity. A price to earnings ratio of 7.5 times might look tempting, especially compared to previous levels. And perhaps there is an argument to be made about chief executive Mark Fitzpatrick’s approach to dealing with the bad news: deliver it all in one sweeping blow.

But I would like to think that the pain is not yet over for advisers like St James’s Place. There is undoubtedly value to be found in good financial advice, especially for those with large and complicated estates. But ongoing fees for advice are surely destined for the history books.

The UK wants to support investment in domestic markets. Advisory services with hefty, opaque fee structures are not the way to go. And without those fee structures St James’s Place is going to struggle to deliver the profits that investors are used to.