How deep are the problems at St James’s Place?

Every year, St James’s Place, which over the last three decades has become one of the UK’s most successful financial services companies, organises a glitzy show for its thousands of investment advisers.

Guest speakers have included Bill Clinton, Bob Geldof and David Beckham, while top-performing advisers were paraded onstage to huge cheers from their colleagues at a company that was famed for its sales-driven culture.

One former employee says they were “gobsmacked” at how “lavish” that event was in 2020, despite moves to scale it back that year. 

This year’s gathering at London’s O2 arena, however, was an altogether more subdued affair. Shares in the company, which provides financial advice and investment management services to 960,000 well-off clients, have fallen 60 per cent over the past year, primarily due to intense scrutiny of the fees it charges. 

The new chief executive Mark FitzPatrick was keen to underscore a break from the past for the company, the UK’s biggest provider of financial advice. “It felt this year like there was a ‘change agenda’,” says one person who has regularly attended the event. 

New chief executive Mark FitzPatrick is keen to tread his own path despite his connections with former directors © Lionel Ng/Bloomberg

According to critics both inside and outside the company, the charging model that ultimately funded the lavish entertainment and other rewards for top-grossing advisers is both opaque and expensive.

Baroness Helena Morrissey, a City grandee who was a non-executive director at SJP for 16 months, says she told the company four years ago that it needed to “do something about the fees” but was informed that the subject was “completely off the table”.

But the structure is now coming under increasing scrutiny after the Financial Conduct Authority, the UK’s financial regulator, introduced a new “Consumer Duty” last July.

The new rule, which imposes a legal obligation on companies to treat their clients fairly, impacts the entire financial services market from banks to asset managers. But SJP, which employs one in eight of the UK’s 38,000 financial advisers, is more affected than most.

“Consumer Duty has been a complete body blow for St James’s Place in terms of its existing business model,” says Richard Buxton, a fund manager who has held SJP shares in the past.

The asset management industry has been convulsed over the last decade by regulatory shake-ups and the advance of index-linked funds, which are cheaper than the managed funds that wealth managers have traditionally offered and which have focused the attention of clients more clearly on the fees they are paying.

Until recently, SJP seemed remarkably resilient to these shifts. But over the past year, the wealth manager has been pushed to change its fees, axe a much-criticised exit charge on some products from next year.

It has made a £426mn provision for potential refunds to customers who claim they did not receive the ongoing financial advice that they were charged for each year. Net inflows in the first quarter were £700mn, lower than forecast and down from £2bn a year earlier.

The company’s dividend has been cut and the sharp drop in its share price has put it at risk of expulsion from the FTSE 100 index. Some analysts believe its shrinking market value could make it a takeover target.

FitzPatrick maintains that independent research has found its charges are “very competitive” and is pledging an overhaul of the company’s business model.

SJP grew rapidly under former chief executive David Bellamy. In the decade that followed the financial crisis, the company quadrupled its assets under management

He and others believe that the overall market for financial advice is likely to grow because of an ageing population and changes to UK pension rules. “About 8 per cent of the UK population receives advice so it’s a huge opportunity,” FitzPatrick tells the Financial Times.

But David McCann, an analyst at stockbrokers Numis, says that “what has become more questionable over the past year . . for SJP in particular, is how much profit per unit of client assets will firms be able to achieve for shareholders in the future?

“The answer is no longer as clear as it once was, in our view.”

At the core of SJP is an entrepreneurial sales culture that dates back to its founders. The Gloucestershire-based company was set up in 1991 by South African entrepreneur Sir Mark Weinberg, the late businessman Mike Wilson and Lord Jacob Rothschild, who passed away earlier this year, as J Rothschild Assurance Group.

Its modus operandi was based in part on Allied Dunbar, a previous Weinberg company that was known in the financial services industry as “Allied Crowbar” because of its aggressive sales tactics.

By the late 1990s, J Rothschild Assurance had been reversed into Weinberg’s listed vehicle, St James’s Place Capital, giving it a stock market listing.

In the decades that followed the company grew rapidly, particularly under David Bellamy, who was chief executive from 2006 to 2017. Its shares entered the FTSE 100 index in 2014 and its acquisition of Rowan Dartington the following year gave the company a stockbroking business and a discretionary fund management arm. 

SJP has nearly quadrupled assets under management over the past decade. It was the first model of its kind: similar to a franchise, it has about 2,700 financial advice firms, known as the partnership. These are independent businesses, operating under their own names and employing almost 5,000 advisers, but they sell only SJP investment products, many of which are run by external asset management firms. The company also trains its own advisers through an in-house academy.

Following the Retail Distribution Review, a set of rules introduced in 2012 to prevent financial advice being influenced by commissions from product providers, most independent advisers now charge clients directly for advice when and if it is needed. The running costs of investment products are covered by a separate set of fees levied by their providers.

St James’s Place levies upfront and ongoing charges for both advice and products. The fees vary by product type, but calculations by EY on behalf of the company show that they would reduce the returns from a £100,000 investment into an open-ended fund growing at 5 per cent a year by about 2.2 percentage points annually.

Critics say that structure is opaque and makes it harder for customers to shop around for a better deal.

Gina Miller: ‘The FCA has allowed SJP to indulge in anti-consumer practices in terms of fee transparency, onerous contracts and aggressive sales tactics’ © Alain Jocard/AFP/Getty Images

“It has been our view for a considerable time that the FCA has allowed SJP to indulge in anti-consumer practices in terms of fee transparency, onerous contracts and aggressive sales tactics,” says Gina Miller, co-founder of investment firm SCM Direct and a campaigner for clearer fees in the industry. “The question remains, why does the FCA continue to let SJP off the hook whilst being tougher on other firms?”

The FCA said it did not comment on individual companies but added that the Consumer Duty “sets higher and clearer standards of consumer protection in financial services”.

“We recognise that some firms have needed to make significant changes to their business model to improve consumer outcomes, and we welcome where firms have done this.”

SJP declined to comment.

Clients who purchase certain products face exit charges if they move their money or encash their investments within the first six years. This hedge against the loss of fee income has been described as SJP’s “secret sauce”, according to one person close to the company. Critics say it is anti-competitive.

Morrissey, who stepped down from the St James’s Place board in 2021, says she questioned the fees shortly after joining: “I was given an A5 booklet . . . I thought: that’s not great.

“I told a senior executive that we needed to do something about the fees, or else the regulators will do something, because they’re not clear . . . But I was told it was ‘completely off the table’ and that there would be no discussion on fees.”

The company declined to comment on Morrissey’s remarks.

SJP worked hard at client retention in other ways. Advisers have been known to send customers bottles of champagne at Christmas or fund lunches at Michelin-starred restaurants. 

This “snob factor” was part of the allure for some customers, says one independent wealth manager, adding that such clients regarded the private-bank style treatment as proof that they had made it. A former SJP adviser adds that many clients “knew they could get a cheaper car” but wanted what they saw as a Rolls-Royce.

Advisers in the partnership were incentivised for recruiting new clients and persuading existing ones to invest more with rewards such as luxury trips abroad with their families and racetrack days driving Lamborghinis, alongside the annual jamboree in London.

The former employee says the annual advisers’ gathering, with its impressive staging, was “definitely a cheerleading day . . . It ended up being a jolly, I could see everyone was having a whale of a time.”

Another former staff member compares the sales culture to mortgage brokers in the early 2000s. “They were trying to get more people and flog them more products,” the person says.

As press reports began circulating about excessive rewards for advisers, the company began to cut back on the more lavish freebies. But people close to the company believe it will take a long time to reform the culture.

Helena Morrissey: ‘I told a senior executive that we needed to do something about the fees, or else the regulators will do something, because they’re not clear . . . But I was told it was “completely off the table”’ © Jason Alden/Bloomberg

“They are struggling to shake off the old sales mentality,” says the former staff member. “The culture there is male, pale and stale on steroids.” Unlike AJ Bell and Hargreaves Lansdown, which are focused on execution-only business and operate largely online, St James’s Place continues to focus on face-to-face advice, the person adds.

SJP said in response that it was “focused on attracting, retaining and developing diverse talent and fostering an inclusive environment where everyone can thrive”.

Just as Consumer Duty came into effect last July, SJP chief executive Andy Croft was preparing to step down. Executive search firm Russell Reynolds scouted FitzPatrick, the former chief executive of insurer Prudential.

FitzPatrick already knew Croft and his predecessor Bellamy, having met the latter while working for Deloitte. He had also worked with Paul Manduca, the SJP chair, who had held the same position at Prudential until 2020.

But despite his connections with former directors, FitzPatrick is keen to tread his own path. The theme of this year’s annual adviser meeting was “our future, our story”. A glossy TV advertisement was rolled out a few weeks later.

“I’m looking for a culture where everybody is very focused on the client,” he says. He is now undertaking a review of the entire business with the help of consultants to ensure SJP can sustain its growth trajectory.  “One of the things we were very conscious of was to be able to demonstrate to investors and the market [that] the SJP model is resilient.”

He also believes there is ample opportunity still ahead, citing multiple changes to UK pension rules and growing fears among the better-off about inheritance tax. “All of that means people need more advice than ever to protect the wealth they’ve created,” he says.

Still, the road ahead is fraught. The most pressing risk is the potential compensation bill it is facing over historic issues with record keeping. For many clients, there is no evidence that their adviser provided the regular advice that was meant to come with the ongoing fees.

The company has implemented a new system and has tied a portion of advisers’ remuneration to logging their client meetings. But the final cost of compensation is still uncertain.

Compliance with the Consumer Duty requires the unbundling of fees from next year — meaning that clients will be able to compare more easily how much they are paying for advice and investments and potentially increasing the risk that they will take their business elsewhere.

FitzPatrick believes the move will be positive, saying that “everyone will be able to see all the different components and with that will be able to see further that we are, and will continue to be, very competitive in the market”.

Profit margins face further strain as SJP explores expanding into passive investments. Until now, its advisers could only offer actively managed funds that are often marketed based on past performance and carry higher fees. Justin Onuekwusi, chief investment officer, says the company “will continue to remain fierce advocates of active management”.

Another looming pressure point is the succession model. When advisers want to downsize their businesses or retire, they can sell their client books to other advisers within the network, who use loans facilitated by the company to acquire them.

But pressure on this model is growing as the interest rates on these loans, currently 3.5 percentage points above the Bank of England’s base rate, have risen. The amount of these loans classed as in arrears more than doubled last year. 

FitzPatrick could also face a takeover threat. The fall in the share price has led to speculation that a high street lender might make a move for the company given its big market share, though the rising redress bill and their own past misadventures in wealth management may put them off.

Buxton, the former shareholder, acknowledges that “there’s clearly still a worth to the largest advisory business in the UK” but questions what will happen if partners start to leave.

Recent issues have “naturally affected the strength of the franchise,” he says. “The scale of their margin will never be the same again.”

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