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St James’s Place is a pricey cul-de-sac in London’s Mayfair district, left unexplored by many passers-by. Its wealth manager namesake too has a luxurious aspect of which its customers may be unaware.
The UK’s Financial Conduct Authority wants SJP to revamp its upfront fee model as part of its new Consumer Duty rules in force since the end of July. Lex thinks this would deduct around £1bn from SJP’s market value.
SJP has high fees, especially for clients buying its pension and bond investment products. These have provided the bulk of its funds. SJP takes an entry fee (4-5 per cent) rebating this over a six-year period. These funds are in “gestation” until the seventh year, after which a simple annual fee applies. These gestation assets account for 30 per cent of funds under management.
If this sounds confusing, the FCA agrees with you. It wants the structure changed. Most wealth management advisories charge straight fees, for easier comparison.
Simplifying the fee system will be a tough decision, likely one for SJP’s new boss Mark FitzPatrick, who begins in six weeks’ time. There must be a cost as legacy rebates will continue but without the normal entry fees. Already the shares, at a historically low 10 times forward earnings, reflect investor concern.
Using SJP’s own data, the accumulated cash flows in 2029 from its gestation assets as of June, one can work backwards and discount these to today at 5 per cent. Simplistically, that sums to around £1bn.
How SJP pays for this shift is another matter. Much may be in the price. Almost £3bn of market value has evaporated just since it announced a small cut to its fees in July, probably to appease the FCA. But SJP has £824mn of excess capital. It could trim its dividend payout, roughly £300mn annually, as Numis points out.
Like Mayfair by-ways, some clients will always see SJP as reassuringly expensive. But its old money fee structure needs modernising.
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