St. James's Place: Distribution is King

Read the full interview HERE

We recently interviewed a Former Corporate Strategy Director at St. James Place and Current Head of Strategy at Quilter on the structure of the UK wealth management industry.

We discuss:

The segmentation and growth drivers of UK indepedent advisors
How regulation has driven industry consolidation
Risk of roboadvisors to incumbents
Comparison of the vertically integrated model versus indepedent advisors
How private equity funds are rolling up advisors to challenge incumbents
How to value FUM when acquiring independent advisors
Impact of the gestation period of funds on future cash flows

How do you look at the importance of distribution? Firstly, today, but also as you see these robo-advisors and a more digital shift?

When I was at St James’s Place, the managing director, David Lamb, used to say that distribution was everything and that if you control that, nothing else matters. Obviously, tongue in cheek, but his view was, very much, if you control the distribution, which St James’s Place do – they have 4,300 very good quality advisors, that they trained and recruited – and if you have that and a vertically-integrated model, it’s an amazingly powerful tool. If you look at the components, the value chain, of a wealth management business, you have advice, platform and investment management. Within those three, the bottom are now being heavily commoditized where, if you believe in efficient market theory, it’s hard to differentiate passive management, unless you go into the old space or the liquid stuff.

You can now get platform for one, two, three basis points. Those two are being very strongly squeezed by the market pressure or market regulation and competition. But the one area that remains largely immune, is advice, because you have the relationship with the clients, with the money, and you direct that to wherever you have the best possible outcome for yourself and for your client. Therefore, if you control distribution, that is a massive strategic advantage. That’s why everybody is trying to buy advisors, to integrate them into their own proposition.

How valuable are these advisors if millennials don’t want an advisor and they want a robo-advisor?

Unfortunately, for the millennials, at the moment, most of the wealth in the UK is still controlled by people who do want an advisor. At the end of the day, it’s almost like a GP, where you can get online questionnaires, algorithms, that tell you what’s wrong with you but, sometimes, you just want a human that has had to do lots of exams and have lots of qualifications and experience, to tell you, you know what, it’s fine; it’s going to be okay. Don’t sell because the market has fallen 20%. In fact, buy more. Or who can point you in the direction of a good accountant or a good trust person or a lawyer. It’s also that, I help you with your wealth and everything related to it. You cannot get that from a machine, yet.

If you want to do an ISA and you want to stick £20,000 into a balanced portfolio, by all means do it online. But when you get a bit older and you have family, kids, houses, maybe a business, that’s when you really need a human being that knows what they are doing. That’s why the value of the advisor is so great, because there are only 30,000 of them, so it’s a finite resource.

What would Betterment say to that? What would be the counterpoint that Betterment would have?

Betterment would say, instead of paying a human advisor 2% a year, pay us 50 basis points and then whenever you need an accountant or a trust guy, just pay him one grand or two. The ad valorem model of paying 2% a year, for life, that is really under threat and really under attack, by the likes of Betterment or Schwab, that offer you a pay-as-you-go service, or almost like a monthly subscription, a flat fee. What they’re saying is, why would you pay 2% on a million pounds invested, when you can pay £10,000 a year, flat and then if you need more stuff, buy it as you need it.

I guess it’s the age-old question of, how disruptive could this be and how are consumers going to behave? There’s one argument that the fees that the traditional players charge are very, very high and, arguably, very hard to understand the value of the service.

The IFA community usually says exactly that about St James’s Place. They charge between 2% and 2.25%, which is not the highest in the market, but it’s certainly not the lowest. What they are saying is, look, we are very transparent with our fees. You pay 2% and, for that, you get advice, a platform, asset management and all the related services. Their clients – of which they have 700,000 in the UK – are, mostly, very happy with that. They get a bundled deal and they get a human that they trust and value and they get a brand that they believe in. As well as a strong balance sheet, a FTSE 100 plc. They’re like, I’m just going to get on with my life and I’m going to pay them whatever I pay them and I’m super happy with that.

Other people say, actually, if you multiply out the fee drag, over life, asset returns are going to go lower. If equities are going to yield 5%, medium term, I’m paying 2% of that away, that’s not amazing. Those people will actively seek a different solution, whether they will do it themselves or via a low-cost platform or whatever.

But the SJP clients and the clients of other similar businesses, are very happy to get on with their day job and let that whole structure manage their money, for a fee. Basically, do you go to Aldi or do you go to Waitrose?

That 30,000 number of advisors in the UK, do you see that being sustainable with those retiring, plus the academies and that growth, potentially, from the big, vertical players, plus the risk of disruption from the robo-advisors. How do you look at that number evolving?

I don’t think the industry has been very good at communicating to the younger generation that it’s actually quite an exciting, quite a cool thing to do, to be a financial advisor. It’s very flexible and it can be very lucrative; you can specialize and you can do all kinds of stuff. As an industry, we are starting to do much more outreach to unis, work placements, academies to younger people. As the older advice population retires, I think that that number will hold steady, for the short term, but as the younger generation comes through, I’m certainly hoping it will increase, because there is a clear need, in the UK, for financial advice and a slightly younger generation of advisor. I’d say that it will probably grow at about 5% to 6% a year, in the medium term, as the processes kick in and people realize that it’s quite a cool career.

You think it’s going to be sustainable growth, continually, on that side?

I genuinely do. There’s quite a lot of wealth in the UK. Despite our government’s best efforts, I think it’s still the fifth largest economy in the world. That wealth needs management. The tax rules are getting more complicated. Tax and trust rules and pensions and all that stuff is getting harder and harder to understand for the average person and so they need advice. I think there will be a push, from the market, to get more advisors trained and into work.

How do you look at the implications of the growth in platforms, like Hargreaves Lansdown?

In many ways, Hargreaves are one of our biggest indirect competitors. Do you get it managed or do you go to Hargreaves and buy a top 50 fund? They’re a phenomenally successful business, running a hundred billion of stuff. I think they’ve got a 40% market share of direct share dealing, in the UK, which is just mind-blowing. They’re a great business if you want to do it yourself and, in fact, many people choose to. If you’re going to put your money with a Fidelity fund, you might as well do it yourself.

Some people use the new tech-enabled ones, like AJ Bell and IntegraFin; all these new platforms are coming up with really clever propositions and good pricing. Some people aren’t comfortable doing it on their own. Some people still want a human to do it. I’m very happy that they’re out there, because it gets people investing, it gets people excited about putting money into the markets. But I don’t think it’s a threat, per se, to the advice model. For example, in the global financial crisis, in 2008/2009, a lot of these people that were invested in Hargreaves, their own funds, lost quite a lot of money. They decided, you know what, I’m just going to go and get it done by a human pro and all that money went to SJP, so it exploded in those two years because people just said, I’d rather not lose that again. I’d rather have a human being to scream at, if it happens.