As the St James's Place share price began to fall by almost a third on Wednesday morning, shareholders could have been forgiven for feeling like they'd been seen before. For the third time in less than 12 months, a profit warning has knocked a significant amount of value from the FTSE 100 wealth management index.
This week's decline was driven by a surprise one-off provision of £426 million relating to refunds to potential customers. This pushed SJP to a pre-tax loss of £4.5m for 2023, down from a pre-tax profit of £504m in 2022. This was not an ideal first set of results for Mark Fitzpatrick as the wealth manager's new chief executive.
Not so for shareholders, who were still reeling from two similar defaults last year, first in July after a planned fee cut was announced, and then again in October after the Financial Times revealed that the regulator was putting pressure on SJP to proceed. In a more radical reform plan for its charges. The company confirmed the change in fees days later.
SJP's consulting fees have been widely criticized as arcane and complex, and for offering employees generous bonuses such as cruises and company-branded cufflinks before a sweeping overhaul of pay and benefits in 2020.
SJP doesn't even know how many clients it might have to pay. The £426 million allocation was based on a “statistically credible, representative group” of clients.
Unsurprisingly, the wealth manager's shares have fallen 60 percent over the past year.
The development has a clear financial impact on the company, which cut its bottom line from 37.19pa in 2022 to 8p. But questions are now being raised about whether SJP may not be the only wealth manager in trouble – and whether SJP's provision may represent the first step in a wider regulatory crackdown on advice fees.
The UK wealth management sector should be able to benefit from a number of demographic trends, such as an aging population in need of financial advice, as well as government efforts to liberalize pensions and push money into defined contribution schemes; Assets that wealth managers can charge fees to manage.
But a string of bad news from SJP has led some to question whether it is as well positioned to benefit from these changes as previously thought. “We increasingly have to question how successful SJP will be in monetizing this opportunity,” said David McCann, an analyst at Nomis.
Its latest cases have come against the backdrop of so-called consumer duty, new regulations that came into force in July that force financial companies to prove they give customers value for money. The Financial Conduct Authority, which enforces the rules, has recently tightened regulatory scrutiny of fees charged by wealth managers.
“One big area of concern for us, where we are currently seeing bad practices, is that too many companies are still charging customers for a service they are not consistently using,” said Kate Tokley, Head of Consumer Affairs. Investments in the FSA webinar in December.
Earlier this month, the Financial Conduct Authority warned advice firms that it may crack down on client fees, and requested information from the 20 largest firms in the sector, to allow it to decide whether to take further regulatory action. This may eventually include fines for companies that are perceived as not treating their customers fairly.
Wealth managers have been largely insulated from the margin pressures that UK asset managers have faced over the past 20 years, resulting in active fund managers consolidating and cutting costs as they struggle to compete for an ever-dwindling market share being gobbled up by passive managers. .
An increasing focus on high fees and value for money could open a race to the bottom for fees for wealth managers, reducing profits and potentially limiting private equity interest in the sector.
“I suspect [this issue is] “This will impact a lot more businesses than just St James's Place,” said Charlotte Ransom, chief executive of discretionary wealth management firm Netwealth.
Wealth managers in the UK charge clients fees for providing financial and tax advice and managing investment portfolios. Typically, clients will pay either a one-time fee, an hourly rate, or a recurring fee for the relationship with an advisor. About 77 percent of revenue in the consulting sector comes from these annual fees, or ongoing fees, according to consulting firm Lang Cat.
For SJP clients, who also pay an upfront fee for advice, this ongoing fee typically amounts to 0.5 percent of all assets. This covers the cost of the relationship with the advisor, which can include services such as an annual review to ensure that the initial advice provided remains relevant.
The problem SJP faces is that prior to the rollout of new IT software in 2021, there are gaps in record keeping and, for some customers, they are unable to prove whether they have provided the ongoing services they were paying for, for example an annual subscription review .
“The further back in time we go, the less available our ability to demonstrate client-advisor interaction becomes,” Fitzpatrick said.
The group was alerted to the issue after seeing a spike in complaints towards the end of 2023 following the FCA's consumer duty rules coming into force. Law firm AMK Legal, which specializes in claims management and takes a 40 per cent discount on settlements, said it had seen a more than three-fold increase in offers from SJP to settle complaints in the past five months. SJP declined to comment on the matter.
The number of complaints received by St James's Place Wealth Management, which is responsible for the advice and services provided by the group's advisory firms, more than doubled in the second half of last year, rising to 8,606.
To cope with the expected high number of claims, SJP assembled its complaints team last year, adding an additional 100 staff to deal with the issue, which it believes will take up to three years to resolve.
The Financial Ombudsman Service, which oversees consumer complaints against the sector, pressured SJP in November to change how it deals with some complaints, which SJP accepted.
It was certainly a baptism of fire for Fitzpatrick, a former senior executive at British insurer Prudential, who took up his post in December. While some analysts praised him for “sucking the nettle”, others pointed to growing trust issues between the company's management and shareholders.
Fitzpatrick told the Financial Times this week that he remained “optimistic” about the market opportunities for financial advice, and urged shareholders and analysts not to lose sight of the company's fundamentals amid the “excitement” surrounding the complaints clause.
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While net flows fell from £9.8bn in 2022 to £5.1bn last year, funds under management rose 13 per cent to £168 billion, and SJP's adviser base grew 3 per cent to 4,834.
But some wondered whether there was more bad news to come, especially in light of the comprehensive review Fitzpatrick announced earlier this year.
“Why is this coming out drip drip?” one analyst asked. “They have to deal with this.”
