St James’s Place business model under scrutiny after fee cut

For much of the past quarter century St James’s Place was a stock market darling as it rose from a start-up based in the Cotswold Hills to the largest wealth manager in the UK.

But the past two years have been bruising. About half its market value — or £3.8bn — has been wiped out as client inflows have slowed, several of its biggest funds have underperformed and regulators have cracked down on inappropriately high fees.

Now the FTSE 100 company is preparing for a change in leadership, appointing headhunter Russell Reynolds Associates to find a successor to chief executive Andrew Croft, according to people with knowledge of the matter.

Crunch interviews for the position are to be held next week. Mark FitzPatrick, a former chief executive of Prudential, is the leading candidate to replace him, although other candidates are also being considered. FitzPatrick and SJP declined to comment on the process.

Among the top priorities for an incoming chief executive would be managing scrutiny of the company’s fees. SJP said in July it would reduce some of its charges in response to the Financial Conduct Authority’s “consumer duty” regime, broad rules that require financial services companies to deliver “good outcomes” for customers.

A chunk of SJP’s 941,000 UK clients should benefit from lower annual fees. But investors worry that a lucrative business model serving well-heeled clients, many of whom lack experience managing investments themselves, is unravelling. The company produces most of its profits from annual charges.

“Historically SJP has always strongly defended its fee margins, and this is therefore a significant departure from that practice,” said David McCann, analyst at Numis. “Moreover, it raises the important question — is this just the tip of the iceberg?”

Line chart of Market value (£bn) showing St. James’s Place’s market value has almost halved since the start of last year

Founded in 1991 as J Rothschild Assurance, the company launched on the stock market six years later through a reverse takeover of St James’s Place Capital.

SJP, headquartered in Gloucestershire, has since become a powerhouse with £158bn of funds under management and a network of almost 4,800 advisers offering wealth management and tax planning.

SJP advisers can recommend only the company’s own investment products, in contrast to independent financial advisers, who have no such restrictions.

Whether clients benefit from the arrangement is unclear. SJP’s figures show that 41 per cent of UK clients’ assets under management were in funds that delivered “insufficient value” last year.

Last month, six of its funds — with a combined £29bn under management — were included in Bestinvest’s twice yearly “Spot the Dog” report that identifies the worst-performing funds over a three-year period.

Some clients complain SJP’s fee structure has long confused them. One said he encountered “obfuscation” when he asked for a breakdown. “It was never entirely clear,” he said. A former SJP adviser said “[SJP] advisers do not understand it either.”

The company said it conducts training with its advisers to ensure they understand the charging structure and how to explain it to clients.

SJP charges 4.5 per cent upfront for initial advice, as well as 0.5 per cent annually. Investment and product charges are additional.

Analysts at JPMorgan Cazenove estimate about a quarter of the company’s revenues come from initial fees.

After a client has been with St James’s Place for six years, the company applies an annual “product management” fee of up to 1 per cent. Last month, SJP reduced this to 0.85 per cent, although only those who have been with the firm for at least a decade — about 65,000 — will benefit.

UBS analysts estimate the reduction will reduce the group’s earnings 8 per cent — or £40mn — next year.

The tacit admission that some of its fees do not represent “good value” under the new FCA criteria is the latest reputational hit to SJP.

The company was forced to overhaul pay and perks three years ago after the Sunday Times reported advisers received lavish rewards, including cruises, for hitting sales targets.

There is also disquiet over executive pay: 22 per cent of shareholders voted against a £3.1mn package in 2022 for Croft.

Returns for shareholders in SJP — whose board is led by former Prudential chair Paul Manduca — are also under the spotlight.

Nasib Ahmed, analyst at UBS, said the company had been seen as “dependable” in the City. But he now expects SJP to miss some of the financial targets it set in 2021.

The company had intended to increase “new business” — a measure of inflows — 10 per cent on average each year until 2025, but Ahmed forecasts it will achieve only 7.5 per cent.

While SJP’s shares reached an all-time high at the start of last year as customers ploughed in savings accumulated during pandemic lockdowns, they lost ground as that effect waned. Net inflows in the six months to the end of June dropped 38 per cent year-on-year.

The sell-off in recent weeks has left the shares trading near three-year lows.

Croft told analysts in July that “the backdrop for UK consumers and savers has been challenging” but that “the need for advice isn’t going away . . . it’s only growing stronger”.

Line chart of Number of advisers showing SJP’s network has grown steadily

“What we hear time and time again from our clients is that the relationship-based, face-to-face service they receive from St James’s Place provides value for money.”

Costs are only part of the equation for clients, said Mike Barrett, director at the Lang Cat consultancy. “It is about the trust and the relationship and the peace of mind,” Barrett said. “That’s what [SJP] is good at.”

SJP boasts a high retention rate, which stood at 95.6 per cent in the first half of the year. Consultants said exit charges put customers off leaving, however.

Clients are subject to exit fees starting at 1 per cent, which in some cases can be applicable for the first 11 years. Total charges can be as high as 7.5 per cent if customers withdraw their money in the first year.

Most SJP clients were “unaware” of “poor long-term performance and high charges”, fund researchers at Yodelar said in a report in March. “Those that are aware are often tied in.”

The former SJP adviser said it was “unbelievable” that the FCA has not yet forced the company to remove the exit fees.

“The client is locked into SJP, [with] an underperforming and expensive fund range whether they like it or not.”

The FCA declined to comment on SJP’s fees. The regulator said that generally, financial products must “provide fair value”.

The company said “feedback has been they [clients] understand the early withdrawal charge”. Croft added exit fees were justified given that the company manages long-term investments that are not intended to be redeemed early.

But while strengthening asset prices in the aftermath of the financial crisis made SJP clients willing to stomach the fees, some analysts warned they could be less likely to do so if they see persistent declines in portfolio values.

Yearsley at Fairview Investing said: “Now that [they’re in] tougher markets, those conversations are going to be harder.”

Additional reporting by Laura Noonan