The fee fiasco weighing on St James’s Place

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As the share price of St James’s Place began to plummet by almost a third on Wednesday morning, shareholders could have been forgiven for feeling a sense of déjà vu. For the third time in less than 12 months, an earnings warning had sliced a significant amount of value off the FTSE 100 wealth manager. This week’s slump was prompted by a surprise £426mn one-off provision related to potential client refunds. This pushed SJP to a pre-tax loss of £4.5mn for 2023, down from a pre-tax profit of £504mn in 2022. It was not the ideal first set of results for Mark FitzPatrick as the wealth manager’s new chief executive.  Neither was it for shareholders, who were still reeling from two similar tumbles last year, the first in July after a planned fee reduction was announced, and then again in October after the Financial Times revealed the regulator was placing pressure on SJP to embark on a more radical overhaul of its charges. The company confirmed the change in fees days later.  SJP’s advisory fees had been widely criticised as opaque and complex, and for fuelling lavish staff rewards like cruises and company-branded cufflinks before an overhaul of pay and perks took place in 2020. SJP does not even know the number of clients to whom it may have to pay out. The £426mn provision was based on a “statistically credible representative cohort” of clients. 
Unsurprisingly, the wealth manager’s shares are down 60 per cent over the past year. The development has a clear financial impact for the company, which slashed its final dividend from 37.19p a share in 2022 to 8p. But questions are now being raised over whether SJP might not be the only wealth manager in trouble — and if SJP’s provision may represent the first step in a wider regulatory crackdown on advice fees. The UK’s wealth management sector should be able to capitalise on a number of demographic trends, such as an ageing population requiring financial advice, as well as government efforts to liberalise pensions, pushing money into defined contribution schemes; assets that wealth managers can charge a fee to manage.  But the slew of bad news from SJP has prompted some to wonder whether it is as well placed to benefit from these changes as previously thought. “We increasingly have to question how well SJP will monetise that opportunity,” said David McCann, analyst at Numis. Its recent issues have come against the backdrop of the so-called Consumer Duty, new regulations that took effect in July and which force financial companies to prove they give clients value for money.

The Financial Conduct Authority, which enforces the rules, has been tightening its regulatory scrutiny recently on fees charged by wealth managers.  “A significant area of concern for us, and one in which we are seeing currently poor practice, is that many firms are still charging clients for a service that they are not benefiting from on an ongoing basis,” said Kate Tuckley, head of consumer investments at the FCA on a webinar in December. Earlier this month, the FCA warned advice firms it may crack down on customer charges, and requested information from the 20 largest companies in the sector, to allow it to decide whether to take further regulatory action. That could ultimately include fines for companies deemed not to have treated customers fairly. Wealth managers have been largely insulated from the margin compressions faced by UK asset managers over the past 20 years, which has led to active fund managers bulking up and cutting costs as they struggle to compete for an ever-diminishing market share gobbled up by passive managers. 

The rising focus on high charges and value for money could open up a race to the bottom for fees for wealth managers, denting profits and potentially curtailing private equity interest in the sector. “I think [this issue is] going to affect way more companies than just St James’s Place,” said Charlotte Ransom, CEO of discretionary wealth manager Netwealth. Wealth managers in the UK charge clients for providing financial and tax advice, and for managing investment portfolios. Typically, clients will either pay a one-off fee, an hourly rate, or a recurring fee for a relationship with an adviser. Some 77 per cent of revenues in the advice sector come from these annual charges, or ongoing fees, according to consultancy The Lang Cat. For clients of SJP, who also pay an upfront charge for advice, these ongoing fees are typically 0.5 per cent of all assets. This covers the cost of the relationship with the adviser, which can include services such as an annual review to ensure the initial advice given remains relevant. The issue SJP has is that before the introduction of new IT software in 2021, there are gaps in its record-keeping, and for some clients it is unable to prove whether it had provided the ongoing services they were paying for, for instance an annual review.  “The further back in time we go, our ability to evidence the interaction that the client and the adviser had is less available,” said FitzPatrick.  The group was alerted to the issue after seeing a significant rise in complaints towards the end of 2023 in the wake of the FCA’s Consumer Duty rules taking effect. Law firm AMK Legal, which specialises in claims management and takes a 40 per cent cut of settlements, said it has seen a more than threefold rise in offers made by 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 service provided by the group’s advice firms, more than doubled in the second half of last year, rising to 8,606. St James’s Place has seen a sharp rise in complaints Period Complaints received* H1 2022 776 H2 2022 1,841 H1 2023 4,193 H2 2023 8,606 *Number of complaints for St James’s Place Wealth Management plc, responsible for the advice and service provided by the St James’s Place partnership. This does not include St James’s Place UK plc, which is responsible for the administration of products. To deal with the expectations of a significant number of claims, SJP has bulked up its complaints team in the past year, adding 100 additional staff to deal with the issue, which it thinks will take as long as three years to settle. The Financial Ombudsman Service, which oversees consumer grievances against the sector, pushed SJP in November to change how it was treating some complaints, which SJP accepted. It has certainly been a baptism of fire for FitzPatrick, a former senior executive at UK insurer Prudential, who took over in December. While some analysts commended him for “grasping the nettle”, others pointed to burgeoning trust issues between the company’s management and shareholders. FitzPatrick told the FT this week he remains “optimistic” about the market opportunity around financial advice and urged shareholders and analysts not to lose sight of the fundamentals of the company amid the “excitement” surrounding the complaints provision.