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On Friday (13th October), SJP shares fell by over 20%! On a single day.

In the past 6 months, it's lost 46% of its market cap. That’s around £3bn that’s just evaporated.

Looking at SJP stock price, market analyst 😜 Ernest Hemingway quipped:

How did you lose half your market cap? Two ways. Gradually, then suddenly.'

The following Tuesday, SJP announced a radical overhaul of its fees!

Oh, now I finally get it: Consumer Duty is a custom-made regulation for SJP. Enforcing it on the rest of us is merely a decoy.

The entire retail investment industry is merely a pawn in this cat and mouse game between the FCA and SJP.

Let’s unpack what’s going on with, what has been until now, the UK's most formidable wealth management business.

In The Beginning…

To understand its predicament, you have to understand its roots.

Founded in 1991 as J Rothschild Assurance by South African lawyer turned financier, Sir Mark Weinburg, and his protege Mike Wilson, with the backing of Jacob Rothschild. The business adopted its current name after a reverse takeover of St James’s Place Capital in 1997, when it became a public company.

Weinberg was a serial entrepreneur, and the father of the variable premium whole life policy, who founded Abbey Life, and then Hambro Life, which later rebranded as Allied Dunbar, also affectionately known in the industry as Allied Crowbar!

Having left school with no A Levels, Wilson found his calling in life insurance sales, becoming the youngest broker consultant at Equity and Law. But what he lacked in academics, he made up for in charisma. Once he gave a speech to 2,000 sales people who ended up giving him a full ten-minute standing ovation!

So when the pair started SJP, they not only brought many of their first cohort of life insurance salesmen (and they were mostly men) from Allied Crowbar, but they also brought the culture, particularly the art of fee obfuscation that is now synonymous with SJP.

Fast forward two and half decades, SJP has become the most dominant force in UK wealth management!

And regardless of how much those of us on the independent advice side disagree, it has become the bellwether of how most people, especially regulators, politicians and the media think of financial advisers.

Don’t get me wrong, there are some things to admire, even envy about SJP.

• Its marketing prowess is the envy of the entire industry! Overall, clients seem to like what they get from SJP. 🤷🏿‍♂️ It retains 96.5% of client assets, better than its own 95% target.

• It brings new advisers into the industry, spending around £12m a year on its Academy program

• It gives advisers a framework to 'run their own business' within the giant corporate apparatus that largely shields them from regulatory burden. Of course, the downside of this is that the adviser is restricted to SJP products, and they are in effect conflicted.

And in spite of all the competition, regulation and media scrutiny, SJP has gone from strength to strength. It's doubled its AUM in the past 5 years.

Nothing has managed to stick. Not RDR. Not media scrutiny. Not the competition.

The House of SJP has weathered every storm, sling and arrow. And has managed to stand stronger and taller than its peers. Until now.

So far this year, SJP has lost nearly half of its market cap! That's around £3 billion, and much of that was on Friday the 13th following the news that the FCA doesn't seem to believe that the changes that SJP has made to comply with Consumer Duty is enough. The FCA seems to be pushing for more radical changes.

The Cash Cow

Before we unpack the changes to its fees structure, let's look at how SJP currently makes money.

It has over 4,693 advisers (Partners), and manages around £158bn of assets for some 927k clients.

In 2022 alone:

• It pulled £17bn in gross inflow (net inflow £9.8bn). By comparison, the entire UK adviser platform sector pulled £67bn gross assets the same year (£25bn net)

• It reported over £1bn in net annual management fees. Of this, £412m in is from what it calls assets in the 'gestation period!' (That is a term you learned in Biology or Science class. Little did you know it would be useful in understanding financial services!). The implication is that, of this £1bn of annual management fees, SJP only banked £607.7m in net income, and ultimately, £410m in cash profit.

This excludes just over £1bn of fees paid out to its advisers. SJP Partners are effectively self-employed and while their pay comes out of the clients funds, it's not included in the Income Statement of the SJP corporate machine.

The problem with SJP has alway been the obfuscation of fees. It’s a feature, not a bug.

And if, like me, you've found yourself scratching your head trying to understand SJP fees, rest assured, you're NOT stupid. It is indeed really complicated. So much so that Baroness Morrissey, former CEO of Newton, former chair of AJ Bell and a former board member at SJP, could not understand SJP fees. Speaking to the Telegraph in January 2020 about SJP fees, she said'

'I have not met anybody yet who can completely articulate how it works in a sentence. I do not believe they are transparent because otherwise I would be able to explain them to you very quickly. '

If Baroness Morrissey couldn't understand SJP, what hope does Mrs Miggins have?

But let's try to break down its current fees. In this example, I am going to use an investment into the SJP Pension, invested in the Balanced Managed Fund to break down the fees.

In addition to the above, there is the Exit Charge if you move your investment away from SJP in the first 6 years. It starts at 6% in the first year, and then slides down by 1% each year. But SJP doesn’t really make any money from exit fees, because very few people leave! And that’s what the fee is designed to do - stop you leaving in the first 6 years.

The initial and ongoing advice fees, as well as the initial product fee doesn't really add to the SJP bottom line. The advice fee is paid to the Partners, and the initial product fee has to be amortised over a period of time.

The real cash cow is the annual product fee!

The Magic of the Gestation Period

About a third of SJP assets are in what it refers to as the ‘gestation period’ which means these assets have been invested with SJP for less than 6 years.

And since SJP effectively waives its annual Product Fee of 1% in the first 6 years, it doesn't earn any money on assets in gestation.

Here's how they describe the model in their own words:

“The primary source of the Group’s profit is the income we receive from annual product management charges on FUM. However, most of our investment and pension products are structured so that annual product management charges are not taken for the first six years after the business is written, so the ongoing benefit of these gross inflows into FUM for a given year will not be seen until six years later. This means that the Group always has six years’ worth of FUM in the ‘gestation’ period. FUM subject to annual product management charges is known as ‘mature’ FUM.”

This means around £50bn, or a third of SJP assets, will start producing income over the next 6 years. And it is expected to add £383m a year of revenue once all the current assets in gestation mature in 5 years.

Assets in gestation are in effect guaranteed future profits. The business has already been won, SJP is already managing the money and there is no additional cost associated with earning a fee from the assets at the end of the 6th year. The word is, the FCA is particularly unhappy with the exit fees because it doesn’t align with Consumer Duty requirements to prevent foreseeable harm. The trouble is, removing this fee will put what it refers to as gestation assets at risk. If these assets walk, so does SJP's future profits.

All Change?

So what’s changing with SJP’s charges?

1. They are removing the exit fees, and the concept of gestation for new business

   SJP is NOT removing the exit fees (or Early Withdrawal Charge) for existing clients! That means £50bn of assets or a third of its AUM will still be subject to exit fees if they moved within 6 years of joining SJP.

   Clearly, as these assets ‘mature’ or reach their 6th anniversary, they will move into the new charging structure.

   And again, as mentioned, the purpose of the fee isn’t to make any money, it’s to stop you leaving in the first 6 years. It’s to keep you in gestation. The flip side of that is that, these new assets will also now start paying the ongoing fees that were previously waived.

   They are a bit vague about exactly when this will come into effect, only that the changes will be in place by mid-2025. Now, if you were a prospective client of SJP, do you want until 2025 to avoid the exit penalty?

2. They are reducing the Initial Fees from 6% to 4.5%

   What they are effectively doing here is removing the 1.5% Initial Product Charge. Again, remember we said that the initial product charge doesn’t make any meaningful difference to SJP bottomline anyway! So this change will have no impact on SJP advisers.

   

3. Rebalancing the fees to show the cost of element

   They are effectively breaking down their fees to show the cost of funds, product/platform, and advice more accurately and transparently.

   That’s what the rest of the industry implemented with RDR, 10 years ago! Better late than never, I guess.

The advice element will increase to 0.80% from the 0.50% they currently show. The annual product fees, aka the cash cow reduces, to 0.35%, from 1%, and the fund charges appear to remain unchanged at 0.52% in their example.

This is important because, for the first time, SJP is having to reflect the value of advice accurately, in line with the rest of the industry. This creates a level playing field between IFAs and SJP. What they did previously was to undermine the value of advice, and make the Product Charge artificially expensive.

Crucially, I expect that the SJP advisers will continue to get ~0.5% of that 0.8%. Again, this is to show them how much they are actually paying for the SJP corporate apparatus! In effect, SJP is charging the adviser 0.30% of the 0.80% advice fee to provide them regulatory, and brand support, while severely restricting what they can recommend to their clients.

The way the maths works currently, is that SJP retains ~0.60% on mature assets of £100 billion in order to maintain its net income of £600m. This is after paying out the true cost of the platform and segregated mandates to third-party fund managers.

The new proposal reduces their net income income on assets to ~0.45%, maybe 0.50% bps. That said, revenue and cash profit will probably stay the same in cash terms, since the mature AUM would be higher due to assets coming out of the gestation period and any new assets start producing income straight away! The point is, these changes should have minimal impact on the SJP bottomline, in cash terms.

The Only Way Is Passive?

In a recent note, Numis analyst David McCann has suggested a solution to the SJP predicament.... wait for it, wait for it..... go passive!

I mean who would have thought that lowly index funds could be the saviour of the UK’s largest wealth firm? Could the stone the builders rejected become the cornerstone?

The proposal was that, with a new CEO, CIO and Consumer Duty, it’s a perfect opportunity for a radical change.

A big deal is being made of the fact that SJP's new CIO Justin Onuekwusi ran a LGIM Multi-Index range, a low-cost multi-asset range and he’s the perfect man for this Herculean task of shifting ~£100bn to index funds. Justin isn't what I would describe as a die-hard index investor - I recall disagreeing with him on the value of tactical asset allocation for instance, but I’m sure he recognises the futility of high cost actively managed funds.

SJP hasn’t adopted this proposal yet, although it hinted it would be assessing its funds. 

Weakening the Moat

SJP has an unassailable moat. Most of the numerous attempts to create SJP Mark II have failed, perhaps with the notable exceptions of True Potential and Quilter. All today’s PE-backed consolidators are attempting in one way or the other to emulate SJP.

The exit fees is SJP’s most formidable moat. Not because it generated revenue, but because it deters SJP clients and advisers alike from leaving. To reiterate, SJP is NOT removing this fee for existing clients. A third of SJP assets or £50bn is within the gestation period, and that was projected to generate c£383m of future annual fees when they mature. That fee will reduce a bit but, overall, the structure, and that moat isn’t going away anytime soon.

Secondly, these changes will have a limited impact on SJP adviser revenue. SJP advisers have an average revenue of £220k in 2022, which is broadly in line with the rest of the industry. The difference is that much of the regulatory headache and to some extent, the marketing costs, are absorbed by the SJP corporate apparatus. And now, they can see that the cost of that is around 0.30%.

The question for SJP advisers is, do you want to stay under this corporate apparatus, with all the restrictions that come with it? Or do you take your client, charge them 0.80% for your advice, and have access to a much wider range of products, many of which would be much lower cost than what’s available with SJP.

My rough estimate is that the average SJP adviser looks after around £32m of client assets. I’ll wager that most SJP Partners would likely do much better on their own, in terms of revenue and profitability, than they do within the SJP corporate machine. Ex-SJP advisers are amongst some of the best IFAs I know. But with a third of their clients' assets trapped in gestation, I doubt many of them would consider jumping.

Another one of SJP moats is the 8x revenue multiple offered to advisers to buy their practice. It offers loans to partners to buy out their retiring counterparts, a way to guarantee the assets never leave the firm, and give both parties an incredibly attractive incentive to stay with SJP until they retire. I guess we’ll see how that changes but, again, if that’s still on the table or even if it reduces to say 6x, it’s still very attractive compared to what they could get if they went independent.

These changes are clearly positive for SJP clients, and probably neutral for SJP advisers, and they slightly weaken the moat of the SJP corporate machine. Changing fee structure is one thing, changing the incentive structure and deeply embedded life insurance salesman culture is quite another.