Is time running out for the St James’s Place (SJP) early withdrawal charge (EWC)? For the uninitiated, the EWC is what SJP takes back from its pension clients if they decide to exit before the first six years of their investment term is up.
If you think that sounds like an exit charge you are wrong, apparently. According to SJP, the EWC is anything but an exit charge, which is just as well because the regulator clamped down on exit charges on pension policies in 2015, banning any charges over 1% for people over 55.
Its status as ‘not-an-exit-fee’ became important again recently after the Financial Times reported the Financial Conduct Authority (FCA) is considering widening its ban on exit fees to include ‘the largest wealth managers and pension companies’. This could include the likes of platform AJ Bell and broking giant Hargreaves Lansdown, as well as, surely, SJP. Gulp!
Ask SJP to explain the EWC and you get a fairly labyrinthine answer (though I genuinely believe this is its press officer’s best attempt to explain it).
‘The initial advice charge (up to 4.5%) is facilitated from the product on day one, and the client gets growth on 100% of their investment should they stay invested for six years. If they don’t then there’s an encashment value of 94% in year one, 95% in year two, 96% in year three etc (the EWC). The initial advice charge can therefore be facilitated on day one, and the client covers the cost of this on day one.
‘The way this is applied in practice is that the effect of the product and advice charges combined (excluding the charges for managing and maintaining the underlying investments) is equivalent to a 1.5% annual management charge, together with a charge (the EWC) that will apply to any amount withdrawn in the first six years on a reducing scale.’
Clear? Well SJP seems to have completely persuaded some people. One we know for sure is Panmure, which last week published a ‘flash note’ titled ‘St James’s Place: Taking Comfort’. Panmure’s analyst Barrie Cornes recounted how he had met with SJP for a ‘catch up’.
But anyway, it then turns to the ban on exit fees. ‘SJP does not [Panmure’s emphasis] charge exit fees but an early redemption charge in order to recover initial advice and product cost… we understand that this is genuinely different from exit fees given that client returns are made upon the full amount invested rather than a reduced figure.’
In other words 100% allocation. OK, so does the client pay for advice? It feels like clients are getting advice for free. But honestly it is confusing.
Full disclosure: in the printed version of this article I asserted that clients definitely did pay for advice, the 4.5%.
It was based on a different response from the SJP press office, to largely the same question about its charges (I admit I am struggling).
Here it is:
‘In order to provide transparency to clients we highlight that the above total charge is equivalent to the following individual components:
- Advice Charges: 4.5% initial and 0.5% each year.
- Product Charges: 1.5% initial, 1% each year (waived for the first 6 years), and a product EWC of 1%.
- External Fund costs: average 0.4% to 0.55% for most clients.’
SJP continued: ‘These are two different ways of looking at the same charges. To show how they are equivalent, below is an example of a client who invests for four years.
Under the total charge clients will pay:
- 4 years’ AMC: 4 x 1.5% = 6%
- EWC: 3% because they are leaving in year four
- In total: 6% + 3% = 9%, plus 4 years’ of external fund costs
Under the transparent component parts clients will pay:
- Advice: 4.5% initial + (4 x 0.5% ongoing advice) = 6.5%
- Product charges: 1.5% initial and 1% Product EWC (the ongoing charge is waived as still in the first 6 years). 1.5% + 1% + 0% = 2.5%
- In total: 6.5% + 2.5% = 9%, plus 4 years’ of external fund costs.’
I appreciate SJP’s efforts to spell it out to me. But I am afraid I am still scratching my head. The advice charge seems to appear and disappear. And I do not think SJP clients are paying 4.5% from their pot before it is invested.
I asked: ‘Is it more of a problem that there is no fee being paid for this advice, so that the FCA would not regard it as RDR compliant? To say they have not paid anything there is no upfront fee…'
Ralph replied: ‘We have spent a huge amount of effort at all levels of the organisation interacting not just with the FCA but a lot of different regulatory organisations making sure they are comfortable with the way we charge for our services. And they have given us the green light to say they are comfortable with what we do.
Before adding: ‘They also understand that that if we are going to provide really good financial advice for clients then we need to be compensated, we need to be recompensed for the service we are providing and if it can be done inside an organisation that has the backing of someone like SJP, that works with 3,500 advisers then from the regulator’s perspective it makes their role less complex than having to regulate 3,500 individual advisers.’
Is that what it all boils down to? That it is just easy for the FCA to leave SJP alone? There is definitely something odd about the EWC.
With so many questions, many from me, we hope the FCA addresses this directly next year. Perhaps when it carries out its RDR review.