Last year our research into how much St James’s Place (SJP) earned from its unit trust funds revealed how earnings from that part of the business are the driving force of the wealth giant. New Model Adviser® sat down with SJP’s chief investment officer Chris Ralph (pictured) to discuss our findings in more depth.
The piece raised plenty of questions about SJP’s business model. One was why it earns sometimes large multiples more than the managers it employs and, importantly, whether SJP passes any cost savings onto clients.
SJP did list a number of benefits its model affords, including an exclusive relationship with independent investment consultancy firm Stamford Associates. This covers administrative, support and compliance costs; and most intriguingly employing behavioural psychologists who will tell the investment committee when a manager shows ‘unusual behavioural traits’.
In our research last year we compared how much SJP earned with the earnings of the fund’s manager. We found the balance varied widely from fund to fund with SJP earning 10 or 40 times as much in some cases.
For example SJP’s earnings from the Alternative Asset Unit Trust were 40 times as high of then manager BlackRock (£13 million versus £333,000). So with a manager being changed, will SJP earn more or less, relative to the manager, than before?
The answer: it’s complicated.
‘One has to be conscious of comparing apples and apples,’ said Ralph.
‘That what we are accessing is investment strategies… that is my responsibility. What we are describing to our clients is a financial and wealth management proposition that includes advice, the management and administration of those assets and underlying asset management strategy.
'Trying to equate the revenue generation from all of the second part of that with the fee we are paying to our underlying fund managers; I am not certain it is an apples for apples comparison.’
Is the price right?
Ralph talks of accessing ‘the very best investment capabilities’ and the price is what in SJP’s judgement clients should be paying for that. These arguments will not win over anyone who does not already believe manager skill, or active management in general, is worth paying a premium for.
Ralph continues: ‘Taking your argument to an extreme, we could invest all that money in passives and pay little or no fee for it to external managers. The argument about multiples of SJP revenue relative to fund manager revenue would be even more distorted.
'But one thing that would be certain. The funds would underperform and ultimately that would be very destructive to our business propositions.’
Last month SJP announced several major changes to its fund mandates. Most notably the £3 billion Balanced Managed fund has seen its manager AXA Framlington replaced by a joint team of 80% Ben Inker of GMO, and 20% Mark Baribeau of Jennison Associates.
Ralph remarked that no client would pay more for these new managers. ‘In all the changes we are making, we are not in any of these cases increasing the fee to our clients,’ he said.
But an investor may equally ask: why not make changes that reduce client costs?
SJP has billions of pounds worth of investable assets and control of distribution. Arguably it should be leveraging these factors to access managers more cheaply.
Ralph agrees, as a vertically integrated business, SJP has a distribution offer asset managers like.
For example, Magellan Asset Management runs £4 billion of assets in Australia, where it is based, and £3 billion for SJP’s International Equity Unit Trust.
‘If I wind the clock back five to 10 years, there was probably more leverage with the asset managers, because there was a premium attached to investment skill,’ said Ralph.
‘That I think still exists. But the power of distribution companies like SJP can bring has become more critical since the time I have been here.
'That is why it is important for Magellan to build a substantial distribution relationship with the likes of SJP, who can provide them with long-term positive cashflows in their funds. This means they are prepared to discount a strategy we have agreed we will run for their clients at a point that is differentiated from any of their other clients.’
'Beaten up on fees'
So where do clients see that discount in the fee they pay to access SJP’s strategies?
Ralph claimed SJP does not want to ‘blunt’ the opportunity to buy in manager skill ‘because of the price we are prepared to pay’.
But if distribution is the prize for the manager, are they not willing to take a big cut in fees for that?
Ralph says managers do not want to be ‘beaten up’ on fees.
‘Some of the firms we talk to feel as though, for relationships outside the UK and institutional market, the providers who they could work with beat them up so hard on fees that either they don’t want to work with them or the relationship becomes so skewed there is no balance in the relationship,’ Ralph said.
‘We want to work with our managers so they feel we have challenged them on the external manager charge, the fee we pay them, but make sure they do not feel the balance is skewed completely unfairly in favour of SJP.
'And therefore that a relationship with SJP is one they do not want to build. It would be idiotic of us to be so short-termist and say, "Well we achieved a five basis points fee lower on that strategy," but the board of that company saying “we had to give so much up in terms of that initial engagement with SJP, we never want to do business with them again”.’
Ralph said the process involves ‘trying to describe the type of flows these managers will be seeing’ as well as the initial funding amount, for example, and use these things to negotiate the fee.
‘But don’t just focus on the price at the expense of the skill because you won’t have any skill left.'
The right fit?
Ralph said SJP’s proposition can be accessed by both a client opening a £20,000 ISA and a £100 million client.
‘Not necessarily the exact same products clearly because of the risk profiles and so on,' he said. '[But] it is conceivable, depending on the risk parameters, that your ISA client is getting access to something generally only available in the institutional market.’
But does a £20,000 ISA client need access to an institutional money manager? Ralph suggested another advantage of SJP’s model is that the cost of advice is all-in. So, for example, tax advice is not charged as an extra.
‘If I am sitting down with a substantial client, I can also sit down with a colleague who provides advice on tax planning for clients,' said Ralph.
‘There must have been a number of different occasions the clients have said: "tell me how much else this tax planning will be?" No, that’s part of the service. "Well, XYZ other adviser was going to say I was go into have to pay £40,000 to get that additional piece of advice".
‘So that’s part of the service we offer. It is not about us selling a single investment to a single client. It is about providing holistic wealth management, often to family units.
‘Often engagement starts with an individual and a family and extends to their parents and children, intergenerational planning and so on.’
That is quite an offer for a £20,000 ISA investor.
When it comes to the value for money question, clients need to get the most out of SJP, which in turn wants to get the most out of its clients.
‘I think the actuality of the experience is so many of our advisers interact with family groups rather than a single individual,’ said Ralph.
‘You will be more than well aware a substantial part of new investment comes from existing clients investing money or existing client making referrals,’ he said. ‘I was with an adviser last week who said her whole effort this year has been helping exiting client with making further investment in to SJP so she has not had to seek any new clients.
‘She will in the future. But if her existing clients were not happy with what she was providing, she wouldn’t be having a conversation with them about getting more investment.’
SJP clients buy into a complex, bundled proposition. It seems only those who are wealthiest and have the most complex needs will derive the greatest value for money from it.