St. James’s Place

An ageing population places increasingly higher demands on savings, including pension schemes. But how to manage the pension – with whom should one invest, and how does one manage one’s assets most efficiently with regards to tax? The greater one’s personal assets, the greater the supply of advisors. St. James’s Place makes a virtue out of offering advice to a group of British citizens who do not otherwise receive many offers. There are good earnings to be made from this – for all parties.

St. James’s Place is an independent British financial advisor. The nature of the independence stems from the company being able to offer its clients a wide selection of potential asset managers without having a financial preference as to where the funds should be allocated. This means that St. James’s Place’s more than 3,800 financial advisors, in collaboration with the individual client, can define the pool of investment which best fits the clients wishes and needs without having the client be concerned whether a manager is proposed on the basis of the client’s or the advisor’s own financial interests.

In a way this sounds elementary, and it actually is. In the past, however, it has been a problem – not just in the United Kingdom – that advisors have received kick-back fees from managers in relation to the scope of the assets directed to the manager by the advisor. In the United Kingdom, however, it has been statutory since 2012 that an advisor must declare whether or not they are independent. St. James’s Place has been independent since its establishment in 1991 – and this has been a success in our view.

Total advised assets have grown by just under 20 percent per year over both the past five and ten years, and now stand in excess of 100 billion British pounds. This is an impressive growth rate, but another core fact is that St. James’s Place on average acts as advisors to the clients for more than 20 years. This adds stability and predictability, both for the individual advisor but certainly also for the company’s cash-flow generation. While the average St. James’s Place client is 56 years of age, more than half of new clients are younger than this.

A different target group

St. James’s Place’s target group, as previously mentioned, differs slightly from the typically very wealthy target group for advisors, where assets of several million pounds are chased. St. James’s Place focuses its resources on advising wealthy Britons with investable assets between 50,000 and 5 million pounds. As mentioned, total assets currently advised by the company is 100 billion pounds distributed across around 650,000 clients. This is around 150,000 pounds per client and almost eight out of ten clients are advised on less than 120,000 pounds. Stricter legislation and regulatory requirements make it more difficult to do business profitably at such levels – but efficient processes and scale make things very profitable for St. James’s Place.

This has, as mentioned, led to a less than plentiful supply of advisors for this group of individuals. This represents an opportunity for St. James’s Place. Very wealthy clients with assets in excess of ten million pounds are used to receiving numerous solicitations, offering expensive dinners and field trips. The less wealthy client group is not used to this. This is not to say that St. James’s Place does not take care of their clients and treat them well, as they certainly do. Indeed, 96 percent of clients state that they are satisfied or even very satisfied with the service and product received from their advisor with St. James’s Place – and they would also recommend friends and acquaintances to seek advice from St. James’s Place.

The influx of new assets certainly suggests that they are doing just that. Around 90 percent of inflows are from existing clients or on referrals from existing clients. In other words, only 10 percent of inflows do not have a direct or secondary relation to the advisors. Word of mouth is an extremely effective marketing channel for businesses build on trust – which is very much the case for a financial advisor.

Assets of 100 billion pounds to double every five years

Managements target is for inflows to grow by 15 to 20 percent, driven by 5 to 7 percent growth in the number of advisors and increased efficiency, measured as inflow per advisor of an additional 5 percent. While the growth rate in inflows was slowing in 2018, this comes after a number of years with higher growth than the long-term expectation, and so has not been cause for any particular concern on our part. Total advised assets are expected to double roughly every five years.

By receiving advice from St. James’s Place, clients benefit from access to asset managers that they would otherwise be restricted from – and at fees that are generally reserved for institutional investors. These rates are about half of what the client would have had to pay had they approached the manager directly.
St. James’s Place features an investment committee and a smaller organisation whose purpose is to identify and monitor current and potential asset managers. This method ensures that the selection of asset managers is restricted to the best of their kind and that there are no unforeseen changes with managers or their performance.

Today, more than 3,800 advisors are associated with St. James’s Place, and as mentioned the target is for this group to grow by 5-7 percent per year. This is equal to an addition of around 225 advisors a year. The current group of advisors equal just over ten percent of the qualified and certified advisors in the United Kingdom, and the company has therefore created its own academy where they can train and educate new advisors. Advisors typically become effective in terms of creating inflows over time, particularly after four to five years with increasing productivity as measured in terms of inflows per advisor. Based on this, it is interesting and promising that a third of the advisors were added to the number within the last five years.

Tasks centrally located at the headquarter are particularly focused on the selection of managers, and on having the right tools to make the work day as easy for advisors as possible. This enables advisors to prioritise their time with clients and hopefully reducing administrative tasks as much as possible. In this respect, St. James’s Place is currently integrating a new IT solution across the organisation. Historically speaking, there have been three platforms, which are being reduced to one. Over time, this should lead to clear optimisation of costs per client and so contribute to increased growth in free cash flows. The business model does not involve any other investment needs and thus has a very limited need for capital expenditure. Just as we like it.

Considerable tenure in management

Andrew Croft is the CEO, and he has been with the company since 1993 and has therefore been on board almost since the establishment. Prior to being appointed CEO, he was the company’s CFO for 13 years. The previous CEO, David Bellamy, was with St. James’s Place since its establishment in 1991 and until he decided to retire in 2017. Long tenures and thoughtful succession planning are often a strong indicator of strong company cultures, which is also the case here. Craig Gentle is the company’s CFO.

As long-term and satisfied co-owners of St. James’s Place, we are also very much appreciative of the financial balance sheet risk of the company being very limited. The company does not assume any financial risks on behalf of its clients, and the company’s balance sheet is therefore not affected when prices of securities fluctuate. This is one of the areas where we frequently encounter misunderstandings related to the business model and stability.

In the wake of the British EU referendum in June 2016, the share price fell temporarily by more than 40 percent, and the British authorities contacted the management to ensure that the risk contingency plans were a match for these large effects. The management team, however, were unfazed.

In order to ensure the same level of calmness in clients, advisors had spent the days after the referendum formulating and distributing letters and emails, outlining how, in their view, the clients should respond to the significant price fluctuations. On this basis, St. James’s Place not only maintained their business, they grew it during those months. Client assets were positively affected by the falling British pound, as more than two in three investments are determined in foreign currencies – and at the same time there was a solid influx of additional assets from existing as well as new clients.

The management team determines on an ongoing basis what it sees as the value of already concluded business – so-called ”embedded value”. This, in brief, is an overview of the discounted value of future earnings and cash flows from existing clients. The share price of St. James’s Place today is lower than this embedded value – and management’s assumptions have historically turned out to be more conservative than subsequent developments. This means that the growth in this high-quality business can be acquired without paying for it. Surely that is a good growth business to be a co-owner of.

Previously, management would generally speak of the company’s many partners – the advisors. Years ago many of these were sole proprietorships, but in keeping with the growth in the businesses of the advisors, and thereby St. James’s Place, advisors have increasingly become small businesses where an older advisor may have one or two younger advisors handling the many clients. Long term, this may potentially be positive for the opportunity for advisors to retain client relations across generations – which again will benefit the long-term durability of the competitive advantage of St. James’s Place and contribute to creating attractive and growing free cash flows.

A model for replication outside Great Britain

There are no immediate reasons as to why a business model such as this should not be capable of being transferred to markets other than the British – we could see the potential in Denmark, as an example. In recent years, management has decided to invest in a presence in Southeast Asia, the rationale being that the number of expatriate Britons in former British colonies could form the basis of success. It is still early days and the overseas business still only totals around half a billion pounds in assets advised.

The predictability and stability of client relationships, as previously mentioned, are seen by average client relationships being between 20 and 25 years. This is supported by the number of pension fund assets. Pension assets make up around 42 percent of advised assets. The share of pension assets is expected to increase. In support of this, pension fund assets are around 60 percent of inflows. Stability and predictability are therefore actually expected to increase.

This cannot be reduced from reported short-term earnings. Due to a variety of start-up payments, pension assets are not cash flow positive for the first six years – but after this, they are. Around a third of the 100 billion pounds currently being advised are in this gestation period. Management estimates that this third of the assets will contribute cash flows of 255 million pounds after tax per year when they exit this period. This is the equivalent of 10 months’ free cash flow which cannot currently be booked – but can be expected to contribute after some years.

Annual dividends in St. James’s Place currently stand at just under five percent of the market value, and we consider this a very attractive valuation. Dividends have grown by 25 percent annually over the last decade. With prospects of attractive growth in free cash flows of between 15 and 20 percent per year, dividends are expected to grow at the same rate. As mentioned, St. James’s Place’s share price development has not reflected neither the potential nor the current business development – but this does not worry us. We see long-term value-creation potential in long-term asset advisory services.