Do you really understand how the Wealth Management Model works?


Do you really understand how the Wealth Management Model works?

Today's Midweek Commentary lifts the lid on some some behavior and performance

July 29, 2022

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In today's 'Midweek Commentary' we lift the lid on massive over charging and under performance in the industry.

Do you really understand how the Wealth Management Model works?

The UK’s largest Wealth Manager, St James’ Place, posted record profits in 2021. You might think that this means your portfolios have made a record amount of profit, but Wealth Managers don’t make their money by making you money; they make it by taking your money.

Hedge Funds charge a performance fee because their job is to try and make as much profit for clients as they can. This is a model we can understand; isn’t that the entire point of investing?

Wealth managers however just make a ‘management fee’ where they take a percentage of your capital even if it’s making you anything, or even held in cash – which some of your portfolio almost certainly is.

The more capital they have under management, the more profits they post at year end. How that money has performed is sadly completely irrelevant.

St. James’s Place (SJP)   the UK’s largest manager, but was left reeling in 2019 after details of its opulent culture – paid for by clients – were laid bare.

The wealth manager promised to change, but recent pay packages awarded to its leading executives have left some wondering whether the firm has learnt its lesson. Only today the CEO said that they have no plans to change their excessive charging even in light of new FCA regulation.

Yesterday the FCA warned that regulated businesses will need to demonstrate any exit fees they charge are reasonable under its landmark new consumer duty rules.

They highlighted as an example of poor practice ‘unreasonable exit fees which discourage customers from leaving products or services that are no longer right for them, or accessing better deals’.

‘Practices such as these are likely to breach our product and services outcome rules,’ the FCA said.

SJP charges an exit fee if a client withdraws their investments in some pension and bond products early. Clients are charged 6% of their total investment if they withdraw in the first year, with the fee tapering down 1% each year until it is waived after the sixth year.

The consumer duty rules come into force for firms providing new and existing products and services on 31 July next year and this will no doubt directly clash with SJP’s charging structure – finally.

CEO Andrew Croft is still in denial though maintaining that: ‘we do not see our firm’s exit charge as unreasonable; it’s also fully disclosed to clients on a regulator basis, so we don’t see any change [to that],’ he said.

But then why would he change it, given that last year it contributed to his £3.3 million in earnings, SJP’s annual report revealed – more than four times the previous year. Was this because of their stella performance as a wealth manager? Sadly not. In fact they have more underperforming funds than anyone else in the business. But as I said, that doesn’t matter. They get paid on the amount of money they hold, not what they do with it.

A whistle-blower set out three years ago how company advisers were being rewarded with lavish holidays and diamond-encrusted cuff links – all paid for out of the fees which SJP charged savers.

Baroness Morrissey, dubbed the ‘City superwoman’, joined SJP’s board in early 2020 to help clean up the charging structure and improve the culture within the business.

Her appointment was viewed as a step forward for the male-dominated firm, and she vowed to help improve SJP’s culture, inclusion and diversity.

Early on she criticised the wealth manager’s charging structure for being too complex and promised to bring in more female talent. In an interview she admitted that not even she could explain or understand the charging structure.

After just 14 months, she stepped down.

Every year Yodeler review various funds highlighting both the good and the bad, in order to help investors choose the right place for their money. This year’s review of St James’s Place is eye-opening. Here’s what they had to say:

St James’s Place is the largest investment adviser firm in the UK. They currently manage £137.1 Billion for their investors, which is 9.8% of the total £1.4 trillion currently invested in UK retail funds (source: Investment Association).

Over the past 20 years the company has grown at an exceptional rate, recruited more advisers than any other firm, and converted many to their 'restrictive' practices. SJP now has the largest distribution of restricted advisers in the UK, restricted on the basis they can only sell/advise on SJP investment funds (which accounts for 0.62% of the unit trust, pension and bond funds currently available to consumer investors).

As well as collectively being one of the worst performing fund managers available to UK investors (as detailed in this report) they are also one of the highest cost propositions available.

Despite repeated callouts from leading media outlets, industry watchdogs and independent analysts over their high and confusing charging model SJP have made it clear they have no intention of changing them.

A large proportion of SJP clients are unaware of the firm's structure and model. St James Place Wealth Management is the advice firm with self-employed financial advisors, generally referred to as partners. However the investment funds are held with St James’s Place Unit Trust Managers. Both companies are the property of St James’s Place PLC. Under their proposition clients can opt to pay for advice or not pay for advice.

Yodelar has completed a number of reviews of St James’s Place and their investment funds over the last 5 years, and have continued to highlight to readers that a large proportion of their funds perform poorly when compared to all other same sector funds.

The restricted nature of their business model (only able to offer investors their own branded funds), hinders SJP from offering clients access to the top performing funds available from better fund managers listed in our Fund Manager League Table.

Many St James’s Place clients have questioned SJP management in relation to the factual performance of their funds, SJP have replied saying they feel market assessments are unfair. However the reality is that the performance of their funds and their investment portfolios lag well behind the majority of their competitors.

Our overall opinion of St James’s Places is that they do not offer a competitive or value driven option for investors. Their high priced funds perform poorly and the organisation relies on the sales acumen of their partner distribution model to attract and convert clients.

The majority of SJP clients are unaware of their poor long-term performance and high charges. Those that are aware are often tied in with hefty exit penalties or trust vehicles that make it difficult to leave.

In short:

  • Poor Performance and high charges from St James's Place
  • 86% of SJP funds have consistently underperformed.
  • Over 50% of SJP funds rank in the worst 25% of their sector
  • Restricted advice model, clients limited by fund choice
  • SJP advisers are unable to advise investors on 99.3% of the investment market
  • Exit penalties of up to 6% for the pension and bond products
  • Limited protection under the Government FSCS Scheme

The main limitation of the SJP model is that their advisers must only recommend SJP products and funds meaning their investors are only exposed to SJP funds irrespective of how good, bad or indifferent they are. As a restricted advice firm they have no onus to provide clients with comparative performance from all other fund managers, unlike 'whole of market' or Independent advice firms.

To provide a diverse range of funds and portfolios that cater to all risk categories St. James’s Place offers access to 148 funds that have at least 1 years performance history. These are made up of 36 unit trust funds, 38 pension funds, 37 life funds, and 37 offshore funds through SJP International (SJPI).

All of these funds are SJP owned and branded but none are actually managed by SJP themselves. Instead, SJP outsources the management of their funds to other fund management firms. These fund managers are selected by SJP’s investment committee and they are each mandated to build and run the fund in accordance with SJP’s objectives - such as the desired risk exposure and asset allocation. An important point to note is that all these funds/ fund managers are available to UK investors directly, and often at a lower cost than the SJP versions.

£137.1 billion of client money is under the management of St. James’s Place’s 114 unit trust, Life and Pension funds. Our analysis of these 114 funds has identified that £115.8 billion (84.5%) is held in funds that received a poor performing 1 or 2 star rating.

There were no SJP funds with a 5 star rating and just 3% of client assets with SJP are invested in their 4 star rated funds.

I think it’s fair to say this is not a glowing report. However, in 2021, profits climbed 50 per cent to £401million. The reason for this? People seem to keep giving them money regardless of how badly they perform or how much they charge.

This can only lead us to believe that the public grossly misunderstand how the Wealth Management model works. If you read in the paper that business at St James’ Place is booming, this simply means that investors are handing over more savings, THIS DOES NOT MEAN they are performing or that your portfolio is booming.

The performance of your portfolio makes no difference whatsoever to the amount they get paid.

Andrew Speke, of think-tank the High Pay Centre, said: ‘Given that SJP should be doing everything it can to prove its culture has changed, awarding the highest chief executive pay package since 2015 isn’t a good sign that much has changed.

‘Actions speak louder than words, and SJP will need to do far more to prove it’s really turned the corner.’

SJP had long been known for treating its clients well. Advisers at the business would frequently take their wealthy customers to exclusive restaurants, sports matches, or on private tours of tourist destinations.

But what those clients didn’t necessarily realise, according to a former employee who recounted his time at SJP to The Sunday Times, was that it was all paid for out of their fees.

SJP charges more than many of its rivals – and the adviser said that clients would often end up forking out almost half of their investment profits over time.

Customers were also largely unaware of how well the advisers were rewarded from the money they paid. If advisers hit ‘sales targets’, they were given Mulberry bags and Montblanc pens. Wealth managers shouldn’t have sales targets, they should have investment targets!

Cuff links, or brooches for women, were also handed out, ranging from blue to green to gold, depending on the adviser’s rank.

Top partners boasted 18-carat white gold, diamond-encrusted cuff links worth about £1,200, the whistle-blower said.

And favoured advisers would be able to bag a spot on one of the firm’s overseas ‘conferences’ – effectively a week-long holiday with free-flowing champagne in locations such as South Africa, Zambia, Japan or Egypt.

In 2020, Primestone Capital, one of SJP’s shareholders, launched a blistering attack on the firm as it blasted ‘excessive pay’ and poor performance.

Primestone noted that a quarter of SJP’s direct employees are among the UK’s top 4 per cent of earners.

Cowed by the outrage from customers which followed the revelations, SJP promised to get rid of all overseas business trips, and ditch company ‘regalia’ such as cuff links.

But James Daley, managing director of Fairer Finance, said: ‘If you’re trying to indicate that you’re making a change in culture then it doesn’t have the ring of truth if you’re continuing to hand out and even increase the remuneration of the top team.

‘Culture flows from the board down and what was going on at SJP was all about complacency and excess. If you’re a customer, this isn’t the sort of signal you’d be looking for.’

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