Dipping into middle England’s pockets: the St James’s Place business model
Lots to read in St James’s Place 2008 Annual Statement of interest to No Monkey Business followers. Over 80,000 wealth management clients have voted for SJP with their cheque books, with an average portfolio value of £182,000. Only 14% have assets over £1m so this is not the high net worth marketplace. In middle-income middle England, costs really do count. As SJP themselves say, we are under-providing and over-reliant on property investments (instead of financial-asset holdings) for our retirement. But attaching high front-end and continuous charges to both the stock of financial assets and new assets (which the firm is still very efficient at acquiring) pushes clients away from their goal. SJP is a phenomenal success story but a bitter sweet one.
In their press release, SJP say they aim at a retention rate of 1% of assets after meeting costs. Wow! That, just so you are sure, is after expenses, not gross. By far the largest cost borne by SJP’s ‘policy margin’ is the remuneration of their direct sales staff, whom they call ‘Partners’. Other costs reflect the fact that they essentially out-source all the manufacturing process so the business model is not directly comparable with other investment houses or even most real insurance companies. They refer to themselves as a ‘dedicated distributor with manufacturing margins’ which accurately expresses the importance of controlling the products (rather than manufacturing them) so as to capture the retail/manufacturing mark-up, and reflects the importance of the SJP ‘adviser’ network in pushing these products to clients. They do both these things brilliantly.
But customers need to ask themselves whether they are well-served by a sales machine that purports to be advice-driven even if it is not independent.
Excluding wrapper charges, which SJP is also pretty good at, the underlying third-party investments carry Total Expense Ratios ranging from 1.44% to 2.32%. At the bottom end, by the way, is their UK tracker! Though SJP claim they introduced it because some clients wanted it, it accounts for barely 2% of asset holdings. You could say clients are acting rationally by ignoring it if you can buy one elsewhere for a quarter of that but more likely is that SJP advisers do not push it and are encouraged not to.
Years ago it was assumed that the high cost of investment products was the lesser of two evils, compared with people’s reluctance to save until their arms were twisted by effective salesmen. Now that there is competition from lower-cost channels, this does not wash any more. But it will continue until customers are more discerning about costs and about the agenda conflicts that typically go with high costs.
SJP are confident that they can tap into the new class of redundant City worker to fuel growth in ‘Partner’ numbers, believing that these are well-connected people. I hope their contacts make a different connection altogether.