Radical rethink at St. James’s Place

Shares in wealth manager St. James’s Place (SJP) fell sharply on the news that it is contemplating raising as much as £1bn from outside investors, says Patrick Hosking in The Times. The group will use the money “to back the independent businesses of the self-employed financial advisers who sell its products”.

The company has operated a business model that relies on affiliated advisors, who typically sell their client book to other people in the SJP network when they retire, with SJP providing the financing. However, SJP is mulling whether it needs to “bring in more outside finance and step up equity investment in firms”.

Part of SJP’s problems stem from the rises in interest rates over the past two years, says Jessica Clark in the Daily Mail. Previously, SJP loaned money to people who wanted to buy the books of exiting advisers at a relatively modest rate of 4%.

However, with the bank rate now 5.25%, SJP is asking for 8.75% a year, a rate that one exiting advisor claims has “killed anyone’s desire to buy any clients”. SJP is therefore rethinking this model in favour of investing directly in networks of financial advisors.

Higher interest rates are clearly having an impact on the ability of SJP’s advisers to sell on their client books, says Lex in the Financial Times. They make it more expensive to borrow money to buy these books, and lower the value of books themselves through a reduction in the net present value (the value of future revenue discounted by the interest rate).

Another factor is that the revenue prospective advisors can expect may fall in future thanks to regulatory changes. The Financial Conduct Authority has forced SJP to “reduce its expensive advisory fee structure”. Still, with £159bn of assets under management, SJP will “get attention”, given “there are more than 30 UK wealth managers keen to consolidate a fragmented market”.