Dan Wiltshire: SJP and the unintended consequences of well-meaning regulation

I was interested to read a recent poll found most advisers feel the Consumer Duty has been a ‘worthwhile’ exercise.

I must admit, having been sceptical prior to implementation, the impact so far has been greater than I was expecting. Most notably, the changes at St James’s Place (SJP) caught me by surprise.

For anyone not associated with SJP, the news of changes to its charging structure, including the scrapping of its exit fees, has been received as an unambiguously Good Thing, although there are still questions about the lengthy transition period and why this hasn’t been done sooner.

There has been quite a debate on social media about how it will affect client outcomes – it’s striking how some partners, even now, are prepared to defend the ‘old’ model. They point to analysis by Numis which suggests SJP is actually quite reasonable compared to other large wealth managers.

Some partners insist there is no initial fee at all. This has resulted in eye-watering sums charged for standard advice on large cases

Perhaps, but the problem I’ve always had with these comparisons is that they only consider headline charges and don’t account for the way commission (sorry, commission-like charges) affect every day commercial decisions and adviser behaviour.

Specifically, having the ability to amortize an initial fee over six years with full day-one allocation reduces the need to discount for large investment amounts – i.e. it is less transparent.

Indeed, some partners insist there is no initial fee at all. This has resulted in eye-watering sums being charged for standard advice on large cases. It is also the reason for the infamous early withdrawal charge (EWC).

Rather than there being no initial adviser charge, it is perhaps more accurate to think of it as a forever-and-ever-and-ever charge

This is where it starts to get complicated. The EWC is required to compensate SJP for not having taken an initial fee, or so the logic goes. Why, then, do ongoing client charges not reduce after the six-year pay-back period? It’s because at this point a ‘product charge’ kicks-in (‘effectively waived for the first six years’), which continues indefinitely.

So, rather than there being no initial adviser charge, it is perhaps more accurate to think of it as a forever-and-ever-and-ever charge.

Once you understand this (and you could be forgiven for not understanding it), you will surely conclude that this mindbogglingly complex renumeration structure cannot be in clients’ best interests. So, who is it for?

The charging structure makes it very difficult for partners to leave SJP

One could assume it’s for the partners, providing them with big initials and the ability to retain clients within the EWC period. Possibly, but I think this misses the point.

The main beneficiary is SJP plc, for several reasons. Firstly, it incentivises a sales-orientated culture, which feeds into the broader corporate objective of growing assets under management (AUM).

Secondly, the EWC creates ‘sticky’ business that helps to prop up the internal market for buying and selling client banks between partners. The high multiples are a significant lure for advisers approaching retirement – another major source of AUM growth. These transactions are often funded by huge loans provided to younger advisers on the premise they are purchasing a reliable, stable revenue stream.

Many younger advisers are laden with SJP-linked debt. SJP has become the Hotel California of financial services

Thirdly – and most importantly – the charging structure makes it very difficult for partners to leave SJP (it’s hard to convince clients to move with you if there’s a 1-6% EWC, no matter how strong your personal relationship is).

Add to this the fact many younger advisers are laden with SJP-linked debt, you will see that SJP has become the Hotel California of financial services. Indeed, an SJP partner recently described it as “like being in a gilded cage”.

I would guess this is why SJP needs two years to implement the pretty straightforward changes (and then, only for new business) – they need time to shore up their restrictive covenants and convince the partnership there’s a reason to stick around and fight it out with everyone else on a level playing field. This, I believe, is why there’s been so much resistance to change – it is potentially existential.

Most IFAs find the SJP brand useful foil to define themselves against – a pantomime villain

So, what will the fall-out be for the rest of us and the broader industry. I’ve never been threatened by the ‘old’ SJP model. In fact, I think most IFAs find the brand useful foil to define themselves against – a pantomime villain.

This will become more difficult with the new charging structure, particularly if it coincides with a shift to more passive funds (and presumably lower costs). The regulator will hope this raises the bar across the profession and filter down to better consumer outcomes. I certainly hope so and, for some clients, it could result in lower fees and better service.

Yet I find myself playing devil’s advocate. What if those SJP social-media die-hards are right, or partly right? Could there be some redeeming quality associated with the ‘old’ model that’s being overlooked? Could there be unintended consequences that haven’t been properly considered?

My concern is that, in practice, the distinction between guidance and advice will be lost on the consumer

For all its faults, I can think of two clear benefits of the SJP status quo. Firstly, the advice gap. Like it or not, the ‘old’ SJP structure (like commission before it) makes providing advice for lower amounts more commercially viable. The cost of providing advice on small regular contribution savings plans, in particular, can appear disproportionate and therefore many IFAs choose not to serve this market. SJP does.

Secondly, SJP is training a huge number of the new advisers our profession badly needs if we are to meet the growing demands of the retiring baby boomer generation. The ability of career changers to make the switch is facilitated, in part, by the initial-heavy charging structure of the SJP model and the ability to borrow to buy from retiring partners. In future it will be harder for these entrants to survive the early years, either by starting from scratch or by purchasing a wobbly client bank.

Both factors point to a lower, narrower supply of advice going forwards, which, left to the market, would ordinarily lead to… higher charges. These concerns have perhaps fed into the Financial Conduct Authority’s recent warnings of a more ‘targeted, intrusive and assertive’ stance in future. But more regulation will only drive costs up further, with the inevitable knock-on impact of either higher fees and/or lower advice standards.

We may be about to return to an era in which large financial institutions effectively sell their own opaque, expensive products, whilst presenting it as ‘advice’.  Sound familiar?

It seems the FCA has opted for the latter with its recent advice-guidance boundary proposals. In the proposals, it admitted its ‘targeted support’ measures may give larger advice firms a competitive advantage and result in more consolidation. The regulator also admitted its proposals for simplified advice may make “holistic” advice more expensive and less easily available.

Is this really progress? My concern is that, in practice, the distinction between guidance and advice will be lost on the consumer. We may be about to return to an era in which large financial institutions effectively sell their own opaque, expensive products, while presenting it as ‘advice’. Sound familiar?

Dan Wiltshire is an independent financial planner at Wiltshire Wealth