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St James’s Square is an expensive cul-de-sac in London’s Mayfair that goes unexplored by many passers-by. Its eponymous wealth management firm also has a luxury side that its clients may not be aware of.
The Financial Conduct Authority wants SJP to revise its prepaid model as part of new consumer tax rules that come into effect at the end of July. Lex believes this will reduce SJP’s market capitalization by around £1 billion.
SJP’s fees are high, particularly for clients buying its pension and bond investment products. These provide most of its funding. SJP charges an admission fee (4-5%) and rebates it over six years. The funds remain “incubation” until the seventh year, after which there is a simple annual fee. These pregnancy assets account for 30% of funds under management.
If this sounds confusing, the FCA agrees with you. It wants to change the structure. Most wealth management advisors charge fees directly to make comparison easier.
Simplifying the fees system will be a difficult decision and likely to be a difficult one for new SJP boss Mark FitzPatrick, who takes over in six weeks. There will definitely be a cost, as traditional givebacks will continue, but without the normal entry fee. The stock’s forward price-to-earnings ratio is at a historic low of 10 times, reflecting investor concerns.
Using SJP’s own data, which is the accumulated cash flow of its pregnancy assets in 2029 as of June, we can work backwards and discount it to today at a discount rate of 5%. In simple terms, this adds up to around £1 billion.
How SJP pays for this transition is another story. The price can include a lot. Nearly £3bn has been wiped off the company’s market value since it announced small fee cuts in July, possibly to appease the FCA. But SJP has excess capital of £824m. As Numis points out, it could cut dividend payments by around £300m a year.
Just like the trails in Mayfair, some customers always think SJP’s prices are reassuringly high. But its old currency fee structure needs modernization.
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