Hello everyone, welcome to your actual May. It’s a month of increasing warmth – whatever that means to you – and Bank Holidays and all sorts of good things. I personally am starting the merry month by writing the Update in a Premier Inn at Southampton Airport and you don’t get much better than that. Actually, the reason I’m here is because in an hour or so I’m going to go and rehearse some music with two legendary cats and you really don’t get better than that. Can’t wait.
Not everyone is in as good a mood as your humble Updater, though. SJP’s new results are out and I fear there will be some furrowed brows at your favourite Cirencestrian consolidator. I do want to pick up on some elements of their financials, but this isn’t really about SJP; they’re a useful and publicly quoted example of a broader point; one which I will drag you along to as we get further down the page. I’m not being entirely truthful; it is a little about SJP. But only a little.
Right, here’s the mise-en-scène. We all know – especially those of you who read our State of the Platform Nation report (available through Analyser, #marketing) that the State of Things are not great. Inflows are sort-of holding up, but outflows have gone bananas, and as a wise man pointed out to us the other day, it’s an awful lot of work to bring, say, £1bn in the door in a quarter, just to see another £1bn or more walk straight back out again. Talk about the hamster wheel.
What’s sort-of, sort-of-not made that bearable is that those inflows are still coming; you are still doing what it is you do, clients are still valuing it and that at least stops the sector going backwards. OK. Over to SJP now.
Here are its net flows for the last few years:
- Q1 2021 – £2.9bn
- Q1 2022 – £2.91bn
- Q1 2023 – £2bn
- Q1 2024 – £0.77bn
I’m not a platform market analyst, right – no, wait, I am – and I can tell that this isn’t anything like a good time. A 74% drop in net inflow in the key first quarter is always sore. But at least those gross inflows have been holding up, right? Right? Let’s have a look…
- Q1 2021 – £4.79bn
- Q1 2022 – £4.73bn
- Q1 2023 – £4.17bn
- Q1 2024 – £3.97bn
If we graph those two things out…well, the lines do not point up and to the right and this makes all financial people Sad.
Grosses have held up better than nets, but the trend is declining and that’s not much fun either. Amusingly, a highheidyin at SJP, revolving furiously to no particular effect, blamed the fall on (and you’re reading this right) “in part due to the fewer number of working days in March this year ahead of the key tax year end period”.
(I told you it was a little about SJP).
OK, let’s finish the story off. In the last 6 months the share price has come off by nearly a third. It’s not a direct comparison, but AJ Bell is up by just over a quarter in the same period, so it’s not a plague on all financials.
Here’s the broader point if you were looking for it, and remember that joking aside I’m just using SJP as a bellwether here. In our most recent wave of State of the Adviser Nation (elements of which are available through…Analyser #marketingagain), we once again found that the imperative to grow at all costs was most marked in the largest firms. That is to say, they are much more sensitive to peaks and troughs in flows than smaller firms, and the reason for that is that there are all sorts of kinky financial structures in place to service all kinds of debt, and getting that all to add up requires consistent and pretty heroic growth. This isn’t just SJP, it’s all consolidators pretty much and plenty of other big firms too.
When you take that growth away, everything gets a bit wobbly and people start looking closer at what’s underneath the quilt. And that’s where things get really difficult. Because the picture of any business that is an agglomeration of smaller firms that have been bought up or tempted in is never a good one. I can’t think of a single – not one – instance of a consolidator that genuinely has its house in order. All are at a place where they can’t properly get efficiencies and benefits of scale because of the fragmented, ornery and downright awkward nature of you lot.
I was speaking at a thing yesterday and a much cleverer guy than me posited that super-profits can only be generated by scale firms, and he’s right – but what he didn’t say was that the preconditions for those super-profits are that every adviser in the business takes the whip, changes everything they’ve ever done for their clients and works to a blueprint that maximises efficiency and economies of scale for the firm.
This is rarely consistent with best outcomes, which is why firms look to widen their offer in terms of integrating investment management and even platform services; the juice from the advice business is not sufficiently juicy. And that makes it harder for firms to get their heads round the blueprint, which then leads to people leaving and taking their clients with them. So outflows increase and flows decrease.
Add to that macro factors like net flows being hurt everywhere, and you get a picture where servicing the debt mountain gets harder, and that’s when the money-men turn the screws, and that’s where things start to get very sticky indeed.
I keep hearing that consolidators will win, not least because advisers can’t cope with regulation – despite the fact that only a few percent of respondents to State of the Adviser Nation said that Consumer Duty had had a profound and destabilising impact on them. My response is: not like this they won’t. The model needs to change; for now I’m backing small and nimble firms to come through the harder times better than anyone else.
And your music choice this week – I was nearly tempted to give you one of the Bangers that we’ll be rehearsing today, but instead I noticed that 6 Music was doing a big retrospective on Disintegration by The Cure, and that’s one of my favourite albums ever. So let’s have the title track because you should listen to it any chance you get.
