Strategy and Trading Update

13 December 2018 

This announcement contains inside information.

This announcement outlines the strategies for both businesses and provides an update on current trading. 

Key Highlights

Strategy Update

• The Group is focused on developing and optimising two strong and self-reliant businesses which will enhance its strategic optionality.
• Providing clarity on, and resolving, legacy issues remains a priority for the Group.

• James Hay is enhancing its platform solution to support expansion into the wider investment platform market, including General Investment Accounts ("GIA"s) and Investment Savings Accounts ("ISA"s) which are expected to represent approximately one third of new business AUA by 2021.
• James Hay is targeting c.7% annual growth in revenue over the next three years, with operating margin improving from c.19% in the first half of 2018 to c.25% by 2021.
• Saunderson House is continuing to expand its addressable market by leveraging its discretionary managed service ("DMS") offering to attract younger clients and clients outside its traditional segments of lawyer and accountants.
• Saunderson House is targeting c.9% annual growth in revenue over the next three years, with improving operating margin over the same period.

 

Trading Update 

• The Group continues to deliver robust results and is trading in line with our expectations.
• The Group maintains a strong balance sheet, retaining cash to cover the worst-case outcomes in respect of Elysian and other legacy matters that are yet to be resolved.
• James Hay's new client wins of c.4,000 to 31 October 2018 are c.22% down on the first ten months of 2017, driven by equity market volatility and the slowdown in defined benefit transfers impacting the SIPP market.  Assets under Administration at 31 October 2018 were £26bn, up 2% from 31 October 2017, with net inflows largely offset by adverse market movements. 
• Saunderson House's new client wins were 208 to 31 October 2018, broadly in line with the first ten months of 2017.  Assets under Advice at 31 October 2018 were £5bn, broadly unchanged from 31 October 2017, with net inflows offset by adverse market movements. 

 

Kathryn Purves, Group Chief Executive, commented:

"We believe that in developing strong, deliverable strategies with attractive growth profiles for each of James Hay and Saunderson House, and minimising Group costs, we are enhancing longer term strategic optionality for the Group.  Our businesses continue to deliver strong results, trading in line with expectations.  I am encouraged by the opportunities for both businesses and expect this to translate into real value for shareholders in the medium term."

 

Enquiries:

Kathryn Purves, Group Chief Executive, +44(0) 203 8876181                          

Gavin Howard, Group Chief Financial Officer, +44(0) 203 8876181

Group

We continue to make good progress on the key areas identified as near-term priorities in the Interim Results, each of which enhances the longer-term strategic optionality for the Group.

We remain focussed on developing two attractively positioned, self-reliant, independent businesses by putting comprehensive business plans in place (including setting more granular and ambitious targets), strengthening the management teams and transferring certain group resources (compliance/risk areas) into the respective businesses. As part of this, Simon Jackson, previously at Brooks MacDonald, will join Saunderson House as CFO in January 2019 and Gavin Howard, Group CFO, has taken on the role of James Hay CFO alongside his Group role.

IFG Group continues to focus on delivering operational and cost efficiencies within the group function. As previously announced we have significantly reduced the size of the Board, we continue to make further reductions in the costs of the group executive/central team and are reviewing options to sublet excess property.  The Group remains on target to achieve annual cost savings of £1m, with the full impact of these savings visible in the second half of 2019.

Resolution of legacy matters within James Hay remains a priority.  The Group has continued its engagement with HMRC to attempt to address their concerns (and the associated, previously reported, protective assessments) in relation to Elysian Fuels. However, there remains significant uncertainty as to potential outcomes and this issue will take further time to resolve.  The wider reviews of NSIs and SSAS Loanbacks are now substantially progressed.  Discussions with HMRC in relation to associated sanction charges are progressing and these are expected to fall within existing provisions.  James Hay continues to engage with the FCA, and its insurers, and is addressing any potential customer detriment in relation to the NSI book - the remediation of this book is presently expected to be covered by existing provisions.  The review of the legacy dual trustee SIPP/SSAS book, highlighted in the interim results, is progressing and we expect to update the market on the scale of the exposure in the year end results.  Following this, we believe we will have reviewed all material risk areas within the two businesses, providing a robust position for future growth.

We are seeing increased market volatility and political uncertainty in relation to Brexit.  Equity market volatility may continue for some time, however, the direct impact on both Saunderson House and James Hay is expected to be relatively limited.   Saunderson House's revenue, despite growth in DMS, remains heavily weighted to time and materials, and in times of volatility can typically increase, and James Hay's fees are only partially driven by market values.  However, continued uncertainty may impact clients' willingness to invest and any economic slowdown could have a negative impact on both businesses.

James Hay

Review

The platform market continues to be an attractive growing market supported by long-term structural growth drivers.  James Hay has a strong position within the high net worth, trusted adviser-led SIPP platform market with significantly higher than average case sizes and a powerful brand in relation to pension expertise. The business will continue to focus on developing its pricing and proposition to retain and attract high net worth clients through a distribution strategy focussed on a defined segment of core advisers.

Building on its strong base, James Hay plans to develop from its current position as a trusted SIPP expert to address the wider platform market, supporting client through their investment life cycle. This will be delivered through accelerating James Hay's expansion into the GIA and ISA market, significantly increasing its addressable market.

Over the next three years, MiPlan, James Hay's market leading, platform-based product, which typically delivers higher margins, is expected to increase from c.50% of AUA currently to more than two thirds of AUA by 2021.  The older, more complex business lines within James Hay will comprise a decreasing proportion of the overall book, with a number of products already closed to new business.  This will result in an increasingly efficient, higher margin business with fewer manual processes.

James Hay expects to maintain its spend on IT systems and its platform in line with historical levels, underpinning its product expansion, supporting growth prospects and building out its investment platform.  This continued investment is expected to deliver robust and scalable systems and create substantial efficiency through streamlining and automating operational processes, resulting in an improvement in cost per case.

Financial Targets

We anticipate strong growth in the wider investment market, with GIA and ISA expected to account for approximately one third of new business AUA by 2021. James Hay is expected to deliver approximately 7% annual revenue growth over the next three years and an improvement in operating margin to over 25%, driven by capturing increased revenues through its expanded proposition and delivering cost efficiencies. 

Current Trading

New client wins continue at a lower level than in 2017 with c.4,000 in the first ten months of the year, c.22% down on the first ten months of 2017.  We believe this reflects equity market volatility and the slowdown in defined benefit transfers impacting the SIPP market.  Assets under Administration at 31 October 2018 were £26bn, up 2% from 31 October 2017. The increase in the Bank of England Base Rate announced in August 2018 has flowed through to improved revenues due to interest income increasing from £5.5m in the first half to a projected £6.5m in the second half, despite lower cash balances in the second half.

Saunderson House

Review

The UK wealth management sector, particularly in relation to high net worth clients, remains an attractive and growing market.  Saunderson House is well positioned within this sector and is focussed on providing a wholly independent, full service wealth management offering.  It is a leading, trusted adviser to high earning professional services executives in which it has an attractive and differentiated advisory and DMS proposition. 

Saunderson House plans to continue to increase penetration within its key accounts whilst at the same time expanding its addressable market to younger clients in the wealth accumulation stage, capturing expected intergenerational wealth transfers and targeting wider professional services and additional horizontal segments.  

Over the next three years, Saunderson House's DMS offering, making up c.60% of new clients currently, is expected to continue to grow strongly.  The DMS offering has enabled Saunderson House to attract younger clients who are at the wealth accumulation stage of their life; and the number of clients in the 35 to 50 age group has more than doubled since the launch of DMS, building a long term, diversified and robust client bank.  This strategy is expected to embed long term value in the business, notwithstanding the short-term impact on average AUM per client, due to the fact that these clients are accumulating wealth with Saunderson House.  With Saunderson House's exceptionally high client retention rates these clients are expected to remain with the business for a significant period of time.

Intergenerational wealth transfers are also a key focus for Saunderson House, building relationships with clients' wider families in a structured way.  Saunderson House now has over 1,000 dependent clients (not included in core client numbers), which should ensure that Saunderson House is well positioned as the wealth they manage is handed down the generations.

Saunderson House will continue to expand its marketing into wider professional services beyond lawyers and accountants.  Whilst it takes time to build brand awareness and traction in wider segments, Saunderson House is starting to see the results of this focus with c.50% of new client wins in 2018 being generated from outside London accountancy and law firms.  This contributes to the development of a more diversified and robust client base and expands the reach of Saunderson House's brand. Traditionally, Saunderson House has developed its own advisers.  However, the management team believes that there are likely to be opportunities to recruit individuals or teams, with existing assets under management, to accelerate growth, particularly in a segment which is increasingly competitive and which is subject to increasing regulatory overheads. 

Saunderson House has invested in technology to support its growth with a new portfolio management system ("PMS") built to support its investment offering.  This has already been introduced for the DMS offering, enabling a significant increase in DMS clients with no corresponding increase in staff numbers.  There are further opportunities for Saunderson House to optimise efficiency by rolling the PMS out to the advisory service.  This is expected to be delivered in H2 of 2019 with the benefits being realised from 2020 onwards.

Financial Targets

Saunderson House is expected to deliver approximately 9% annual revenue growth over the next three years by growing clients number to almost 3,000 clients, with improving operating margin over the same period.  DMS is projected to continue its strong growth trajectory and is projected to represent over 20% of AUA and revenues by 2021.

Current Trading

Saunderson House achieved 208 new client wins across both advisory and discretionary management services in the ten months to 31 October 2018, broadly in line with the same period in 2017, and now serves 2,321 clients, up c.10% from 31 October 2017. Assets under Advice at 31 October 2018 were £5bn broadly unchanged from 31 October 2017 with net inflows offset by adverse market movements.