FX brokers can easily rival London’s fund managers, shareholder brands trad firm outmoded and wasteful

British wealth manager branded profligate, expensive to operate and outmoded, as well as criticized for lavishing gifts onto partners – why doesn’t the FX industry challenge the fund management business and show efficiency, cost-effectiveness and multi-asset execution excellence?

St James Place, one of the most prestigious and well established networks of independent practice wealth managers in the UK has for the first time in its long, illustrious history, become the subject of criticism by one of its major shareholders for ‘excessive pay’ and poor share price performance.

St James Place, which operates a wealth management and portfolio investment business via two specific methods, directly employed St James Place financial advisors, and independently owned practices tied to St James Place, often run as regional offices, or tied representatives, has a grand reputation for quality, selecting its customer-facing personnel very carefully and placing them on long-term induction programs, often supporting them in opening their own practices.

Primestone Capital has the wealth manager in its crosshairs and is calling for SJP to slim down its staff, sell its lossmaking Asian business and boost returns for its ‘long-neglected owners’.

Primestone, which owns a 1.2 per cent stake in SJP worth £60m, said the business could more than double its share price if it cut costs to increase profits.

FinanceFeeds is aware that St James Place has not been operating induction programs for new wealth managers, due to their need to be on site and the absurd restrictions put in place by the government on people attending workplaces since March this year, meaning the company has not been able to grow its salesforce, however it is looking to begin video based programs unless the government ends the restrictions soon.

In an open letter to SJP chairman Iain Cornish, Primestone’s Benoît Colas and Damian Hahnloser said: ‘SJP has delivered tremendous value for clients, advisers, employees and management but not so much for shareholders over the last five years. It is time for the company to address its high cost base and change its culture.’

It is feared, however, that pressure to boost profits could see SJP raise fees for savers.

Justin Modray, of Candid Financial Advice, said: ‘A greater focus on cutting costs and boosting shareholder returns doesn’t sound encouraging for SJP customers.

‘SJP’s fees are already rather high on larger portfolios. Any increase in charges could prove the straw that breaks the camel’s back. SJP customers should also be wary that cost cutting might lead to a fall in service levels.’

However, Modray added that SJP’s business model was ‘archaic’ and needed updating.

It is FinanceFeeds perspective that most of the traditional wealth managers operate an outmoded business, however they are regarded as gold plated by the public and the regulators, yet the sophisticated, urbane and cutting edge FX giants are under continual scrutiny and have to keep adapting due to continual regulatory impingements.

In what appeared to be a bid to reassure customers, Primestone said that any changes need not come ‘at the expense of other stakeholders’.

Instead, it said that a change in culture ‘will provide SJP’s clients and advisers with a leaner, more agile and more reactive SJP’.

A source familiar with Primestone’s plans added: ‘Primestone is not advocating or recommending the increase of fees to clients to boost shareholder returns. It only wants the company to boost its profitability by optimising its cost base without any negative impact for clients and advisers.’

The intervention comes after years of criticism of SJP over incentives offered to its partners, including luxury holidays and white-gold cufflinks.

Was it not ASIC that just this week sent a clear message to CFD brokers in Australia that they are not allowed to offer any IBs or partners (or retail clients) gifts such as those which St James Place has been offering that have been criticized but not acted upon?

More double standards.

Shares in St James Place, which was founded by Lord Rothschild, genius financier Sir Mark Weinberg who founded Allied Dunbar and invented the Unit Trust in the 1980s, alongside the late Mike Wilson, were 929.6p last night.

That is around the same level they were at five years ago, even though the amount of money it is managing for savers and wealthy investors has doubled to more than £115billion.

St James Place has earned its stellar reputation, and this by no means is a slight at the company, however it is clear that another example of why FX brokers should be able to step up and rival such companies is now on the table.

Efficiency is the FX industry’s strong point, which is how giants such as IG Group and CMC Markets managed to get all of the retail trading off the exchanges and onto OTC platforms in the first place.

Even Hargreaves Lansdown, the largest financial services firm in England, which has its own Vantage platform, uses IG Group as a white label provider for its HL Markets CFD business.

And talking of Hargreaves Lansdown, the debacle it got into with the Woodford fund when that rose to controversy over its failure enraged founder Peter Hargreaves, and understandably so.

Here is a clear example of an FX firm doing so well that it is not even noticeable as a separate component by Hargreaves Lansdown customers, a loyal bunch who are all based in the UK and have driven the firm to a value of $6 billion, yet Woodford, a supposedly plate glass hedge fund, makes a disgusting mess, and nobody in the regulatory offices did anything about it.

Imagine if a FX broker said “You cannot withdraw” to over 290,000 of another broker, in this case Hargreaves Lansdown, a firm that has worked very hard to gain its huge stature and has a great reputation. There would be mayhem. However, the upper lips remain stiff where Woodford is concerned.

Why on earth is there an unwritten assumption that all hedge funds and wealth managers are polished bastions of truth and solidity and that all FX firms should be pilloried by the regulators? FX brokers need to step up after Woodford, one of the world’s most famous funds, blocked withdrawals and destroyed a large trading business, and got away with it.

If St James Place is a reputable company but is too expensive to run, and uses an old fashioned business model, and obnoxious urchins such as Neil Woodford get away with broad daylight robbery with no consequences, is it not the time for the FX business to go multi-asset and take them all on?

FinanceFeeds is an absolute advocate of the need for FX firms to move into the professional trading and hedge fund sector, largely because many good quality FX brokerages along with their associated prime of prime liquidity providers and technology vendors that integrate platforms into a multi-asset market are more than capable of providing a highly efficient direct market access solution for wealth managers with a diversified asset requirement at low cost with efficient execution.

This industry is, after all, a massively entrepreneurial and innovative sector, far more than the traditional hedge funds are.

On 4 June 2019 trading in Woodford Investment Management’s largest fund (the Woodford Equity Income fund) was suspended. There had been large withdrawals of funds by many investors. Following this, St. James’s Place plc terminated Woodford’s contract to manage three of its funds, valued at £3.5 billion.

The FCA has launched a formal investigation into the suspension a Woodford spokesperson said: “We can confirm we have been contacted by the FCA, regarding its investigation relating to the events that led to the suspension … and will be co-operating fully with its investigation.”

Suspension in this case is a box-ticking exercise. The old boy network well and truly at work.

Why the diatribe, you may ask?

Well, this affects our industry directly, yet Woodford Asset Management continues to be viewed as a professional hedge fund and therefore part of the elite compared to the retail FX industry, which is a totally inaccurate assumption.

Hargreaves Lansdown, the largest retail financial services firm in the UK, which is led by CEO Chris Hill, former CFO of IG Group (Hargreaves Lansdown’s HL Markets FX brand is a white label of IG Group) has been massively affected by Woodford’s issues.

This demonstrates a form of total trust that no firm would give an FX broker. We all know what some of the profit sharing antics of so-called liquidity providers have led to, yet Woodford Investment Management holds its head high after decimating Hargreaves Lansdown’s share prices.

Hargreaves Lansdown will soon report results after a disastrous week for Woodford, who had been held out as a star fund manager and favourite of retail investors. The equity income fund’s administrator said it would probably take until early December for the fund to reopen as Woodford disposes of difficult-to-sell stakes.

Woodford was also revealed to have sold more than half his shares in a separate publicly traded fund whose board is considering terminating his position as the asset manager.

Chris Hill, Hargreaves’s CEO, issued an apology to his customers a few days after the fund’s suspension. “We all share their disappointment and frustration,” he said. Hill has also offered to forgo a bonus of as much as £2.1m until the matter is resolved and has waived Hargreaves’s fees for Woodford investors.

Gurjit Kambo, an analyst at JP Morgan Cazenove, said in a note to clients that customer deposits of funds into Hargreaves were likely to be affected by the Woodford debacle.

“With investors in Woodford’s equity income fund still gated, and the relationship between Woodford funds and Hargreaves Lansdown under increased scrutiny, we have reduced our inflow estimates,” Kambo said. He cut his estimates for new funds for 2020 to £5bn from £7.9bn and to £5.5bn from £9bn the year after.

This is effectively white noise. FX firms in Australia, the US and Britain have been wound up by regulators, their responsible officers criminally prosecuted and assets seized time and time again for practices far less grim than this. Yes, they should pay the price, but everyone should pay the price, not just retail FX brokers.

So why did a company this astute trust Woodford Asset Management? It would not have trusted AFX Group or ILQ, both of which had engaged in profit sharing and mixing client funds with operational capital, but to a far lesser extent, however the end result is exactly the same.

Look at the NFA’s treatment of Drew Niv, founder and former CEO of FXCM, which at one time was the world’s largest FX firm. He personally prevented any damage to client withdrawals during the Swiss National Bank’s removal of the EURCHF peg which plunged FXCM’s resources into massive decline (as it did with many other firms) yet the regulators would not let him go. FXCM has been absolutely decimated, whilst Woodford carries on. Of course, FXCM’s alleged false statements that it was A-booking trades when it was sharing them with a market maker is not excusable, but customers were not affected, and nobody complained. Therefore the Woodford situation is worse.

Woodford’s reach has even been notable in the firm’s aspirations toward challenging the banks. Neil Woodford’s venture capital fund enabled Atom bank, the UK’s first bank built exclusively for mobile, to raise £50 million in a fundraising round with participation from BBVA, Toscafund, Woodford Patient Capital Trust and funds advised by Perscitus LLP.

The funds raised were set to used to finance further growth and to continue the bank’s investment in technology.

Atom continues to be a fast-growing challenger in the UK’s lending markets. The bank says its total lending, for homeowners and small businesses, has grown by 76% in the past year to £2.4 billion. At present, Atom is welcoming up to £20 million of business and £10 million of residential mortgage applications each week.

In the meantime, Atom is making progress with re-platforming the bank into the cloud and preparing to launch new products using Thought Machine’s smart contract core banking technology. In November 2018, Atom bank agreed a multi-year partnership with Thought Machine to put its next generation of personal and business banking products onto Thought Machine’s Vault platform.

Thus, if the investment division of Woodford is blocking withdrawals, how can any client of Atom bank be certain that the backing behind it is stable? As mentioned yesterday, challenger banks are currently in major vogue, perhaps because their initial seed capital amounts have not yet run out!

We will only see which have merit in 10 years time when they are running on their own revenues. Let’s see if they can challenge long established institutions.

Woodford Patient Capital is now the target of an aggressive potential takeover by Mastertrust, purely because of its instability.

It depends who you play golf with as to whether all retail FX and CFD firms should be under massive scrutiny and hedge funds should be allowed to create havoc with minimal consequences.

If St James Place is being labeled inefficent, profligate, expensive to operate, and full of 1980s trinkets being lavished on its partners, and Woodford is an odious shyster, surely the FX industry will be able to modernize it all for them, and even offer companies like St James Place a good affiliate marketing system for their regional practices, and a multi-asset trading solution that keeps costs down and uses platforms and venues that are used widely in the electronic trading business.

It’s a great way to get a huge and immediate supply of excellent quality clients with no marketing costs – and we know how futile the client acquisition procedure is – and equally elevate your brokerage to the top.

It is time for the FX industry to challenge the traditional hedge funds. We know it can be done. We have even hosted many of London’s finest, all of whom are keen to work with this industry and take their high net worth clients to a higher level of technology and efficiency.

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