Being a St James's Place adviser is similar to being in a “gilded cage” due to restrictions on exiting the company and high interest rates payable on loans taken out to buy client books, according to one SJP adviser.
FTAdviser previously reported that the average St James's Place adviser owes the firm £111,000 due to loans taken out to enable advisers to buy the businesses or client books of retiring advisers.
But that figure excludes loans worth a further £273.2mn made by a network of five banks, Santander, Investec, Metro Bank, NatWest and Bank of Scotland.
Those loans are also made to advisers, and it is the advisers responsibility to repay the bank. However, the loans are guaranteed by St James's Place, and so appear in the firm's accounts under the heading “financial commitments".
Although the adviser’s debt is to the bank, the collection of loans are administered by SJP itself, with one adviser, who has an outstanding debt to one of the banks mentioned above, telling FTAdviser that “I don’t really interact with {the bank in question}, its all through SJP".
St James's Place is liable to repay 100 per cent of the outstanding amount to the banks in question if the adviser fails to make the payments, except in the case of Metro Bank, where St James's Place is liable to pay 50 per cent of the outstanding amount.
Of the other £400mn of debt owed by St James's Place advisers, and covered in the firm's latest set of accounts, around £362mn is owed directly to St James's Place, and the remaining £38mn has been securitised by the company.
Securitisation means that the FTSE 100 company has parcelled up some of the individual adviser loans and sold them onto investors, in the same way that individual customer mortgages are parcelled up by banks and sold to investors as mortgage backed securities.
In that instance, the adviser pays the investor, and St James's Place is not liable to the investor if the adviser defaults on the payments.
A representative from St James's Place told FTAdviser the loans are to enable “succession planning” for advisers, and stated that this model has been “proven.”
An adviser whom FTAdviser spoke to said the expectation is that when buying a client book, one should pay 7.5 times the value of the fee income of generated by the assets being bought.
This is based on paying 6 per cent for the book of business, and a further 1.5 per cent for the “goodwill” held within the business.
That figure is based on the experience of two advisers with whom we spoke, but is disputed by SJP who say the actual figure is much lower.
Interesting times
St James's Place website reveals that the standard interest rate on a 10-year loan made to buy a book of business is 3.5 percentage points above the Bank of England base rate.
The Bank of England base rate is currently 5.25 per cent, meaning an adviser must pay 8.75 per cent in annual interest on the loans. That rate of interest is charged on a declining balance, so over the ten year period, may be lower, depending on base rate movements.
But separately, as the loan is 10 years in duration, they must repay the principle, or money owed, at 10 per cent per year. This means they face a total outlay of 18.75 per cent per year.
Debt interest is tax deductible, and so can be offset against the tax bill of the adviser or the firm. But the 10 per cent repayment of the principle cannot be deducted from a tax bill.
St James's Place’s own website lists the 3.5 percentage point over base rate figure for a 10 year loan, but the company said interest rates can vary as one can choose a different repayment period.
They added that an adviser can make overpayments on the loans at any time.
Advisers are not permitted to sell their client book for the first 10 years of operation, and can only sell the client book at the end of the 10 year period to another adviser within the St James's Place network.
One adviser, who is around halfway through the 10-year period during which they cannot exit, told FTAdviser he believes that St James's Place is “not the right place for my clients”, but cannot leave until the 10 years are up.
Leaving then would allow him to realise the value of his business, and exit St James's Place, while also repaying the loan.
Were he to default on the loan, he would be unable to work as an adviser anywhere else under Financial Conduct Authority (FCA) rules.
At the end of the 10 years he can sell his practice, but not take the clients with him.
He described this as making him feel like a “bonded servant".
St James's Place declined to comment on this.
He said that on entering St James's Place, the company makes a virtue of the fact advisers can sell their practice at the end of their careers to another adviser.
david.thorpe@ft.com
