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How to profit from the fee experience

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SG Wealth Management director Neil Shillito recounts how he and fellow directors hammered out a plan to build a fee-based business and how
it has grown more efficient and profitable. Interview by Cherry Reynard

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Neil Shillito had a baptism of fire when he and his fellow directors launched SG Wealth Management in February 2001.

Not only were they dealing with the aftermath of the technology bubble, 9/11 and the subsequent downturn in financial markets, they were trying a completely new approach.

They wrote their business plan in 2000, having had a long history of working as advisers on commission. As they were doing so, they could see that the FSA was not happy with commission and would eventually move away from it even if - at that stage - it was not labelled as RDR or TCF or CAR. They thought that a fee basis was the best way to run a higher-end financial services business.

Shillito says:”People in the industry looked at us like we were mad when we explained what we were doing. We think we were 10 years ahead of the game. Slowly, the industry has accepted the changes.”

He believes that this “clean slate” automatically helped him to build a more efficient business. There were no legacy systems in place, no clients to switch.

From the start, SG’s clients knew exactly what was being charged and for what services. The group adopted the Transact platform because its business model dovetailed with its own and clients paid for services through the cash account. Shillito says that ultimately they got through those difficult first few years by “sheer hard work and the occasional sleepless night”.

The client base was built up through networking in the early days. Shillito says: “We did not have enough clients to generate referrals. It was all about getting our name known. We did a few in-house investment lunches, bringing in businesspeople from different areas. It was very tough and it took time for fee income to come through. We finally became profitable in the fourth year and have become increasingly profitable ever since. Even in 2008.”

The subsequent success of the business has vindicated many of the directors’ early choices. For example, Shillito decided early on that it would be an intensively client-focused business. This meant setting a minimum level of £250,000 in investable assets. He adds: “We realised that our service and advice would not be that useful to someone with £100,000 or so to invest. Also, the business would not be profitable if we dealt with clients on less than that.”

He admits that one option would have been to increase the number of clients but this would have meant a commensurate fall in service levels. He adds: “Our service offering is intense and one wealth manager couldn’t cope with more than 40-45 clients.

In practice, most of our clients tend to have upwards of £500,000.”

The group runs bespoke portfolios for clients and its own Oeic. It has four different risk-rated core portfolios - cautious, balanced, adventurous and income.

All of them have a multi-manager focus and the percentage in these core portfolios will vary. For each client, the group will have satellite funds to meet a clients’ attitude to risk more exactly. A balanced investor will have a balanced managed portfolio as a core but will also have holdings that will take into account any specific requirements for, say, funding grandchildren’s schooling.

Shillito is clear that risk profiling is not a tickbox exercise and that many of the models currently used for asset allocation are inadequate. He says: “We think stochastic modelling is a load of nonsense. It tends to overweight to assets that have been the best-performers over the past 20 years. Even the FSA which says specifically that past performance is no guide to the future apparently has no problem with the idea that because an asset has performed well over the last 20 years, it will automatically do well over the next 20 years.”

’The markets were pricing in Armageddon’ Shillito says not being bound by these rules has a significant effect on investors’ portfolios. He says:
“We don’t say that because someone is an adventurous investor, they should have 90 per cent of their portfolio in equities, for example. From October 2008 to October 2009, corporate bonds gave the most outstanding returns. We saw that in the credit crisis they had been substantially sold down and the active bond managers we were talking to were buying into them like there was no tomorrow. The markets were pricing in Armageddon.

“Under stochastic modelling, there would be no place for fixed income in an adventurous portfolio. Yet corporate bonds went up 45 per cent in one year. In this kind of situation, we say to our clients that we believe this is a good opportunity and we would like to put some money in. Usually, they are willing to go with our view.”

Shillito says that advisers dealing with a bigger number of clients have to follow models because any micro management of the portfolio in this way is very difficult. He says: “Our model is client-centric.

It is geared to looking after and servicing clients. It is about individual and bespoke advice.” SG has grown steadily in the past 10 years. There
are currently 12 in the organisation, of which four are wealth managers. It also employs two full-time paraplanners, a team of administrative staff and a financial controller/fund administrator.

Shillito is still keen to bring new blood into the group. He says: “We could, in theory, close the doors now but we don’t want to rest on our laurels. Over 10 years, we have only lost seven or so clients but they do die every so often. Also, the people who work for us need to know that this is a growing and dynamic business and that they can achieve career progression.”

In terms of developing the business, the group’s latest project has been to make a lot of changes to the website, particularly on search engine optimisation. It has also recently hosted a successful investor event in Norwich. They brought in Investec’s Alistair Mundy to talk and this generated a number of opportunities, which are likely to come to fruition in 2011. However, Shillito says the group are not “slaves” to new
business. “We are not like conventional IFAs, where we have to generate new business all the time to sustain our profits.”

In addition to continuing organic growth, acquisition is a central plank to the company’s strategy and negotiations are at an advanced stage to acquire a similar sized business this year.

The group has been largely ready for the RDR for some time. However, it has had to make sure that the right systems and processes were in place to demonstrate readiness to the FSA. However, Shillito concludes that the regulatory changes hold no fears for the group.

Company data
Name: SG Wealth Management
Based: Norwich
Established: February 2001
Wrap platform: Transact
No. of clients: 160, with £80m in funds under management
Outsourced investment management: No - in-house Oeic, plus risk-rated portfolios
Back-office provider: 1st
Fee-based: Since inception
Qualifications: All level four plus Investment Management Certificate

Key points

  • SG Wealth Management launched in February 2001 with a feebased structure. With no clients and in the midst of a significant downturn in markets, it was a baptism of fire
  • The group built up its client base through networking and a number of in-house investment lunches. It was profitable from the fourth year andhas remained so since
  • Each adviser will handle no more than 40-45 clients to maintain a high quality of service. The group has a minimum level of £250,000 in investable assets but the majority of its clients have £500,0000-plus
  • The group runs bespoke portfolios for clients and its own Oeic. It has four different risk-rated core portfolios - cautious, balanced, adventurous and income
  • SG has grown steadily over the past 10 years. There are currently 12 in the organisation, of which four are wealth managers. It also employs two fulltime paraplanners, a team of administrative staff and a financial controller/fund administrator

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