☀️☕️ Good Heavens, St. James!

📊 Also: It’s PCE Thursday; No HK property tightening; Japan inflation not high enough 🎓 Wealth managers

📈 Market Roundup [29-Feb-24]

US large-cap S&P 500 closed 0.17% DOWN 🔻

Tech-heavy Nasdaq Composite closed 0.55% DOWN 🔻

Pan European STOXX Europe 600 closed 0.35% DOWN 🔻

HK/China's Hang Seng Index closed 1.51% DOWN 🔻

Japan's broad TOPIX closed 0.13% DOWN 🔻

📝 Focus

  • Good Heavens, St. James!

📊 In the Markets

  • It’s PCE Thursday; No HK property tightening; Japan inflation not high enough

📖 MoneyFitt Explains

  • 🎓 Wealth managers

💸 Personal Finance Corner

📝 Focus

Good Heavens, St James!

The largest UK wealth manager🎓 St James’s Place announced a £426 million provision for potential client refunds and slashed its dividend, causing shares to plummet on Wednesday, bringing its 12-month loss to 60%. The charge sent SJP into a pre-tax loss of £4.5mn for 2023, from a £504mn profit in 2022. 

Last year, the Financial Conduct Authority (FCA) introduced the “Consumer Duty” - another round of regulations pushing for higher standards of consumer protection in financial services, and the SJP provision came from a late 2023 surge in client complaints regarding service levels. (The total number of affected clients remains unknown thanks to poor historical record keeping and IT limitations.)

Once a financial powerhouse, and still the largest wealth manager in the UK (half again as large as second-placed Schroders Wealth), SJP is facing increased scrutiny over its long-criticised fee structure, as do other “full-service” wealth management firms. It also has to deal not only with regulatory pressures but also competition from lower-cost platforms such as AJ Bell and Hargreaves Landowne, which cater to a broader audience including DIY investors managing their own portfolios and financial advisors managing portfolios for clients.

..... ▷ Part-founded by the recently deceased Jacob Rothschild, St. James's Place (SJP) was formerly known as J. Rothschild Assurance and is the largest of the UK’s “full-service” wealth management and financial advisory firms, with assets under management of  £168 billion at the end of 2023. 

As a wealth manager🎓, SJP offers investment advice, retirement planning, and wealth preservation through an advisor force of almost 5,000, mainly to wealthier clients in the UK, but does not directly manage the clients' funds. 

Instead, SJP collaborates with external fund managers and other investment professionals who oversee the day-to-day management of the funds, while SJP focuses on overall financial planning and client relationships. Advisors may ONLY recommend those funds to their clients.

But SJP has long faced criticism for very high, sticky, confusing and opaque charges, though there have been, under pressure, some selective reductions in recent years. “Exit fees” for clients wishing to close some older “investment bonds” and pensions early still apply, but have been largely removed (under pressure) for new investments. 

The initial advice fee of 4.5%, and the recurring 0.5% fee for ongoing advice still apply, though. Excluding all the other underlying or “hidden” charges and investment performance, those charges would, with the magic of compound interest working against an SJP investor, send starting capital of £10,000 down to £9,083 in just ten years.

The advice gap is not only in the UK- Image credit: Minions (2015) / Universal Pictures via Tenor

..... ▷ The UK faces an advice gap, where many consumers lack access to financial advice.

Factors contributing to the gap include 

  • High upfront fees (partially from the cost of compliance, partially from greed), which deter some consumers

  • A shrinking and ageing adviser population, which limits availability

  • The perceived (sometimes intentional) complexity of financial services

  • Poor awareness of the benefits of advice

And, perhaps most powerfully

  • Dismal financial literacy levels in general (take these!)

AJ Bell and Hargreaves Lansdown benefit in a way from this by providing low-cost execution-only services, but not all consumers are equipped to benefit the most from them, even if some think that they are.

At a higher level, the gap is troubling as around 39 million adults in the UK fall into the advice gap, and it’s expanding.

..... ▷ The Retail Distribution Review, or RDR, launched by the FSA (the precursor to the FCA) in 2006, aimed to address problems in the distribution of retail financial services products, focusing on providing greater clarity about different types of financial services and enhancing transparency regarding costs and associated fees. 

Sounds good. 

But while well-intentioned, the RDR did have some unintended consequences, including a decline in the number of financial advisers as advisers exited the industry due to increased regulatory requirements and costs. 

Those increased compliance costs for advisers were sometimes passed onto clients through higher fees, pricing out middle-income individuals, ironically contributing to the advice gap.

Then, the Financial Advice Market Review (FAMR) in 2015 tried to enhance access to financial advice, but even higher regulatory requirements and costs led even more advisers to exit the industry, with remaining advisors again passing compliance costs on through even higher fees. 

Meanwhile, new rules and standards made the advice process more complex, making it even more challenging to navigate the intricacies of financial products. 

The unintended consequence was that some individuals avoided seeking advice altogether.

📊 In the Markets

Tech stocks saw broad weakness, with 5 of the Mag7 down, dragging the Nasdaq Composite down 0.55% on Wednesday, its largest one-day fall since February 20th. Both it and the S&P 500 remain below recent record highs. 

Investors are watching to see if Thursday's PCE (Personal Consumption Expenditure) report for January will change the narrative on the Federal Reserve's upcoming interest rate decisions after the already-released CPI data showed inflation was hot last month. Forecasters expect core PCE growth of 0.4% monthly compared with a rate of 0.2% the previous month. That’s 2.8% higher than a year ago, which is slower than the 2.9% seen in December, but moving in the right direction is still above the Fed’s 2.0% target. We shall see!

In the bond market, two-year Treasury bond prices, which move on rate expectations, rose, sending the yield, which goes in the opposite direction, down by 0.06 percentage points to 4.65%.

European stocks edged lower on Wednesday as disappointing corporate results weighed on investor sentiment ahead of upcoming inflation data. 

London's FTSE 100 dropped 0.8%, dragged down by a 19% decline in wealth manager St James's Place (SJP, above), though at its bottom had traded down over 30% on the day, and a 10% drop in consumer goods firm Reckitt Benckiser, which owns brands like Nurofen and Dettol.

Sometimes the signs are all there - Image credit: Tenor

Bitcoin, on the other hand, sailed through the $60,000 mark and briefly touched $64k for the first time since November 2021 as a wave of capital continues to surge into new spot bitcoin exchange-traded products. Well done to those 💎🤲 who (genuinely) HODL-ed over the last 3 years… and the more recent traders piling in with leveraged bets. [MFM: Spot Bitcoin ETF (as anticipated!); BlackRock's Bitcoin ETF]

Hong Kong's budget announcement scrapped plans to tighten its property market with immediate effect in an effort to support its flagging real estate sector. Measures included cancelling buy-side property tightening for residential properties and waiving stamp duties on REIT unit transfers. After a sharp initial rally, the Hang Seng Property index ended down on the day, as did the broader benchmark Hang Seng index. Financial Secretary Paul Chan said he expected the economy to grow between 2.5% and 3.5% this year. 

Meanwhile, South Korea's Kospi rebounded after two down days, and the Reserve Bank of New Zealand maintained its official cash rate at 5.50%, citing inflation holding persistently above target levels.

In Japan, the benchmark Topix index closed slightly lower. The Bank of Japan said that the likelihood of achieving the central bank’s 2% inflation target is not yet “sufficiently high”… unlike much of the rest of the world, it’s an upside target for Japan rather than a struggle to bring inflation sustainably lower. Only once reliably UP to a domestic consumer demand-driven 2% can the BOJ’s ultra-loose monetary policy (i.e. basically ultra-low interest rate) be allowed to tighten up.

In The Upside Down, central banks try to get demand-pull inflation to go higher - Image credit: Stranger Things / Netflix via Tenor

📖 MoneyFitt Explains

🎓 Wealth Managers 

A wealth manager offers comprehensive financial services to individuals, families and sometimes institutions. These firms typically provide services such as investment management, financial planning, retirement planning, estate planning and some level of tax advice. 

There are many different types of wealth management firms, including:

1. “Full-Service” Wealth Management Firms, which offer a wide range of services and personalised advice to meet the unique needs of each client.

2. Boutique Wealth Management Firms, which tend to be smaller firms that may specialise in niche areas or cater to specific client demographics.

3. Online Wealth Management Firms, also known as Robo-advisors, use algorithms and technology to provide automated investment management services at a lower cost at the cost of a reduced or zero human interface.

4. Private banks offer wealth management services along with banking services to high-net-worth individuals and families. May provide authorities with less transparency, although this is changing. 

5. Family offices are set up by the wealthiest individuals and families to manage wealth either entirely in-house, or in conjunction with external parties. Reporting requirements are low. Some also provide similar services to other family offices in a multi-family office setup.

Overall, wealth management firms aim to help clients achieve their financial goals and secure their financial future through tailored strategies and advice.

💸 Personal Finance Corner

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