These should be golden times for wealth managers. The affluent middle classes are getting richer. They also are more in need of handholding and advice because of the complexity of the new pension freedoms, the exotic number of investment options and the uncertainty over inheritance tax.
Brewin Dolphin, which has been advising families for more than 250 years and boasts a client roster of 60,000 with average investible assets of £690,000, should be well placed to prosper. Indeed, yesterday it unveiled improved results.
Total funds under management grew by 6.7 per cent. Net discretionary funds inflows grew by 6.8 per cent. Brewin prefers discretionary, where it makes all the decisions, over the more cumbersome advisory model, where it is obliged to seek approval before changing a portfolio.
Profits before tax rose by 19 per cent to £68.5 million and the final dividend was lifted from 10.75p to 12p, making a total for the year of 16.4p, up 9 per cent. David Nicol, chief executive, said that Brewin has the strategy, scale and focus to capture new growth opportunities.
Yet there are a few quibbles. Inflows in the core discretionary division were flattered both by the acquisition last year of Duncan Lawrie Asset Management and by the nudging of existing advisory clients into the discretionary bucket. Strip this out and net inflows were down from £2.2 billion last time to £1.9 billion. The jury is out on Mr Nicol’s plan to increase business by extending upmarket into serving more sophisticated clients requiring more complex financial solutions via its so-called “1762” service and on plunging into the mass-market world with its Wealthpilot and BPS services. Wealthpilot has managed to attract only “a few hundred clients” while BPS, which takes on anyone with £2,000 or more, has just 4,000. Volumes have to be higher than this to produce a sustainable business.
Costs have been cantering higher, thanks to new recruits, inflation-busting pay rises and the never-ending demands of upgrading IT. Brewin warned yesterday that capital expenditure in the current year would go up by as much as £15 million because of the need to modernise its ancient custody and settlement system. It has a margin goal of 25 per cent, but admits that it might be derailed by the need to invest: the last big IT upgrade at Brewin was a shambles that led to a £34 million write-off.
Its pricing structure means that some clients are dropping into lower fee bands as their portfolios expand. Analysts at Liberum cut their forecasts because of this. Brewin’s clients are notoriously sticky, some staying with the firm for generations. They like the physical presence of branches. Brewin has 30.
Unfairly, perhaps, Brewin sometimes sounds like a firm more interested in asset-gathering than client outcomes. There is zero discussion in the results of how clients actually fared last year, though Mr Nicol says they got a positive return. The net promotor score, a measure of client happiness, was down, though still high.
The 1,700 staff shared a profits pool of £58 million — or an average of £34,000 each — while Mr Nicol was on a total package of more than £1 million. Where are the customers’ yachts, as one critical book on asset management once asked?
Brewin is not about to disappear after 250 years, but it looks vulnerable not only from peers such as Rathbones and Hargreaves Lansdown but also from fintechs trying to break into the market. The shares, down 3 per cent to 322p yesterday, are inexpensive, on less than 15 times earnings and yielding more than 5 per cent.
ADVICE Hold
WHYDiversification strategy is unproven, while competition is intensifying, but the clients are sticky
Hurricane Energy
If you are looking for the future of the North Sea oil industry, you could do worse than turn to the waters west of the Shetland Islands (Greig Cameron writes). There are huge untapped resources in the area and an expectation that more large deposits will be found. But it is not an environment for the faint-hearted. Waves can reach 25 metres and wind speeds can top 100 mph.
Alongside the likes of BP, Shell and Total, Hurricane Energy is one of the smaller players, but it has generated a great deal of interest given that it’s yet to produce a drop of oil. The Aim-listed company believes that it is sitting on some of the largest undeveloped oil reserves on the UK continental shelf. Its modelling taps into fractured basements that lie below where oil and gas typically has been found in the North Sea.
An early production system on Hurricane’s Lancaster field, where there are thought to be 523 million barrels of oil, enters operation next year. It is a key test, seen as an indicator of whether the wider acreage that Hurricane holds is as valuable as the company claims. Spirit Energy, which is owned by Centrica, struck a $387 million agreement to join Hurricane’s licences covering the Lincoln and Warwick prospects, which are estimated jointly to contain up to 1.5 billion barrels of oil.
Hurricane has ticked off most of the engineering milestones in the Lancaster project with a minimum of fuss. It was crucial for work to be completed before winter weather in the area makes it impossible to get anything done. A floating, production, storage and offloading vessel is also undergoing sea trials ahead of its arrival next year. The target is for Lancaster to produce 17,000 barrels of oil per day starting in the first half of 2019.
Hurricane was floated on the junior Aim exchange in London during 2014, but has been looking at a move to the main market after seeing its value soar to more than £1 billion. Uncertainty over the oil price has dragged its shares lower in recent weeks, which could present a buying opportunity for investors confident enough in Hurricane’s thesis on the potential of fractured basements.
ADVICE Hold
WHYIf Lancaster works, the company becomes much more attractive
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