It looks as if Quilter is one of the few safe havens in the financial services sector of the JSE. As a wealth manager, it manages and administers third-party funds. It does not put its own capital at risk either by lending like a bank or underwriting like an insurer. It has already bought back £76m of shares and plans to buy back almost £300m more.
In its UK home market, retirees no longer have to buy an annuity-based pension from a life office. Instead they can buy a fully flexible drawdown pension from wealth managers such as Quilter and its archrival, St James’s Place. Quilter CEO Paul Feeney says these are the two businesses which operate across the wealth management value chain, offering multimanagement solutions, an army of financial advisers and investment (linked product) platforms. Quilter now has 1,808 tied financial planners, and there are 169 investment managers who give a bespoke service to the wealthy through Quilter Cheviot.
Still, margins are coming down, not least because of the growth of lower-fee passive products in client portfolios but a pre-tax profit fall of just 20% to £71m — and positive growth, when translated into rands, looks unusually strong for 2020.
In its latest results for the six months to June, net client cash flows into Quilter improved from £300m to £1.1bn.
It is no surprise that Quilter’s market cap of R62bn is now larger than its former parent, Old Mutual, which lost a lot of credibility during its year-long battle with former CEO Peter Moyo.
Of course, it was tough for Quilter to get new business in the first half of the year, given that it operates an entirely intermediated model, with no direct to consumer online sales. Online materials were offered to advisers and some of the old-school advisers discovered Zoom and Teams for the first time.
The advice and wealth management division has a 0.64% revenue margin, which is quite high considering it no longer does direct asset management in-house, but its expenses are growing by 8% as its adviser base increases. The wealth platforms division now has £77bn (more than R1.5-trillion) under management.
Dry runs and dress rehearsals
Quilter has gone through a clunky transfer of assets to a new platform. It cancelled a planned migration with IT firm International Financial Data Services back in May 2017, when it was still called Old Mutual Wealth.
Its partner is now FNZ. Quilter went through three dry runs and two dress rehearsals (I don’t know the difference either) before a small migration of about 10% of the book in February 2020. The rest was supposed to move by September but instead it will be split between the fourth quarter of 2020 and the first half of 2021. The delay will cost a further £15m, leading to a total migration cost of £200m.
Litigation risk could be another concern for Quilter shareholders. We are all too familiar with people being persuaded to leave defined benefit schemes, with an underlying pension guarantee, to go to defined contribution funds in which the member is hostage to market movements.
A handful of advisers from one of Quilter’s most recent advisory force acquisitions, Lighthouse, had given inappropriate advice to people leaving the British Steel defined benefit fund. At least 30 clients had complained and it means Quilter will have to cough up £26m for the 266 people Lighthouse advised. Feeney assures me that he has zero tolerance of mis-selling. This took place before Quilter bought Lighthouse, but he admits he should have done a more thorough due diligence.
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