Charles Stanley Warns 'major Regulatory Change' May Impact Third And 'hardest Step' Of Turnaround

In interim results for the six months to 30 September, the group reported a number of strong figures, including a 53.3% increase in profit before tax to £6.9m, up from £4.5m for the previous six months to the end of March this year.

The wealth manager saw its funds under management and administration rise by 1.3% to £24.3bn, while core business revenue was up 9.8% to £74m.

Its balance sheet also strengthened having seen regulatory capital resources increase from £61.4m to £65m over the 2017 financial year.

Meanwhile, it announced an increase in its dividend to 2.5 pence per share.

Goals by 2020

The results show the group is on its way to delivering the aims outlined by CEO Paul Abberley to become the UK's leading wealth manager by 2020, the group said.

Abberley commented: "The first step toward this has now been delivered and the business has returned to profitability, achieving topline growth by focusing on core wealth management activities.

"Our second step has been to put in place improved governance, better cost control and revised remuneration structures. We are now focused on the third but hardest step, that of invigorating our new business channels and more generally improving our productivity across both front and back office."

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However, though Abberley said the group has benefitted from favourable markets, which it believes "are likely to persist on a six- to 12-month view", it also faces a number of current and upcoming headwinds.

"In recent months, we have faced various headwinds. First, there is an unusually high level of regulatory change being introduced in 2018 which is expected to give rise to an additional IT and process change cost in the second half of approximately £900,000," he said.

"Secondly, although overall share trading volumes have been in line with our expectations, the commission income generated from it in recent months has been lower because of mix variances.

"We will therefore need either a higher level of trading activity or other revenue increases to be generated in the second half in order to meet current market expectations."

Asset management

Abberley said the asset management division, which was restructured last year, was "very much on track" with revenue growth of 25.8% year-on-year from £3.1m to £3.9m.

The firm also launched a Personal Portfolio Service (PPS) for clients with less than £150,000 to invest. However, it acknowledged it was currently a "loss leader" for the business because the costs of the underlying OEICs were currently being subsidised to keep them at an acceptable level for investors.

They are expected to become profitable once the OEICs have gained £100m in assets. 

Abberley said: "We are known for bespoke investment management but nowadays clients want a broader range of services. It is very early days for PPS but it is now available on Charles Stanley Direct and we have seen some inflows via there. 

"Once we start marketing it in the second half of the financial year, it could grow slowly or it could go off like a rocket - we are not making any projections."

Regulatory headwinds

January 2018 will see the implementation of the MiFID II and PRIIPS regulation, which the asset management industry has been anticipating and preparing for for some time.

Charles Stanley said it expects regulatory requirements to "accelerate the shift from advisory to discretionary services" and so has been focusing on promoting the latter where it is appropriate for existing clients.

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It is also aware that revenue increases will need to be generated in order to counteract the costs associated with additional IT and process change costs brought in by the regulatory changes.

As a result, the firm hopes to increase revenue by implementing new charging structures arising from a firm-wide pricing review, devoting more resource to growing and integrating its financial planning proposition and widening its distribution network by building links with external independent financial advisers.

Main threat

Despite the noise around incoming regulation, the firm said "with global growth improving, the main threat to financial markets is inflation and higher interest rates".

Abberley added: "However, we are not seeing the effects of this trend yet so we forecast a supportive market backdrop for the next six to 12 months.

"Notwithstanding this note of caution, we remain confident about the long-term prospects for Charles Stanley as the benefits from the detailed execution of the third leg of our strategy begin to bear fruit."