Rathbones Group Plc (RAT) Earnings Call Transcript & Summary

Ladies and gentlemen, I would like to welcome you to the Rathbone Brothers 2020 Preliminary Results. My name is Brika, and I will be the co-operator for today's call. [Operator Instructions] I will now have a pleasure of handing over to our management team to begin. Sir, please go ahead.

Good morning, everybody, and welcome to our 2020 results presentation. I'm sure you're all very used to this 2-dimensional format that we now operate in, but I, for one, very much miss the opportunity to interact with you. Have us share coffee and croissant this morning, but unfortunately, it won't be possible. So I do hope at this 2-dimensional format is a reasonable substitute. Now I know many of you are always used to asking questions, so we very much welcome those in this virtual world. [Operator Instructions] And we very much welcome the opportunity to answer those questions. If we don't for any reason, I'm sure you will shout. Now inevitably, as we look back into 2020, there are a number of reflections, I suppose. For Rathbones, certainly the need for vigilance and a dynamic investment process definitely came to the fore in what were volatile markets. As you can see from the slide, a number of indices there demonstrate that. And of course, with the pandemic, I put here unprecedented operating conditions. They indeed were and presented a number of challenges, which we've largely overcome, certainly. Also, I think we -- at the start of 2020, we set ourselves a very demanding strategic target, and that was to progress 4 strategic pillars, as you can see here. I'll give you an update on that a little later, but very good to see that the business has risen to the challenge of all of these 3 factor., Obviously, with a little help from some improved markets towards the end of 2020 but we've delivered some strong results, with growing assets under management, growing profitability, a resilient margin and a growing dividend. Now in a moment, Jenny will take you through the financial numbers. And after that, I will take you through where we are in terms of some of our strategic initiatives. So we look forward to that. And now, Jenny, I hand over to you.

Thank you, Paul, and good morning, everyone, and thank you for joining us today. Given all we have lived and worked through in 2020, I am pleased to report that Rathbones have delivered a resilient financial performance. I will take you through some of the details today and look forward to any questions you might have at the end. So turning to the first slide. As Paul has just highlighted, we saw strong funds under management growth, particularly in our funds business and strong investment performance, which resulted in operating income increasing 5.2%, despite much lower average market levels year-on-year. Underlying operating expenses were up 5.5% or 4.8% if you exclude the increase in the FSCS levy during the year. This delivered an underlying profit before tax of GBP 92.5 million, some 4.3% ahead of last year. Our underlying operating margin of 25.3% was in line with last year and in line with our mid-20s guidance. Finally, the Board is recommending a final dividend of -- a total final dividend of 72p per share for the year, an increase of 2p on 2019. Let's take a look at funds under management in some more detail. We continue to grow our funds under management during 2020 through the generation of net organic growth and market outperformance and despite the market volatility and challenging operating environment. Focusing on the chart on the top of the slide here, total funds grew by 8.5% to reach nearly GBP 55 billion at the end of 2020. Investment performance of 4.4% was ahead of the flat MSCI PIMFA index shown here, to which we are more correlated. Funds under management have grown at a 4-year compound growth rate of 12%, consistently outperforming market movements during that period. On the lower chart, total net inflows during 2020 were GBP 2.1 billion compared to GBP 0.6 billion in 2019. That represents a growth rate of 4.2% of opening funds and up from the 1.3% net growth rate in 2019. Now let's move to look at the segments of the business. In our investment management business, we have increased funds under management and administration by 4.4% during the year to reach nearly GBP 45 billion at the end of December. This has been achieved through total net growth of 1.4% and investment performance adding 3%. Gross organic inflows of GBP 3.3 billion, in line with last year and a good performance given the prevalence of face-to-face client meetings in our industry and proving we pivoted well to engaging digitally with our clients. Inorganic or purchased inflows of GBP 0.6 billion, largely comprised of the GBP 440 million of assets purchased from the personal injury and court of protection business we bought from Barclays Wealth team in April. With nearly GBP 1 billion of assets in this specialist market, now we're the leading discretionary investment fund -- investment management firm in the sector and excited about its prospects. All of our specialist market teams performed well in 2020. Our newly formed Scottish-based charity team had a great first year, securing some large mandates in the first half of the year. And Rathbone Greenbank grew by over 18% to have funds standing at GBP 1.9 billion at the end of the year. Paul will talk some more about our specialist markets teams later. Turning to outflows of GBP 3.3 billion or GBP 0.6 billion lower than 2019. Outflows from closed accounts represented 3% of opening funds, an improvement on the 4.7% recorded in 2019 and in line with the trends I forecast when I spoke to you when this time last year. Our rate of retention also improved from 90% to 92% in 2020. Turning to our funds business, which had another outstanding year, growing funds under management by 32% to end the year just short of GBP 10 billion. Net inflows added 20%, whilst investment performance added 12%. Funds under management has grown at a compound average growth rate of 25% over the last 4 years in this business as a result of sustained investment and focus on its strategy. Our single-strategy funds grew by 29% for the year, while our multi-asset funds were up some 55%. Together with our investment management services, our multi-asset funds provide a comprehensive suite of wealth solutions for financial advisers and their clients. All of our core funds have future capacity to grow. Net inflows of GBP 1.5 billion were up 67% on 2019, with our multi-asset portfolios, our global opportunities and ethical bond funds continuing to attract particularly strong inflows throughout the year. According to the Pridham report, Rathbones has ranked in ninth position for overall net retail sales in the U.K. in both 2020 and 2019. This is 7 quarters in a row that we've achieved this position and a good achievement for a fund manager of this size. Following the 2 new funds that we added to our multi-asset portfolios in 2020, the defensive growth and dynamic growth funds, we recently announced our intention to launch 4 new ESG-themed multi-asset funds in 2021. These funds will be managed via our claimed multi-asset team in collaboration with Rathbone Greenbank. This proposition will uniquely position us to meet the growing demand for ESG investing and leverage on our long heritage in this area. Having covered the flows and funds growth, I will now turn to the revenue slide. Total operating income increased by 5.2% from GBP 18 million to GBP 366 million for the year, a very credible performance when you consider that the average market levels on our quarterly billing dates, FTSE and the PIMFA indices shown here both decreased so materially. The large majority of this increase came from fee income, up 5%, reflecting our growth in funds, but also our focus on fee on revenue quality. In line with our strategy, we continue to focus on improving the quality of our revenue, with the shift from commission revenue to fee revenue. Results of this can be seen with our revenue and margin increasing by 4.5 basis points to 72.7, returning to the level that we achieved across the group in 2017. Along with our ongoing movement from legacy rates to standard tariffs, this also reflects the successful transfer of the Speirs & Jeffrey clients who were largely on advisory and commission fee structures and now have moved on to our standard discretionary tariffs towards the end of 2020. Overall, a positive result on revenue from both growth, performance and quality. Now let's take a look at costs. I'm very pleased with the cost performance of the business and the discipline we have shown, resulting in a flat cost to income ratio and a flat underlying operating margin. We've delivered on the Speirs & Jeffrey cost synergy targets at some GBP 5 million. These were ahead of the GBP 4.5 million guidance for the year. Savings are also seen as a result of the pandemic across areas such as travel, entertainment and events, plus slower hiring in quarter 2 and quarter 3 than was planned. This has caught up in quarter 4 and continues into 2021. This discipline enables us to continue to invest in our strategic plans, accelerating in some places as a result of the extra savings. Over GBP 3.7 million of investment spend is focused on digital and infrastructure solutions designed to support our growth strategy over the medium term. Paul will update a little more about these initiatives later. Savings as a result of the pandemic offset the GBP 1.8 million increase seen in the FSCS levy during the year, but it remains that at GBP 6.3 million, this levy takes nearly 2 percentage points off the operating margin. However, in summary, we balance investment with discipline and an operating margin broadly in line with guidance and slightly ahead of expectations. Turning to profit before tax. This slide shows the reconciliation from underlying profit before tax to statutory profit. The first item we exclude from underlying profit is the amortization of goodwill, which is a noncash item. While the second relates primarily to the Speirs & Jeffrey acquisition costs. As I've covered before and we highlight throughout our reporting, the bulk of these costs relate to the initial share consideration and the earn-out and incentivization awards, which we have to treat as remuneration and charge to the P&L, given that the shareholders of S&J continue to be employees of Rathbones. The charge for 2020 was GBP 32.3 million, ahead of our GBP 18 million guidance, as the repricing exercise and the retention of clients were more successful than anticipated. Our expected nonunderlying P&L charge in 2021 for the second and final earn-out award is forecast to be approximately GBP 9 million. Our effective tax rate for 2020, 39% was again elevated as indicated to you before, and this is because of the cost of the deferred consideration [ over ] disallowable deduction. The expected tax rate in 2021 will remain elevated, but thereafter, will return to 1% to 2% above the statutory rate. Taking a look at our capital expenditure. Year 1 of our strategic investment has seen an increase in the focus on digital solutions to support both our client experience and our operational efficiency priorities. These are by no means complete, but progress has been made really well in year 1 and all in line with our plans. Very limited impact on progress here as a result of the pandemic, as the team really came together and operated perfectly well remotely. In fact, there's been acceleration in some of the digital projects, one, for example, being the facilitation of remote working for all of our staff. Again, pleased to report good discipline here where reductions in regulatory and property spend have been recycled into digital solutions, some of which are now live and others are work in progress and all achieved while keeping CapEx flat year-on-year. Turning to our capital position, which remains robust. This slide shows the breakdown of our position for 2020 and 2019. This is a complicated slide, but I know some of you appreciate the detail and reminder that Rathbones is classified as a banking group for regulatory capital purposes and is therefore required to operate within the rules prescribed by the capital requirements regulation applied in the U.K. by the PRA. There's 2 numbers on here, I'd like to draw out to you. Total loan funds of GBP 304 million, and the GBP 133 million of capital surplus after deducting the capital requirements and additional capital buffers from our -- from own funds. This surplus will be allocated to the final dividend for 2020, investment in our growth strategy and to fund or part fund the future inorganic opportunities that may arise. Finally, dividends. We operate a generally progressive policy that balances current and forecast performance, the level of distributable reserves, market conditions and investment in the business. In line with this policy and reflecting a confident outlook and a strong capital position, but also mindful of the ongoing uncertainty, the Board is proposing a final dividend of 47p per share. This brings the total dividend for the year to 72p per share, which is just under 3% ahead of 2019. The proposed full year dividend is covered 0.7x by basic EPS and 1.9x by underlying EPS. The dividend will be paid on the 11th of May 2021, subject to shareholder approval at the 2021 Annual General Meeting and to shareholders on the register on the 23rd of April. So to summarize, a good year against a tumultuous backdrop, the business has made good progress with its strategic plans. Although we expect ongoing market volatility, we will continue to invest in our growth strategy, always balancing investments with prevailing market conditions, and while -- and whilst we maintain our mid-20s operating margin guidance. I look forward to your questions shortly. But for now, that concludes my presentation this morning, and I'll now hand back to Paul.

Jenny, thank you. And for what I hope you will see is a pretty resilient set of financial results for Rathbones in 2020. Now aside from that and overcoming some of the challenges, but also taking advantage of the opportunities of the pandemic, we have been making some strong progress against our strategic plans. Now remote working has involved us mobilizing a lot of our systems and infrastructure and indeed, innovating in terms of some of the key processes that we have so that our systems and people can work remotely very efficiently, and indeed, that has been the case. And we've seen little or no disruption to day-to-day activities as a result. If you combine that with what has been a resolute focus on employee well-being and support, we find ourselves effectively exceeding expectations in delivering our overall strategy. So let's remind ourselves what that was. As we looked into 2020, our strategy had 4 pillars. And those pillars are just as important today as they were back then: to enrich the client and adviser experience; to ensure that, that is a top-quality supporting up our brand and effectively builds towards an ambition of being a responsible wealth manager. We continue to be committed to high-quality results that -- high quality services, which, of course, is so important to securing future growth. We also said that there would be a number of specific actions that would support growth in itself, whether that's leveraging ESG space or bringing in skills, be it investment, financial planning or business development to penetrate, not only the private cloud market, but the adviser market. Inspiring our people has never been more important, one could argue, and that's certainly something that is part of a strategy to ensure that we deliver against the values we set out for our employees, and they do likewise. It's an important part of supporting a positive client experience and, indeed, growth itself. And now with a refreshed executive team pretty much in place, we have begun our efficiency journey, which is so important to make sure that we manage costs, margins, et cetera. So let's spend a little bit of time on what we've done to enrich the client experience. The first thing was to enhance our digital capability effectively to establish a portal built on reliable technology as wasn't historically. MyRathbones has now been launched. It was launched in October to new and existing clients. And that's the first step in establishing a digital interface with them. We will be able to share much better functionality across that portal in a secure fashion, improved client communications and also have a better interface with financial advisers that is so crucial to ongoing growth. This isn't the end, by any means. It's merely the start of an ongoing program to improve our overall content and indeed, data exchange functionality. We spent a lot of time over the last year or 2, upgrading our suitability processes and functions. So that's given us a great opportunity to engage with clients more. The pandemic has certainly accelerated this with an opportunity for much more digital marketing, for more digital events and also to share our content more widely across a wider client and adviser audience. This expanded footprint has put the name of Rathbones to a much wider population in 2020, which can only bear fruit as we go forward in future years. What we've also done is spent resources to make sure that the quality of our client documentation and indeed, our core processes that impact clients and indeed, our efficiency agenda later, do get a wash and brush up. Again, not all can be done in 1 year, but it's certainly something that we would like to pursue and have achieved quite a bit in 2020, be it client onboarding processes, albeit new look and feel tax packs and valuations and all the opportunity of a little more digital interaction. As I say, not done yet, but we've made some good strides. Now historical investment in our research capability has always been something that we have prodded ourselves in and certainly bore fruit. I hope you can see the charts in the middle of this slide, which are GIPS compliant charts that show our performance in 2020 against some -- the PIMFA balanced indices. Certainly, the fact that we've invested in such strong intellectual property in our research team is definitely feeding through the organization. And as an average return across all the risk levels, we've outperformed both PIMFA and indeed ARC indices over 1, 3 and 5 years now. No guarantee of the future, of course, but something we will continue to press on with. I think the other important thing is measuring client outcomes. And you can see on the right-hand side of the slide there, the outputs that have come from various client surveys and external surveys of Rathbones. They're all very positive. So #1 positions there, which we're very proud of and not complacent against, but also some very strong showings in de facto surveys for financial advisers. So overall, in 2021, clients will be on the -- seeing strong investment performance, some good outcomes and some increasing investment in their experience. The other part where we've been really focusing in clients and experience and -- is proposition. Very important that the main products and services we offer today, which are in the boxes that you can see on the slides, are fit for purpose. The blue box, as you see there, are where we've invested in 2020. And effectively now, we have a complete suite of products and services that really will enable us to meet a range of client needs, whatever they may be from fund choices all the way through to managed investment services. Our tailored funds, obviously, at the high end, and our single-strategy funds at the lower end now we've combined with a very strong and resolute middle range of propositions coming from our multi-asset range. In 2020, we launched 2 multi-asset funds that complete the suite of CPI plus mandates that match the 5 different risk categories that are adopted in the investment management business. Now this enables us to provide modern managed solutions for lower valued portfolios, such as Rathbone Select, and indeed, manage discretionary portfolios into the adviser market, both of which we launched in 2020. Now all solutions are supported by a common investment process which balances the need for liquidity, equity growth and indeed, diversity. That's our LED approach, and this underpins all of our investment process across Rathbones. We also refreshed our charity proposition and added GBP 440 million of assets in the personal injury space following our acquisition of Barclays Wealth. Financial Adviser is still very much in our proposition suite with a capability currently of 167 financial planners, if you add our internal and our external vision network. The aim, of course, is to leverage also on the ESG capability that we have within Rathbone and Greenbank. And the way we plan to do this is very much to complete a mirror suite of propositions with an ESG flavor. If you look at the similar setup here, we're about to launch 4 targeted ESG return funds in the first quarter of this year, which will very much be sourced on the investment research capability that is already in Rathbone Greenbank. That itself will be able to enable us to spawn other managed investment solutions, as you can see with the arrows here, that are so important to the adviser market and at the lower end of the private client space. All of that will be supported by an ambition to screen firm-wide for ESG. Many people claim they can do this today. It's not as easy as you think that we are certainly developing our capability to do that fast, incorporating sustainability themes already into the assessment of investment fundamentals and indeed responding to client preferences by incorporating some selected exclusions. All of that is very much part of what we will be developing again in '21, but last year, we've built some strong foundation in that area. For Greenbank, itself is already managing just south of GBP 2 billion. We can see the Greenbank proposition very much moving more into the impact space, where it will emphasize the ethical sustainable, and it did impact investment themes and support those with robust investment streams that are able to accommodate client preferences. So plenty going on in that space and work that has very much progressed a lot in 2020. It isn't just a responsible investment, though, that's part of the Rathbone proposition, we're also supporting that with our own engagement, with the investment market as a whole. Our ability to vote. as you can see here, you can see our voting record for 2020. And indeed, our own accreditation, and you can see here where we're positioned in terms of the PRI. So it's very much a suite of responsibility, if I could call it that, starting with responsible investment, but also including stewardship, voting and indeed, our own governance and transparency. Now our strategy was also about growth. We -- as I also said, we were doing a few things to delegate our activity towards growth, which indeed, we've done. We now have a fully functional, dedicated client development team that is working very, very closely with regional teams, following up on growth opportunities, adding skills, building learning and also sharing best practice across the firm. Our adviser distribution team, which was very mobile before, has now been supplemented with DFM specialists in the adviser space. And armed with a refreshed DFM proposition that I talked to earlier, the team has on-boarded 58 new adviser firms, bringing the total now to 82 in -- since July 2019. A lot of opportunity there, I think, to build growth, obviously, alongside the improvements in our digital capability. 2020 has presented a lot of opportunities, as I said earlier, to improve our marketing in the way we did. And certainly, the success of virtual events, as I mentioned earlier, has been very successful this year. So we do expect to continue to invest in that area and continue to share our footprint more widely across clients and adviser spaces. Investment manager recruitment has proceeded pretty well. We've added 23 professionals in 2020. And we've also refreshed the way in which we remunerate our investment managers, much more with a clear line of sight to growth rather than the [ L-scheme ], certainly to reward growth outcomes and change the culture towards growth. We continue to manage team capacity closely and they're improving the productivity to free up time. Our financial funding capability, I've mentioned earlier, but just to mention our in-house capability, that's grown by 20% in headcount terms year-on-year, and that team are directly aligned now to investment teams and working very well with them to merge financial planning and advice investment in life services where appropriate for the client. The vision platform has grown again this year in assets under management, and indeed now has 131 financial planners operating in the network. Now our website will continue to be part of what we do. And inevitably, that is going to be updated over the next year or 2. We've made some strides this year, but we'll continue to have that as part of our growth arsenal. And indeed, anything that comes in through our website in terms of client referrals are now triaged through our financial planning team. So our people agenda has been big and establishing a Chief People Officer this year has provided a strong focal point for HR issues as well as a platform to improve our core HR processes and support our diversity agenda. In a remote working environment, we work very hard to engage our staff. And as you can see from our engagement survey results here, 91% is an extremely positive result, which suggests that we are communicating and supporting our employees really, really well as well as they are aligning very much with our strategic agenda. This was obviously helped with the implementation of some of our remote working practices, providing desks, chairs, laptops and other capabilities to people's homes to make sure that they could continue to work effectively throughout the year. We've continued to focus on training. Our graduate academy always brings in a surprising amount of wonderful talent, which is just great to see. And certainly at the grassroots of Rathbones, they're our future stars. So very pleased to see that, that group is both talented and diverse. We -- our signatures to the women in finance charter as well, so worth mentioning that we're already approaching our commitment there to achieve a 25% female representation in senior management by 2023, well on our way there. But on diversity itself, I would recommend that you read the annual report when it comes out. So plenty going on there in terms of efforts we've made to raise awareness on D&I issues across the year. So our culture is strong and something that shouldn't be underestimated, particularly as more and more people work flexibly. You can see the framework we're operating here and we will very much nurture our culture as we go forward. So operating more efficiently, certainly part of any strategy, but we've certainly done that in 2020 and have tremendous opportunities to do more of that in 2021. Having added Jenny as CFO in 2019; and Andy Brodie has joined us in May 2020 as COO; we created a new Chief People Officer role in June. And most areas of the business have undergone some form of organizational design change in 2020. More recently, 2 managing directors have been put in charge of Rathbone Investment Management, and that's resulted in certainly my organizational span of control resuming to more normal levels. We've also set up a dedicated team to streamline operational processes. That's very much delivered benefits in terms account opening and indeed electronic contact notes and a number of other things that have eased the path. This agenda will be certainly part of our agenda for the next 2 years, but 1 or 2 things there that have certainly helped to ease the way. We continue to improve our remote working infrastructure. It's never done, as you know, in IT, but certainly balancing the use of technology, just to make sure that it's just as easy to work in the office as it is remotely. From an infrastructure perspective in IT, we've definitely moved more to the cloud this year, which has allowed us to be more nimble. And we've also set up dedicated resources to manage day-to-day IT, which has helped in terms of, certainly, remote working, IT help desks, et cetera. We'll definitely continue to be investing in this space to make sure that we keep up, not only with the latest technologies, but also cyber risk, which is so important to our brand and reputation. A quick word now maybe on Speirs & Jeffrey. Amongst all of that, we still have had Speirs & Jeffrey to work with and very, very pleased to say that I'm absolutely delighted with the way in which we work with that Glasgow team. There's been an incredible amount of hard work that's undergone in 2020 to meet our market promises. I'm very glad to report that we're very much on track with all of the targets that we promised. Qualifying funds under management of GBP 5.1 billion was ahead of expectations, and legacy Speirs & Jeffrey clients transferred onto the Rathbone fee rates for the last quarter of 2020 as planned. We now have a very energized Glasgow office. Very pleased to be working with them directly, and they've added a lot to Rathbones. They are hungry to deliver a quality client service and grow market share. We will, of course, continue to work to support them as we will, all of our other offices. So let's move into 2021. Plenty to go on with, I think, with that rather large change agenda for 2020 and we will continue this growth momentum, which we are definitely seeing across the business. We must balance faster delivery times with obviously keeping resilience and maintaining a quality client service. Our digital agenda will certainly be a big part of 2021 as well as the MyRathbones rollout, leveraging some of the new specialist propositions that we just talked about will be key as well to make them more meaningful in the group. We do plan to invest throughout this cycle, adding revenue, generating people like financial planners and investment managers throughout 2021, which will continue to add growth capacity. Our funds and financial planning businesses. Well, the funds business, hopefully, will see another year like we've seen in 2020, but let's see. We're optimistic. There's a lot of good things going on in the business. But they -- but both of those businesses, the funds business and the financial planning businesses are very much well positioned for growth in 2021. Added with a little business development activity and discipline, I'm optimistic. Now what we also must do is, obviously, plan an effective return to office. There will certainly be some flexible working in that. But it's critical that we maintain the momentum, keep the culture as well as keep people being able to work with seamless technology and works well underway to plan and support this. There's an exciting opportunity, I think, in our sector and certainly for Rathbones in terms of use of technology, Upgrading our client life cycle management system is very much on our minds and will bring a number of efficiencies. This digital agenda will complement our personal service and build new client networks and make it much easier for the IFA sector to do business with us. We do expect the markets will remain volatile this year. And as Jenny said, we'll continue to balance this investment with some cost discipline as well. But the business is very well positioned to blend what is a very strong brand, with a leading suite of propositions that we just talked through. Combine that with an improving digital technology and capability as well as driving our efficiency agenda will make Rathbones a compelling proposition for investment. So with that, I hope that's been very helpful. Again, apologies for the 2 dimensions rather than 3 dimensions. We look forward to that next time. Perhaps now it's time for questions. Thank you.

[Operator Instructions] The first question from the phone lines comes from Jonathan Richards of Berenberg Bank.

This is Jonathan Richard from Berenberg. A couple of questions, if I can. The first one is for Jennifer. If you could give us an idea, please, variable costs in the Investment Management division came in around at 27.7%. Should we think about sort of the upper 20s as the new sort of normal range of the S&J acquisition? And then on fixed staff costs for 2021, in terms of guidance there, considering the hires made in Q4 and also the planned hiring for 2021.

It's Jennifer here. I'll take that question. I hope you can hear me okay. On your -- first part of the question, variable costs increase. That's reflecting the increase in the growth this year and the performance that's come through. So if you understand our remuneration structure, that's about in line with guidance. I'm sorry, could you repeat the second part of the question? I missed that.

Sure. So the variable cost to the Investment Management division as a percentage of prevariable profit is around 28% for FY '20. So I'm just wondering, is that elevated percentage level, something that we should consider the new normal post this S&J acquisition?

The influence of the S&J acquisition there isn't directly correlated. The link in the growth will be the growth in funds that we've seen through the year that we've just covered. And as we grow the variable, the variable growth and performance rewards will grow in line.

Jonathan, I think it's fair to say that there will be very high components of that and some of those awards are deferred as well. So you often get good years that roll into lots of good years in the future and vice versa. But I think maybe a couple of points, as investment performance has been particularly strong in 2020. So that has obviously generated a higher variable award. It's been a volatile year. So in a flatter year, I would expect downward pressure on that number. At the same time, the Speirs & Jeffrey Group are still very much in their own structure because they're still in the earn-out period. So that will have an impact after the end of this year, which we can give you more detail on as we go in '22. But I think keep to the upper end overall. That wouldn't be unrealistic, depending, of course, our market conditions and outcomes in profit and growth in 2021.

Great. That's very clear, Paul. And maybe just 1 quick follow-up question for you. Thank you very much for the update on the strategic rational. I was wondering if you could give us a couple of potential numbers around how that might sort of play out, especially looking at the organic growth side with respect to the Investment Management division. As organic growth there has slowed over the past couple of years, do you think these new initiatives can reinvigorate that? And potentially the new sort of remuneration structure that you guys have sort of alluded to, how might that look? Or how might that impact group numbers?

Yes. A great question. It's absolutely question we ask ourselves every other week, Jonathan, as you might imagine. Certainly, look, I think it's very much dependent on the external environment as well as the internal. I think we've done everything that we can to drive -- to begin to change the culture and enable and support our business to grow. So no question about that. A couple of points, I think, is that if you're looking at outflow track history, that's certainly been reducing quite markedly, nearly 20% year-on-year, and that obviously helps the net number. So the gross number hasn't been too bad over the last year, notwithstanding, of course, that we've had -- got a difficult, what I would call, face-to-face sales environment. And I'm sure Mike will back this up. Very, very difficult in the adviser space to build new relationships when we're all sitting in our cardboard boxes at home. I think there is some external environment dependencies, I think, on there. But internally, I think, yes, we ideally want to bring that -- the main investment management business back to generating a couple of percent net a year. And it will take some time to do that. But bear also in mind that the Speirs & Jeffrey team up in Glasgow have been very much focused on their work to bring the clients over and Rathbone fee rates this year rather than particularly growing. So there's another opportunity there. So I think that's the sort of target. The time frame, of course, will change. It's a large ship, but there's a lot of positives, I think, to point to from '20 into '21 that should help. It's on its way. Mike, I don't know whether you'd add anything on the adviser space?

Sure. I think from an adviser perspective, it has been easier to make progress in the areas of -- where our services or products are more commoditized, for want of a better word. So where they're more fund-based, advisers have been easier to bring on board. Where you get up into the more -- the higher value client base, advisers themselves have found it hard to conclude conversations with those underlying clients without a face-to-face contact. So during a lot of last year, that was significantly more difficult. They are getting more used to this as is their client base. So we're optimistic looking forwards from here. But clearly, whilst face-to-face is very restricted, that does continue to present a bit of a problem.

Jonathan, thanks for the question. Does that answer your question?

Yes, very clear.

The next question we have comes from Paul McGinnis of Shore Capital.

Three questions, please. First one, just around, obviously, the strong performance of the Unit Trust business. I know that historically, you've not kind of widely adopted a vertically integrated model. I don't know. Is there a growing proportion of Rathbone Unit Trust products now being used by the investment management business? Or might there be a case for it to increase over time? Second question, I don't know whether if Jennifer can give us some guidance around on the investment management business, what -- given that the price increases or the move to fee rates, Speirs & Jeffrey only occurred to the back end of last year as to what the run rate would be on management fee basis points in terms of the figure for 2021? And then just finally, on pricing more generally within the investment management business. In terms of sort of the menu pricing at the various tiers, it feels to me as if that's fairly firm. And yet, when I think the adviser sector, intermediary is always looking to try and save some costs for their underlying clients. They're worried that sort of the discretionary service could get dumbed down somewhat such that advisers look to use increasing amounts of MPS as a cheaper way of, in effect, accessing the same thing over time or even if there's no sign of it too much as yet.

All good questions. Thank you. What I'll do is let's start off with Mike on the Unit Trust business, if that's all right, Mike. I'm happy to chip in as well. We'll then get to Jennifer and both Mike and I will pick up on the pricing and the adviser sector and some of the trends there, Paul, that you rightly point to. Mike, would you help us a little bit with the...

Yes. Paul, yes. So is RIM using or has the potential to use increasing levels of our own internal products, I guess, is the question. I think it's fair to say that on the multi-asset side, we see, very much, an increasing usage of those funds because they form component parts of the lower value or less complex services that our wealth management colleagues can provide to their client base now. So that is in the form of the select portfolio service and the managed portfolio, so LED managed portfolio service in the IFA space. So we are increasingly seeing that usage happening for lower value clients. In the, what I would describe, as more single strategy funds, we continue to take the view that the investment managers should be viewing us alongside anybody else in that competition space. So they are welcome to buy them, but we don't envisage forcing them to do so. There are within that range, however, a couple of funds, which perhaps seen particular interest from our RIM managers. The high-quality bond fund, which is in the liquidity space of our LED investment risk approach. That is a LIBOR plus 0.5%, near cash, for want of a better word, product, and they found significant use to that. And our strategic bond fund, because particularly for the lower end of their DFM portfolios where they're looking for risk-adjusted returns from the fixed income market, which have low correlation to equity-type risk. So we expect that to continue, but I think the area that we are expecting far greater RIM support, for want of a better word, is in the multi-asset space.

And Paul, just to add to that, I think it's important we've always had a culture whereby from a single strategy fund perspective, they stand on their own merit in terms of other selection choices by our investment managers. As you can imagine, in the multi-asset space, that's a ready-made diversified wealth product, which does have a degree of diversity and indeed transparency as well as it is also some common pillars of -- with the LED strategy, have some common access points with our overall investment process. We're quite comfortable that we can build product on such a diverse foundation. Paul, is that okay on that question? We're happy to move on to the...

It is, yes. Very comprehensive. yes.

Okay. Thanks, Paul. Jenny, could you take the run rate guidance?

Yes. So as you noted, yes, we successfully moved the old clients of Speirs & Jeffrey onto our standard fees towards the back end of the year. And as we've covered before, the average basis point return was in mid-40s, given a lot of the Speirs & Jeffrey clients were on commission advisory fee structures, and they're now on our near low to mid-70s and Rathbone's standard tariff. We've transferred slightly ahead of expectations at GBP 5.1 billion. And that all took place during the last quarter. So I'm sure you can put the sums out from there, Paul.

I could. I was hoping you'd do it for me.

Goodbye to you, certainly, Paul.

We'll have a chat afterwards and see whether we can get your maths right, if that's all right. But I think there should be enough in the uplift. You can actually see the basis point return and obviously return to normal levels in the full year of this year. And Jenny's given you a rough idea of where the pricing was too. But let's take that in a little bit more detail afterwards, if that's all right. Paul, you mentioned a very good point, which is about ongoing pricing pressure and there's no question that we, like everybody else in the industry, is under a degree of pricing pressure. And one of the reasons in a way that we've felt today about spanning our product range is that we can meet those demands with very good valued products in the adviser space and, obviously, then reflecting into the private client space. So we are responding very much to those pressures. In terms of advisers and their general approach to DFM, yes. I think the trend I would point you to is very much more advisers really looking at tailored bespoke DFM as a solution for GBP 0.5 million portfolios and above and that has certainly increased as a minimum watermark over the last few years. So we don't see any challenges in terms of the value of the DFM product. But certainly, its application in terms of size of portfolio creates much more opportunity for the sort of products that both Mike and I have been talking about today. Again, Mike, very happy if you wish to add anything to that.

No, I think it's a very complete picture. And that is the reason why we have developed the managed portfolio service and indeed, a sort of discretionary wrapped service called LED managed, which, again, actually invest in the underlying funds that provides investment management contacts. So I think we are extremely well placed to be relevant to financial advisers as they change their client segmentation and decide what represents value and what doesn't.

Mike, it's a very good word, relevance, and it's something that is very much driving our proposition and development now and into the future. Thanks for the questions, Paul. That was a good range.

Sorry, Paul, just to follow-up on that final answer. Are you saying that ultimately, the threshold for which advisers would refer someone to your bespoke service is rising and that pricing within that bespoke segment is firm, but that ultimately, if more clients are now sort of falling below that threshold, then MPS becomes where pricing's obviously more competitive becomes sort of the more obvious solution for them?

I think that's -- I think it's probably right in the adviser space. But at the same time, let's not just look at revenue margin, it's important to look at profit margin, too. So if we can deliver products, albeit in a more competitive space at a better cost, we can obviously keep managing our margins as best, as optimally as is possible. But I don't think in terms of the pricing pressure on the discretionary proposition above GBP 0.5 million, we're certainly seeing no material degradation there in terms of overall pricing.

We now have another question from Ben Bathurst of RBC.

I've got 3 questions as well, please. First would be on the S&J migration. So just following the transfer of the S&J clients over to the Rathbones charging structures in October. Wondering if you could just share what portion of the original book of S&J clients have now taken up the standard Rathbone's discretionary rate. And of the remaining sort of former S&J clients or legacy S&J clients, is there a chance that any more of those may transfer over in due course? That's the first question. Second question is sort of a follow-up question, I think, for Mike, on Unit Trusts. I just wondered if you could perhaps give an update on what the main distribution channels are for those single strategy funds in RUTM, kind of aside from that sort of that internal play. It's just -- given the strong performance with households hoarding cash through the pandemic, I'd be interested to sort of better understand the potential exposure to a strong ICCs on the retail investment platforms in particular for RUTM. And then the third question is on capital, probably for Jennifer. After payment of the final dividend, we've got regulatory capital surplus standing at around GBP 108 million. Of this, how much should we consider as being really freely deployable were an attractive deal to land on the desk tomorrow? Last one for Jennifer.

Great. Ben, thank you. Why don't I take the first one on S&J, we'll share it out a bit. Let Mike obviously do the Unit Trusts one, and Jenny comes in on the capital. Look, in a nutshell, I think the best indicator of successful migration to Rathbone fee rates is the amount of qualifying assets that we disclosed that have effectively made the consideration target. Because that -- qualifying was always on Rathbone fee rates. So GBP 5.1 billion gives you some idea of the success of that. And could other clients move on? Yes, there's no question. One of the reasons we had a 2-stage deferred consideration structure in the acquisition of Speirs & Jeffrey. First stage, which is the larger piece of deferred consideration, has just gone, and that's what we just reported on at the end of '20 and into '21. There will be a similar but smaller piece of deferred consideration going into '22 and that may well capture some more clients that have moved over onto the Rathbone rate. As a general principle, then, we've been very clear and working very hard with both clients and the investment teams at Speirs & Jeffrey that our rates are clear, transparent and not out of line with market. So that certainly helped the success of this exercise. But yes, it will move and in a way, we expect it to move, and hopefully, in a positive direction over the rest of 2021. And obviously, we'll update you as we go through the half year and indeed, the full year of this year. Does that answer your question, Ben?

Yes. Perhaps, a follow-up, Paul, would be around the specific -- is there a specific date in the same way that there was in October of last year?

Yes. The cut-off dates are 31 December 2020 and 31 December 2021. That's when we will be assessing the amount of qualifying assets for the deferred consideration.

Okay. Understood.

Great. Thanks, Ben. Mike will move on to distribution in the Unit Trusts business.

Yes. So just to be clear, about 95% of all of our sales coming from external sources as opposed to internal sources currently. They are -- because we're a wholesale business, they are -- 99.9% of that comes in through our financial advisers. So are we expecting a strong year? Yes, at the moment we are, markets allowing. So when I talk about wholesale, I'm referring to those are the self-select execution platforms like Hargreaves Lansdown and others as well as financial advisers who are looking primarily to outsource their investment. And yes, so I'm not sure whether that answers your question.

And in a nutshell, it's very similar to a normal retail base in investment house.

Sure. I was just looking to discover if there was any particular exposure to the platforms versus the financial adviser channel. But it sounds as though it's kind of bundled together in that wholesale.

They are sort of bundled together. So there are about 12 direct execution-only platforms. But there are 32 platforms in total in the U.K., most of whom are supporting financial advisers in the execution of their business.

Ben, thank you, and we'll get on to your third question on capital. Jenny, if you would take that for us. Thank you.

Yes. Ben, so surpluses is what it says. It's all there, available. But clearly, we like to run with some buffer for unknown events, probably in the region of GBP 30 million, GBP 40 million. In our capital requirement, we are more than covered by the required buffers in the event of a market correction or downturn. So as we've discussed before, Ben, the size of the opportunity that will come along will always be the wrong time and may require going to market plus, that's all -- we could do 1 or 2 within the -- in funds that we have.

[Operator Instructions] We now have another question from Rae Maile of Panmure Gordon.

Just a quick question coming back on this point about investment spend. Obviously, you expect that the investment spend will come through in the form of new business down the line. What are the measures are you using internally? Because obviously, with markets being as they are, you could see an improvement in new business, which is unrelated to the investment. So how are you judging whether the investment spend has been well spent?

I think, look, there are a number of ratios that we can then use internally. I mean, one of the interesting ones, I think, is our paper bill when looking at digital, for example, and that's a very interesting one. So that's more of an efficiency KPI, if you like, as well as, obviously, responsible on our carbon footprint, but that's a good example. Other examples are about capacity in investment teams and growth in those investment teams, how common those growth rates are across investment teams and the client mix and all of that across them. So technology can help us very much in terms of how that precious time is used on growth versus admin. So certainly some KPIs like that. Jenny, I'm sure you've got a whole host more but we could be here all day on this one.

Yes, Rae. I mean, we're investing across the spectrum, as we talked about last year, both in people, in the front office, client-facing and in our change capability to digitize a lot of our paper processes, which then releases capacity in the front office. We've got a whole host that I think Paul summarizes them there well. Your point's noted. The growth could come from somewhere else, but we have above average portfolio sizes and the key there is increasing the resource to create that capacity for them to continue to grow and bring business on in a more and streamlined digitized way.

Yes. And look, Rae, I think the other challenge, of course, is we can, in the technology age, measure how many clients are actively using our digital portals and things like that. So that'll be something that we'll -- we're obviously looking at as well in terms of the penetration and take-up of how we're interacting with clients. So there's a myriad, and I'm happy to take some more questions on that off-line.

We have no further questions registered at this time. So I will hand back over to the management team.

Lovely. Thank you very much. Dominic, you've been carefully watching the chat line, which is a wonderful addition to our year presentation. Is there anything that we haven't covered Dom, is that people have taken the time to ask questions about.

Yes, sure, Paul. First, 2 questions, probably for you, Paul. The first one, do you think the pandemic will accelerate consolidation within the industry? And how do you see Rathbones participating? And the second one is, what was the impact on client retention from moving your S&J clients onto the Rathbone's charging structure?

Okay. We've been around the second one a little bit, but let's talk a little bit about the pandemic. I think there's no question that the industry's response to pandemic has been very much -- a very quick shock response get together, make sure resilience and working hard, continuity and all those sort of things in the first few months. But now, which is a little bit more business as usual, really. So no surprise really that there haven't been that many deals done in this pandemic world. They're not easy, but there are 1 or 2 there. I think what will happen is that the value of using technology in our space, given that what we've seen in the pandemic has shown us is that, that value has gone up. So any combination that is likely to use technology and be able to leverage technology for some of the gains that we were just talking about, that will be a catalyst for some sort of consolidation. I think aside from that, inevitably, there's a bit of capital that hasn't been used and a lot of interest in the space because the long-term key indicators in the wealth space are still positive. So undoubtedly, with ongoing cost pressure, either technology, people and all of that, that is going to be an underlying trend that is going to support consolidation. In terms of Rathbone's positioning with all of that, Jenny's talked you through the capital position. So we're strongly capitalized to take advantage of that, but only obviously, for businesses that fit our culture. Our main focus is very much on organic growth, albeit, but we continually look at opportunities to build scale. And you can see some smaller examples of that in 2020 with the acquisition from both as well of a court protection team of about GBP 440 million. And obviously, the work we've been doing to integrate Speirs & Jeffrey. So I think the pandemic has accelerated the opportunity of using technology. And that's exciting given some of the pricing trends that we've just been talking about. If I go on to the second question, Dom, I have to say, I'm trying to -- the client retention?

Yes.

I think it's really important that when we set out in working with Speirs & Jeffrey that we put clients very much first. And when we looked at the services that they have access to our Speirs & Jeffrey client today will have access to financial planning, has some ethical investing capability, has access to some very high-quality research so there's a lot of value, we think, we brought Speirs & Jeffrey. I would say it's come the other way as well. They've taught us a lot too, which has been great culturally. But that value has certainly been demonstrated to clients in terms of the level of attrition that we've seen versus expectations. And I go back to the -- for the GBP 5.1 billion of qualifying assets, which is, as Jenny said earlier, exceeded our expectations. And that's because of that. It's the rate that we charge and the marketplace is consistent. It's still, we believe, good value for money and supported by those services. So I think the rest of the comments, I think, will go to the earlier question about to what extent will this change in 2021, we'll continue reporting on that throughout this year. And the next benchmark for that will be the amount of the deferred consideration, the second piece, which we'll report towards the end of the year. But no, a good experience on both sides, I hope, and continual striving by both teams to make sure that we provide value for money for clients.

Thanks, Paul. There's another question coming in from Julian Roberts at Jefferies. What are our views on how the competitive environment is changing, particularly in light of the recent news flow that certain of our peers are starting to now expand their wealth footprint in the U.K.?

Yes. Look, it's -- in a way, it's quite complementary to see other parties wanting to come in and participate in the wealth space. Two good things, I guess, from that is it reaffirms that we're in the right place and reaffirms that we've got some big advantages by already being in place. But equally, it's going to put a natural competitive pressure on that, which we are naturally responding to and some of the actions that Mike and I have been talking about in terms of proposition and penetration in the space are definitely a response to some of that. So yes, there's no question that there are other eyes in the sector, but we see that as a very positive force, which drives us rather than a negative course. I think, inevitably, in the wealth management industry, there is a huge amount of competition for talent as well. So that's one of the reasons why inspiring our people. When you talk to the analyst community, it feels a little soft, but actually, it's a very important success factor that culturally, we can have a strong identity and put our people together, train them, continue to develop them and push them through careers. And it's very important in such a competitive space. But all of those things we are doing. So pretty well positioned, I think, to meet that competition.

Thank you, Paul. Then there's a couple of questions from Stuart Duncan. The first one is are private clients asking as many questions on ESG as institutions? That's the first one. And the second one relates to client longevity. How long do you typically expect a client relationship to last for? And is the 92% retention rate linked to the age of the clients.

Okay, thank you. And thank you, Stuart, for those questions. Good to know you've got the technology, not the audio technology, the written technology as well, Stuart. I appreciate that. Listen, I think private clients, there's no question that private clients are asking questions in the ESG space. I can't say that it's as many as the institutional space because there's an awful lot of questions in the institutional space are on ESG and how we're positioned. But it isn't easy in the retail space to talk about ESG. And then the example we often news is, do you invest in Shell, for example, which would fail any oil or carbon filter. But when you look at the positioning of that company in terms of its ongoing investment in renewables, you will all know this, is that, that's quite a positive picture and an important part of funding the future. So it's important, I think, that not only we educate ourselves in terms of ratings and have our own views on stocks, which is very much how we've set up our approach to screening an ESG. As I said earlier, leveraging from the expertise that we already have in Greenbank. But equally, over the next, certainly, 12 to 18 months, with regulations coming in as well supporting this, educating private clients about some of these subtleties in the ESG space is going to be a challenge for the industry. It would be easy to overpromise. And that's why I said earlier, it's not straightforward, this particular area. But we've done a lot of work in 2020 to prepare for this, and that will continue in 2021. So very much on the front foot, I think, on that, Stuart. In terms of client longevity, look, our average age of clients is still 63, and that hasn't changed in all the years I've been here. So no question that client longevity is going to build an annuity value for us. And as long as people live longer, that annuity value grows, of course. That is fair to say, sadly, in 2020, we have seen -- we have lost more clients for obvious reasons than the norm. But with vaccines and what have you, that should return to more normal levels. And obviously, you know the demographic trend and the more that, that's in our favor, which it looks with the advantages of -- advances in medical science to be. Then clearly, we look forward to building those long-term relationships clients and that presents value, we hope, both sides.

Thank you, Paul. The next question is from Mark Rogers. Please, can you comment on the net inflows for the Investment Management division? When will they return to normal -- to more normal levels? And I'm assuming this to be around 4% of AUM.

Mark, thanks. I think I'll just go back to what we were talking about earlier. I think it was Jonathan that started on that one. So perhaps, I think that question is covered with our aspirations. And I talked earlier about some of the expectations there and what needs to happen in order to deliver them. So if Mark, you need any more clarification than that, do give us a call afterwards.

And there's a question from Simon Skinner at Orbis, Paul. Our clients showing an increased willingness to transact and engage digitally as lockdowns have continued. Is there scope to increase the AUM and/or client capacity of investment managers in a portion of clients' interactions on digital in the future?

I mean in a nutshell, yes, I think. Bear in mind that we do have a range of clients from very pretty sophisticated institutional clients to quiescent institutional trustees and charities, all the way through to some quite vulnerable clients who are obviously not going to be at the forefront of the digital scale as a generality. Don't underestimate anybody's ability to learn from their grandkids as to how to press buttons because they -- it's so easy these days, that anybody can do it. But there's no question, from our perspective, that it's a very efficient use of time, particularly for any existing relationship, to have much more digital interaction that can be quicker, much more efficient and effective in 2 dimensions, if I coin that phrase again. So yes, we will be leveraging that, and that goes a little bit to how our marketing strategies will be tweaked accordingly as well. But I do go back to what Mike was saying earlier a little bit in terms of building new relationships that's not going to be as easy in this format. So undoubtedly, in the future, it's going to be a blend, and we will try and optimize both of those channels to market.

And then just one final question, and probably this one's for you, Mike. Can you talk about some of the measures taken to focus advisers on growth? Is this likely to have an impact on adviser retention and what is your outlook for net adviser number growth?

So I guess I would put this into 3 areas. The first is ensuring that we have a range of products and services that are relevant to the IFA communities, and we can apply them according to the client segmentation of those financial advisers. That is a process which moves away from push sales to consultative sales and has been very successful for us in the last couple of years, in particular. So the product side is one. Second is the resourcing, and we are gaining more and more traction through having a single sales force but supplemented by our 5 DFM specialists who are brought in to focus on those financial advisers who have more of a focus on discretionary fund management outsourcing. And the third is pricing, which we now feel with the products and services priced as they are, are highly competitive in that marketplace. That process has taken us a number of years to get right. And the resourcing as well, and we've had the DFM specialist now over about a year. So we are approaching that in -- with some optimism for the future. So I think yes, you can expect to see improved sales, I would say, from that space as a mix of solutions-based products and services, so including multi-asset funds through our NPS, our LED-managed service into full bespoke.

Thank you, Mike. And no more questions on the webcast.

Great, Dominic. Well, look, it's fair to say that I really appreciated your time and energy that's been taken up by listening to us today. It was a little longer than normal. We were just keen to get a few messages across we have. But resilient year and very much looking forward to 2021 and all the challenges it will present. Thank you very much for the questions. We are now able to end the webcast. As I say, if anybody has any further questions, do give us a shout afterwards, but I greatly appreciate your time this morning. Thank you.

Ladies and gentlemen, that does conclude today's call. Thank you all again for joining. You may now disconnect your lines.