Tatton Asset Management plc (2T7.SG) Earnings Call Transcript & Summary

Good morning. Thank you to those of you who are joining us today to hear from Tatton Asset Management, who announced their interim results earlier this week on Tuesday. We're going to have a presentation from the management team. There will be an opportunity for Q&A at the end so please feel free to submit questions as we go through. I'm also going to launch a poll so if you could please respond to that as well. Otherwise, without further ado, I will hand over to Paul.

Thank you Hannah. I hope you can all hear me loud and clear and see me too. A quick introduction to the speakers today. There's myself, Chief Exec; I'm joined by Paul Edwards, our Chief Financial Officer; and Lothar, our Chief Investment Officer. On Slide 6, we've just got a quick divisional structure slide, which shows you the Asset Management plc with the 2 separate divisions. So we've got the Investment Management division, which is very much the growth area, the model portfolio service, which is now responsible for 81% of the revenue of the group. And then to the right hand side, we've got Paradigm, the IFA support services division, which is the Consulting side or the IFA club and Paradigm Mortgage Services, our mortgage club, which is responsible for 19% of the revenue. We'll cover all 3 in the presentation. But if I can jump forward to Slide 8, key highlights. Just pulling a few of those highlights together not all of them. Obviously we've had a tremendous 12 months. Very pleasing to see that our key metric of assets under management [indiscernible] now up to GBP 13.9 billion, which is an increase of 22.3%. So obviously we're delighted with that and that is reflected by the organic flows. So our flows were a record high and our flow has got up to GBP 1.8 billion for the last 12 months. So we had done GBP 900 million in the first 6 months. We thought the second 6 months might be a little bit not as comfortable as it turned out to be, but we actually did the same again in the second half so GBP 1.8 billion, which we're delighted with. That reflects down into our new profit line of GBP 16.4 million, up 12.9% and improvement in our operating margin to 50.7%. Also pleased to say that we're announcing our final dividend of 10p, which again is progressive and sticking with our mantra of distributing 70% of our net assets. So the other key point to take out of that really is the number of accounts that we have and we're now over 107,000 accounts. So a quick little bit of simple arithmetic dividing that into the GBP 13.9 billion says that actually each 1 of our account holders has on average GBP 130,000 with us. And I think that's a testament really to discretionary fund management to the mass market. Discretionary fund management has never been available to people who could only invest -- sorry, normally only available to people who could invest over GBP 0.5 million or GBP 1 million. So we brought that down to GBP 130,000 and we actually don't control that. That's controlled by the IFAs. IFAs basically decide on what elements of or what amount of assets we manage on behalf of their clients. We have no strict minimum. We let the IFA decide and, as I say, that comes down to GBP 130,000 per account. Just taking the maths on a little bit further. At 15 basis points, that works out at a cost of GBP 195 per annum to the end client. So to get discretionary fund management to the degree that we operate, GBP 195 we think is very, very reasonable indeed and actually ticks a lot of boxes for consumer duty that the regulator is launching next month. So we're [ reasonably ] positioned. The MPS world where we play is maturing. It has matured to a great extent over the last couple of years. There are lots and lots of people involved offering MPS services, which we think is refreshing. And when we first started, it was a bit of a crusade and an educational process to get IFAs to look to outsource their fund management decisions. Now it's becoming a lot easier and, as I say, with lots of lots of new entrants in the market, it becomes a quicker proposition to convert IFAs into utilizing our services plus the GBP 1.8 billion over the last 12 months. Happy to say that post the end of the year as well if we look at the results for April, May and so far for June; we're trending at GBP 150 million of new flows per month so again moving nicely onwards. Our strategic partnerships with IFA distribution with Tenet Group, with Fintel and with Paradigm continue to do well and we're getting really good flows from these groups. And I think that really concludes Slide 8. Looking on to Slide 9. Showing really good CAGR growth of 24% of AUM and 18% for group revenue and that step change that I talked about on organic flows moving from the sort of GBP 1 billion to GBP 1.2 billion that we've tended to do up towards the GBP 1.8 billion that we had in March '23. And Paul will take you through the margin improvement and his outlook for the future. But as you can see bottom right, that's been clicking up point by point by point from 38% back in March '17 to 51% in March '23. So without further ado, I'll hand over to Paul.

Thank you. Yes, it's been difficult year for many businesses this year. I think Tatton performed very well. It's been consistent H1 to H2 and for the year we've increased revenue by 10% to GBP 32.3 million. Adjusted operating profit increased to GBP 16.4 million so just under 13% increase and that's on the back of reasonably significant inflationary environment this year. Our overall asset cost increase has increased by 7% or 8% in the year or GBP 1.1 million. That's helped drive our profit margin to 50.7%. All the adjusting actions year-on-year are broadly consistent with this year. There's a slight change in the gain on fair value deferred contingent consideration, which is a credit of GBP 2.6 million. But that growth comes down to obviously diluted earnings per share of just over 10% to 20.6p. And obviously Paul just mentioned the final dividend, which is up 17% to 10p and which gives a full year dividend of 14.5p, which is 16% increase year-on-year. On the next page, we go into the divisional performance of Tatton. And you'll see that what drives Tatton obviously is the AUM/AUI growth, which is 22% this year or GBP 2.6 billion. Clearly that comes from the flows which is a record GBP 1.8 billion this year. We have the acquisition of 8AM, which adds a further GBP 1.1 billion. And we've had an impact in markets this year actually, which was if you were on this presentation back at H1 back in November, you'll remember that would have been GBP 900 million at AUM/AUI standpoint so a negative AUM movement of GBP 900 million. It's all netted out for the year at GBP 400 million. And that's what's driven the revenue by GBP 2.6 billion or 11% to GBP 25.9 billion for Tatton. And also you'll see the adjusted operating profit has increased up GBP 1.9 million to over GBP 15 million. I think the key here though is the continual increase in margin, which we anticipate to continue. That additional revenue that we got through and the additional profitability or the marginal impact of that has actually been about 73%. And when you take account of those markets, which is actually an impact of about GBP 1.2 million so that's GBP 400 million on average over the year actually impacted profits by GBP 1.2 million. If you add that back, it would have been 80% that dropped through to the bottom line. Paradigm also had a very good year certainly from a mortgage completion standpoint. We had a record level of mortgage completions up to GBP 14.5 million, a 10% increase, and that effectively enabled us to increase our revenue overall by 7%. Margins and operating profit, certainly operating profit was broadly flat year-on-year and margin was slightly decreased so that's because we basically returned to a normalized cost base post COVID. On the next page on Page 14 is really the group's financial strength. So it's a combination of the balance sheet and our capital adequacy. The only real change on the balance sheet this year in fact you can see the net assets significantly increased just around GBP 42 million. You see the investment in the joint venture of GBP 6.7 million, which is our 50% holding in 8AM and obviously the continued cash generation at GBP 26.5 million of cash we have now on the balance sheet. Of that GBP 26.5 million, what's really free cash flow? Well, it's the GBP 10.4 million that you see on the waterfall graph on the right hand side. The capital resource requirement for the group is GBP 4.4 million and we're holding 337% of that resource requirement in the GBP 10.4 million headwind. On the cash flow bridge, the key number here which I always refer to really is the operating cash. So it's really the cash conversion, which is effectively 99% of operating profit so it's very, very strong. And then the calls on that cash is just the normal dividends. If you followed Tatton over the last few years, you'll recognize that we continue to pay dividends around 70% of adjusted operating profit on a sort of 1/3-2/3 split from interim to final. And then you just got the normal tax payments and acquisition related costs and in addition, a relatively modest amount of CapEx, which then leads us to the GBP 26.5 million. And then finally just from an outlook perspective. Net flows for the first 7 weeks of this year have been very strong so they have been GBP 350 million. And if you do the math on that, that extrapolates to GBP 150 million a month or nearly GBP 1.8 million albeit still relatively early days. Obviously markets remain uncertain. It's relatively volatile at the moment, but we remain cautiously optimistic on that. And our record GBP 14.3 billion of AUM is touching distance from our GBP 15 billion target. And from a Paradigm perspective, you probably all read in the press about the impact recently of the lenders withdrawing products from the market and putting them back on the market and repricing them. That's clearly going to have a short-term impact in the market generally. You've seen obviously the impact of increasing interest rates and affordability issues. But overall -- it's going to be a tricky year for Paradigm in many respects, but overall it's still a relatively small part of the group. And then from just the inflationary environmental costs, clearly CPI is still at 8.7%. We will be increasing salaries on an average basis of between sort of 5% to 7% this year and we are investing in an additional 5 people, which are all really IFA facing people or distribution and service resource.

Okay. If we can turn to the strategic side then on Slide 18. We gave the market a guide back in FY '21 that we would grow from GBP 9 billion to GBP 15 billion over the 3-year period and we would do that by organic flows of GBP 1 billion and some M&A activity for the other GBP 1 billion per annum. So that's the original kind of position. If we look at the actual performance where the breakdown has not been quite as planned, the organic growth has been stronger than expected and the M&A activity has been less and then we've had the sort of the increase on the markets and then the drop in the markets in FY '22. So they kind of balanced each other out. But as Paul says, as we sit here today in June, we're now GBP 14.3 billion towards the GBP 15 billion target, which was the end of FY '24 so basically to the end of March next year. So we're only GBP 700 million short and we will do that by organic growth. So I'm confident that we will exceed that GBP 15 billion target that we gave ourselves back in FY '21 and we will probably look to guide a new target level next time we report at the interims. So GBP 700 million required. On the M&A side, we are very much an organic house. We have done a little bit of M&A. We can talk on them individually later on. But there have been smaller amounts that have helped, but as I say, not to the degree that we had thought back in FY '21. It's quite hard to acquire businesses these days for the right price in our world mainly because the model portfolio service has grown in popularity. Everybody who runs these believe that the valuations are a lot higher for them and some are basically saying we're going to build our FUM up before we look to sell. So we haven't got any M&A activity to talk about today and there's nothing effectively that we are looking at that is imminent although we'll keep fishing and keep looking to see what's out there. So turning to Slide 19. As I said, yes, we're growing of age and it's nice to see that the actual pool that we fish in has actually increased. So now it's up to GBP 103 billion of FUM. We've got a 13.4% share of that, but it's nice to see that increase from GBP 81 billion up to GBP 103 billion. We believe that market will continue to grow. All of the consultants are basically saying that it will grow to GBP 200 billion by 2027 so that's obviously a huge increase. And if we could maintain our share minimum and maybe even improve on our market share to take our share of that extra GBP 100 billion, then that really is the execution of the plan that we've got on the way. We have got consumer duty coming and consumer duty we believe could be a really attractive tailwind for the Tatton Investment Management business. We've always concentrated on client outcomes right from the outset and we've always dealt with a good price and obviously have given value for money with the 10-year consistent investment track record that we now have behind us. Lothar will cover that off later on in his presentation. So we now have a 10-year track record, which is the [indiscernible]. It is nice and consistent and we are very, very pleased with that positioning and, as I say, consumer duty coming forward. So we'll look to grow the number of firms that we have and there's a significant opportunity not only to grow those firms, but also to actually extract more of their assets into the Tatton investment management proposition. We've got a slide which will show the penetration that we have with our Paradigm firms that we've worked with the longest and also the penetration that we have with the new firms that have joined us post the IPO. And it's really pleasing to see that there's a gap there and that gap means that over time we should be able to increase the amounts that we've had from the non-Paradigm firms, the direct firms and that actually does show a target of round about GBP 14 billion that could come our way if we were to get as close to those new firms as we have been to the Paradigm firms. More of that later. We really do enjoy fantastic strategic partnerships with other distribution businesses within the IFA community and 50% of IFAs tend to be in clubs or associations. So we're working very closely obviously with the Paradigm firms, with the Tenet firms and with the Fintel firms and looking to develop our relationship with Sesame Bankhall Group and Threesixty. And then we touched on the M&A at the bottom which, as I say, is quite light at the moment because of the emergence of the MPS world and everybody's new valuation ideas. So if we move to Slide 20, this really shows the sort of increase in value. If you look at the bottom in the green shaded area, you can see in 2017 there was GBP 25 billion in DFM/MPS obviously where we are and now that's GBP 103.5 million. So it's 16% of the total so there's still a long way to go. We believe that IFAs are in good health and will continue to prosper. We believe that they will continue to place assets with platforms so platform growth will continue. And we believe that DFM/MPS will take a greater and greater share of those assets sitting on platform over time and we totally concur with the GBP 200 billion that is forecasted by the market. If we look at where we are with the pie charts on Slide 21, we can see how the jaws have changed in favor of the direct firms over that period of time. Now we've dropped off a couple of years. We're looking from March '21 to March '23 and you can see now that 81% of our firms are non-Paradigm firms and 19% are and also you can see how the AUM has changed over time. April always was dominated by the Paradigm firms back in 2021. You can see how the direct firms over time are increasingly important to the overall FUM that we have. On Slide 22, we have our saturation or penetration slide, which we're happy to share with you. That basically says that each firm on average so we assume that the firms are cohorts have around about GBP 40 million available on platform. And if we look at the Paradigm firms, the average of those firms with the assets that we have comes out at GBP 30.8 million per firm. If we look at the new firms or the newer firms that have joined us post floatation, there is actually a huge number of those, 703 firms, but we've only got GBP 10.8 million per firm on average at this moment in time. So again a little bit of simple arithmetic and nonscientific approach. If we were basically to get as close to these firms as we have done with the Paradigm firms and they are cohorts, then there's a potential opportunity of GBP 20 million per firm, which is GBP 14 billion in total. Now that obviously assumes that we just continue to farm to the existing supporting firms that we have and obviously that will not be the case. We want to drive the number of member firms supporting us up as high as we possibly can and that is very much our drive. On Slide 23, we're just showing how we've evolved the operation. Lots of IFAs are very happy to outsource completely to us the investment proposition after they've chosen the right portfolio for their clients and the right attitude to risk. Others want to have a little bit more of an involvement, some like a co-brand and we have 14 of these arrangements. This is literally where we co-brand with the IFA firm and have Tatton very much at the forefront as well. And we can then go a stage further to white label where the IFA wants to have its own named portfolios and there's a few examples there or we can go to the final stage where the IFA or a couple of members of the IFA team would like to join our investment committee and have a joint investment committee working towards actually providing a bespoke asset allocation and fund selection. We have the final say in that arrangement so nothing can be effectively positioned within the portfolios without our final say and it really is just the collaboration of working with the IFA firm where they want to actually be involved in the investment committee. In all of these propositions, we still remain at 15 basis points and we have no pay away so there's no drop in margin and we can provide this service as, as I say, the MPS world evolves. On Slide 24, we just look at attrition. There is consolidating or consolidation of certain IFAs. Consolidation has a ying and a yang for us. We really quite like consolidation because it says to all IFAs, you're actually building up something of value and that is obviously a good thing. For every IFA that wants to sell, there's an IFA who wants to buy. And basically lots of IFAs are bringing their sons and daughters into the business to continue with the development of the business as they see they're building businesses of value. But we do have attrition and the attrition is 1.8%. That's slightly better than last year's attrition, which was 2% and we've even highlighted where it's [ attracting to ] with that consolidation. So consolidation we keep an eye on and we always will and it's something, as I say, that we would always make sure we have a weathered and continued eye upon. Turning to Paradigm Consulting on Slide 25 and also Paradigm Mortgages. As Paul alluded to, obviously the mortgage market is likely to be difficult and we can't obviously ignore that, but it's a very, very small part of what we do. 19% of our revenue comes from Paradigm Consulting and Paradigm Mortgages. You can see that consulting increases and grows by around about 2.5% to 3% so it's just nice steady increases. We've done incredibly well in building up our number of mortgage advisers who utilize our mortgage business and also on the protection side and we'll continue to do that. Mortgage advisers will focus their attention into other areas, product transfers, dealing with protection assurance and rebroking of that; to fill in that revenue gap, but we do expect applications to drop and we're giving sort of like a guidance of approximately 10% to 20%. And as Paul said, that wouldn't push us away from our consensus numbers, but obviously will have an effect which we can't ignore. I think that really gets us to now Slide 26, which is just our investment case. I think our brand has strengthened remarkably well over the last 12 months since we reported. We are operating in the fastest growing segments of the U.K. wealth market and we look continually at what we should be doing next. We can't find anything better than the MPS world and we obviously want to continue to at least keep our market share or if we can increase and improve upon that. As I mentioned earlier, we've now got this lovely consistent 10-year investment track record now, which is very, very good to have. IFAs want to see you being consistent. They don't want firms that actually shoot the lights out 1 year and then down the next. So we've got that little bit consistency and 10-year is obviously a great number. We've got that lovely distribution link through all of our IFA propositions and partnerships and a highly scalable model, which we're very, very proud of. And we probably won't dwell on the final bullet points of experience and entrepreneurial management team. I'll let you decide upon that. So I'll pass and without further ado, hand you over to Lothar on the investments.

Thank you very much. So 1 thing that we haven't quite mentioned yet is consumer duty, which is the new regulation that is coming into effect from July and price and value is the leading principle there. Price was never the issue for us. Value while we now have a 10-year track record in managing model portfolio services and discretionary record on platforms and that's this slide where you can see that compared to our peers, we have put in a very consistent performance track record and on a risk-adjusted basis also somewhat outperformed them. The next slide gives the same picture for the 5-year period, similar picture again. For the 1 year, it looks a bit more [indiscernible]. That's obviously because the asset allocations of the risk profiles which we managed did not permit for positive returns last year. We did slightly better than our competitors as you can see on this slide. But nevertheless, obviously as the Chief Investment Officer, I'm never happy when I can't produce positive returns for our underlying clients which obviously as we all know, last year was the conference of the bond market resetting to the old normal interest rates and yields again and equity is obviously suffering a re-rating from that end. So that also started to shift our assets under management. Sorry, shouldn't forget the ethical portfolio, which now also altogether has a 5-year track record to balance even an 8-year track record, but we can show now the 5-year track record there. If that looks of more outperformance and a slightly higher risk than the other, that is because the ethical ESG universe is a restricted and quite growthy investment universe with a lot of exposure to the U.S. and we all know how that has panned out over last 5 years. So on the next slide then, the matrix of our model portfolio offering down the side, the different slides and across the top, the different risk profiles. And as you can see at the bottom, we have seen a bigger growth in the higher risk profiles as investors reassess their need for being invested in bonds. Even though I've now stopped saying to advisers bonds are running out of road, please make sure that you're not allocating clients into that, wouldn't need to. It did result in as you can see only 2% of our book being in the defensive in the 75% bond portfolio, which I was actually quite pleased about what we can see that the higher risk so from active onwards have grown relatively faster than the rest. On the right hand side, you can see that there's still a trend towards the hybrid model, which combines the Tracker with the Active and the ethical growth has slightly tailed off compared to last year while the global asset allocation that provides the same model portfolios but with a global cap weighted regional allocation is currently growing the fastest. I've got a couple of slides in terms of our investment outlook. So just perhaps for your interest, we have come through a tough winter which hasn't turned out quite as bad as everybody thought. So recession has not yet materialized. It seems to be the best time posted recession ever, but there are clouds on the horizon. So we still can't be quite sure whether we can actually really sell through this globally without a meaningful earnings contraction out there, which obviously would put equities under pressure. Central banks are still raising interest rates, particularly in the U.K. In the U.S. we had a pause last night, but whether that's really at peak interest rates yet is not quite certain. And therefore, we continue to be on the neutral side. And I think perhaps we should leave it at that and just perhaps go for questions now.

Yes. Our summary slide is Slide 36. So strategic direction is very much the organic growth piece that we talked about. We're very close to concluding that Roadmap to Growth to get to the GBP 15 billion. And yes, M&A activity, as we said earlier, is pretty quiet at the moment. I think over to you, Hannah.

We've got some questions in. Congratulations on the great set of results. Can you please comment on the capital allocation policy going forward? How will the free cash be split between increasing dividend, acquisition, potential share buybacks? And in terms of acquisitions, I think alluded to this in the presentation, what are the parameters that you're looking at to decide whether it's got fit to Tatton and how is the valuation stacking up in today's market?

Okay. I mean I'll deal with what we're looking for. I mean from an acquisition point of view, we're very much looking for anybody who we think is complementary or offering complementary model portfolio services in the marketplace and maybe where they could take us into a whole new group of IFAs that we're not currently talking to. So distribution links with assets under management and with complementary MPS propositions probably needing to be roughly at the same sort of price. But as I say, valuations for those businesses have shot up as MPS has become very, very important within the marketplace and we've been outpriced a couple of times. So our recent acquisitions have been around about sort of 10x for the 8AM proposition. We're not going to be able to buy businesses at 10x currently at the moment. So yes, we'll just have to see how that pans out, but that's it. I think when it looks at capital, I'll let Paul talk about the capital allocation.

Yes, sure. I mean we've actually returned well over GBP 30 million to shareholders through dividend and that's through a policy of, I think I mentioned earlier, sort of 70% of adjusted earnings. We see no reason why that should change going forward. So that's obviously the key component in terms to how we allocate our capital. Clearly we have GBP 10.4 million headroom over our capital adequacy. GBP 3 million of that probably will be taken up by the interim dividend this year and if we leave a little bit of headroom there, couple of million headroom, we have GBP 5 million free flow for any small maybe bolt-on acquisitions if and when they do arrive.

Paul Hogarth, you just touched on there about the strength of that 8AM deal. Can you please confirm details around your role at 8AM and strategically what the acquisition brings to Tatton?

Yes. Very similar to what we said earlier really, which is it was a complementary model portfolio range, a range that we are not involved in. We haven't integrated that business yet because we've only got 50%. So the business is stand-alone, it runs on its own although we have assisted in certain ways. We like the management team. They're a good management team and we've assisted them with things like on technology where we've given them use of our portal to help client engagement. And we're pleased with the assets that they have absolutely maintained. So I think we guided this at GBP 800 million to start off with, that went to GBP 1 billion and now we're at GBP 1.1 billion. So it takes us into a whole different type of IFAs and, as I say, it's complementary and it's the same price as our offering.

Couple of questions here around competition. As you rightly pointed out, valuations are going up because the sector is hotting up. And how is your success being responded to by both competitors and in terms of the scope of the IFA landscape you now have to go after?

I mean the genie's out of the bottle when it comes to MPS. So yes, we have lots more competitors out there. But we actually think that's a good thing. As I say, it speeds up the proposition when we're talking to IFAs. When we first started, it was a crusade. Then it became an educational process and now everybody is aware of the MPS world and very much aware of where Tatton fits because the Tatton brand is actually very, very strong and it got stronger over the last 12 months on the back of that. On competition, we've seen people come towards us on price, but they tend to be sort of coming towards us gradually because of their own legacy book. Some have gone underneath us on price, but it's a slightly different proposition. But as Paul alluded to and I think Lothar did as well, it's not just about price, it's about value too. And I think when you look at why we do as well as we do out there, it's because of one, we're competitive on price; 2, we have that long-term track record of consistent investment returns; and 3, our service standards are excellent; and fourthly, our communications to our IFAs so that they are ready and armed when clients actually ask them questions about what's going on in the markets, what should they be doing I think is second to none. So we bury our IFAs with video content and weekly market updates and everything else. So we're an MPS specialist whereas you've got a lot of people now who've come into it just because they think MPS is the place to be and they may be struggling on parts of the value chain in that regard and are just adding that to it. So we are competing still against the same people that we're competing against. It's not really changed. As I said, price comes towards us, but we're very happy with the 15 basis points. We think that's absolutely spot on. We're under no pressure to reduce that.

Okay. Well, who do you see as your 2 and 3 biggest competitors and when they do win, what is the reason?

I mean our competitors would be obviously Bruins, they would be Brooks McDonald, it would be LGT Vestra, sometimes A.J. Bell. They are the ones that we tend to come across, FE Investment. And we don't tend to lose that often. When we do, what is it down to? Probably local arrangements or local information. I can't think of any specific reason that we would lose to anyone. We're completely open around what our performance looks like. Every IFA has got all of the tools to check what performances they can match anybody against anybody else. So there's no change of gray or opaqueness in that world and we are very proud of where we sit with our track record on that and where we are price-wise.

Okay. In your annual report, you talk about loss of the key client being a key risk. How big are your Top 3 clients and how solid are they in terms of ease of switching?

I mean there's no really significant concentration of what I would call material concentration in clients. Sorry, what was the last part of the question, Hannah, second part of the question?

Do you have any particular that you -- lost it, here we go. You talk about loss of key client being a key risk and how big are your Top 3 and how solid are they in terms of ease of switching?

I think one can switch at any point in time. They can just choose to use a different provider of MPS or DFM service. But the reality is whether this is either on our service or on platform very, very sticky. So as Paul alluded to before, when you look at the attrition, it's very, very light and you'll see obviously the continued growth of AUM over the last 5, 6 years has been phenomenal. So I think the risk is relatively low. In terms of Top 3 clients in terms of value, it's probably GBP 1.5 billion, GBP 2 billion probably max across the 3.

Paul Hogarth, you mentioned that consumer duty regulation could play into your favor. Can you expand on why this might be the case?

Yes. I mean consumer duty is all about client outcomes and, as I say, we've had that at the forefront of everything we do. Consumer duty talks about price and value. I think we are giving our service, as I said, for GBP 195 on average. That's a very, very good price. Some would say it's cheap as chips, some would say expensive for the purposes of the call. And it's also about -- value is about your returns and how you do. So I think the big thing really with the regulator is them now saying to not just IFAs, but platform providers and asset managers. Are you sure that the services that you provide are priced correctly and do you think everybody is getting the kind of return that they should get for the price that they're paying? And I think that sort of tends to lead IFAs in the main to start to look at their existing book and maybe just question whether everybody is in the right place and getting the right price and right value. I would imagine that when that exercise is done and you look to sort of segregate or look at what actually happens there, we could see some assets transitioning towards us because of our price and value.

Would that speed price adjustments from your competitors?

I think it depends really on whether what the service is, how tailored that service is, how bespoke it is, what kind of price that is compared to what the return is. So if you were to take an example and I don't want to actually talk about any 1 particular firm, but if you talk about a discretionary fund management piece where I don't know the charge is sort of 60 basis points or 70 basis points and our charge is 15 basis points. And if the client got the same end result from the markets and the performance of the asset allocator or fund manager, then you ask yourself why am I paying 60 basis points when I should be paying 15 basis points and that's what consumer duty takes you to.

Can you expand on how your variable pay structure works so we can better understand how costs might go from down in a good and a bad year?

So the variable piece, obviously we give annual salary increases every year so that generally tracks inflation plus or minus. The variable pay element is really around sales performance and that's linked to flows so new flows. So typically on average, we're probably paying GBP 400 per million of new flows. So as the new flows increase as they have this year so they go from GBP 1.3 billion to GBP 1.8 billion, you effectively got GBP 0.5 billion of flows, GBP 500 million will generate about GBP 250,000 additional bonus payments. So that is a definite variable cost of the business. And then we also have a sort of general bonus pop around the rest of the group, which then gets allocated against internal plans and performance criteria.

Recent FDA discussion paper where some commentators such as PIMFA seem unhappy about the potential effect on MPS services. Can you comment on how you see this?

Yes, not at all concerned about that. I mean I did read that comment from PIMFA. I think basically what they were saying is that discretionary fund managers would have to operate regulatory wise at the same level that asset managers do. That's not a concern for us at all. We're highly regulated. We have a very, very strong compliant ESOP and I really don't see that as an issue to be honest.

Okay. Lothar, in your Q&A in the results release, you mentioned you want to see Tatton continue to help expand retail access to DFMs. What might this look like? Under your current model, would that mean that smaller IFAs would need success in targeting less wealthy clients and do you see that happening or is that more the domain of digital-focused retail distribution models?

We from the start provided a proposition where we're not setting any minimum investment levels for our discretionary service. So it's really just continuing to do what we've done for the last 10 years just on however many platforms we can operate on and the IFAs are then deciding how large or how small the client might be to whom they offer our services. We are hugely scalable and therefore it doesn't really make a difference to us whether a client has GBP 50,000, GBP 500,000 or GBP 5 million. It's therefore really down to the IFA sector to further that democratization, if you like, of access to professional portfolio management.

Okay. Are your average revenue margins likely to come under pressure from continued shift to passive strategies?

No, I don't think so. I think we're happy with the 15 basis points. I think it's the same question whether it's passive or active. Actually we have got an awful lot from the distribution. If you look at the AUM distribution, you can see that mostly we're still in favor of active from where we are, we're 42% active. But we don't see any issues on that regard and 15 bps works on both sides.

As you become bigger, how are you guarding against key people risk, senior management leaving and how do you think about the second rung of management who are now becoming senior in the organization?

Yes. I mean it's a good question. It's a very good question. I think we look to reward our management team and the second line and every member of staff to be honest. We've got a lovely -- if you look at our churn rate, our churn rate is so low which I'm very, very proud of. I think when you look at the business with the business growing as it is and everybody is at a good place to be, everybody enjoys a growing and thriving business, it's nice to be where we are. So it's got a lovely culture, a lovely feel and we've only got 105 employees so we're still very, very small and everybody knows everybody's name and it's a good place to work.

Well, following on from this question. Since you're so successful, can you not spend more to invest in sales to bring forward higher growth levels?

Again a very good question and a question that we ask ourselves all the time. Could we spend more? But I'm not sure that would necessarily reap the rewards. It's not as simple as to say if you doubled your sales efforts and costs, would you double your FUM? I think what we'd rather do is just sort of increase the size and scale as we are doing. And we know how well our teams are operating and what capacity they're running at. So I think it's a good question, a question that we do ask ourselves all the time. But we think we've got a good handle on what is the right size of team and the right cost to get to where we need to get to. This is a land grab though. This is very much get as much as you can whilst you can. So it's an excellent question.

So it's something you wrestle with regularly. Under consumer duty, there is a pressure on IFAs to look at percentage charging on assets under management so higher value clients may be subsidizing lower value clients. How will Tatton address this as the cost to manage a client for you with GBP 100,000 is the same as a client with GBP 1 million?

Yes. I mean it's just a question about how to lower fees and the industry runs on the lower fees and it's just something that I can't see that the regulator will focus on. They do want to see that everybody has price to value, but I don't think this working towards a flat rate or anything like that and it's not going to be Tatton's decision to do that. I think that is left to a wider power. But again it's not something we expect to happen.

Well, that is it for the questions. So it just leaves me to thank the 3 of you and those of you watching and for your insightful questions and say that we look forward to an update in 6 months' time.

And thank you for everybody's time. Thank you, Hannah.

Thank you.

Thank you,. Cheers. Bye bye.