This is an exclusive interview with Richard Stone (CEO) and Mike Birkett (CFO) of Share plc.
It should be of particular interest to anyone who has been following the collapse of Beaufort Securities, as it has been announced that most of Beaufort’s accounts are due to be transferred to The Share Centre at the end of September.
I separately covered Share’s interim results on Stockopedia last week, so you can also head over there to read my analysis of the company’s performance.
- Share price: 25.25p
- Forecast 2018 EPS: 0.5p
- Market cap: £36 million
- Website: share.com
Q, Hi Richard and Mike. The first thing I’d like to talk about is your position in the market because a lot of my readers are not just prospective investors, they are also prospective clients. Where do you see yourself positioned versus your competitors?
Richard Stone: I think there are a couple of things around our positioning. Right from when The Share Centre started, its purpose in life is to try and enable more people to access the market and invest and therefore enjoy the benefits of investing as they build a pot of savings for their and their families’ futures. And that sort of mass market approach means we are really focused on two things. First of all, the customer relationship is really at the heart of what we do and so customer service is vital. Then from a pricing perspective, we have a ‘flat fee’ environment for our account administration charges, which is different to many in the market, which, on the administration side, will charge you a percentage fee relative to the value of your accounts.
We charge a fixed fee there precisely because if, as an investor you are diligent and put more money into the account, or you are successful and the value of your investments goes up, why should I take a larger proportion of that? Which is what happens in a percentage fee environment. Fundamentally, in that percentage fee environment, you are penalising an investor’s diligence or success. Whereas actually the costs-to-serve don’t change.
On the dealing commission side, there we charge 1%, £7.50 minimum. The majority of our deals are done at £7.50 and an average deal size for us is low single thousands – so £1,500 to £2,000 is average deal size. And if customers are dealing more frequently – and most of the customers we attract are long term ’buy and hold’ investors, who are looking to build that pot of savings over time – if they are dealing in higher values, or if they are dealing more frequently, they can pay £20 per quarter fee. That then fixes all their dealing commission at £7.50 and that, again, makes it pretty economic.
The other thing I would say is that we are very keen to encourage a good overlap between the shareholders of a business and the customers of a business. If you own shares in Share plc, then you get a dealing discount against your online dealing commission and that can reduce that £7.50 a bit further. We gave away free shares to our customers back in 2000, and we have about 34,000 customer shareholders.
Yes, so we would argue that it is competitive, it is a flat fee environment, which I think is distinctive in terms of the administration charges, and the commission can be fixed if that what makes sense for you as an investor, in terms of your dealing behaviour.
Q. Sure. And on the customer service side, I see you do have a very strong Net Promoter Score reported, against execution-only peers. Personally, I would have thought that some of those execution-only peers would be significantly cheaper, they’d be really budget. Personally, I have an account with a budget broker. I don’t expect frills, and I don’t get frills. So, correct me if I’m wrong, I think you are offering more customer service and more services on your website and that obviously has to be paid for.
Richard Stone: We’d certainly like to believe that that is the case, and we believe it is the case.
We offer substantial guidance and resources and things on our website, we’ve got the whole mobile app piece as well, so people can fund and deal and things through the mobile app, whether that’s on a phone or tablet or whatever as well. And we have a call centre functionality, which will answer the phone, deal with emails, post, mail etc.
A lot of the no-frills, or some of the non-frills providers you see, particularly some of the new entrants coming in now, effectively provide a mobile app-only access – so you can’t find a phone number to call, there’s nobody on the end of a phone necessarily if you want to speak to somebody. Obviously there is a cost to servicing that we have to cover, in order to be commercial, but hopefully that provides some support and reassurance to customers in the process.
Q. OK, I understand completely.
Moving on, I’d like to say well done on the Beaufort success. Somebody asked me a question on Twitter about how you managed to secure those 15,000 accounts. Can you tell us anything about the process?
Richard Stone: Thank you. It’s difficult for me to comment on that because it was the administrators, PwC who ran that process. In terms of answering the question around why were we successful in being selected by the Administrators to take that book on, I think there are a number of reasons behind that.
I think it’s principally to do with customer service and it’s to do with experience. We’ve taken on books of business in more ‘normal’ circumstances, if you like, from people like Invesco and Janus Henderson and also in ‘distressed’ circumstances where we’ve taken on books from Wills and Co and a small broker called JPJ Share, which went bankrupt some time ago. So we have a great deal of experience in transferring books of business to us.
We have experience in taking on new customers, and servicing new customers and retaining them on our platform and that’s really what the administrator, I would assume, is looking for in trying to select an appropriate home for those customers.
From a personal point of view, I’ve been quite vocal in terms of criticism of the special administration process – the length of time it takes and the cost. That’s not to criticise the administrators, who are doing their job, but rather the process itself. And my answer to that, is that you have to get into the inside of this process and help these clients out, and that’s effectively what we are looking to do and this announcement today is sort of the culmination of that. These clients have been locked out of their accounts and unable to engage with their investment for some considerable time and it should be good news for them that towards the end of September, those customers will start coming across to us and will be able to, once again, trade and interact with, and take an active part in their investments. So hopefully good news all round.
Q. Would you agree with ShareSoc that it is really a loophole, or some kind of anomaly that enabled the initial proposal to be so expensive to customers? I think you agree that the initial proposal by the Administrators wasn’t very attractive.
Richard Stone: It is a complicated and time consuming process, and I think the challenge is that this is only the third Special Administration process since the legislation was written to have a distribution plan, and had to go through the courts in the way this one had.
My challenge is – is it right that the customer assets are capable of being used to cover the Administration costs? Because what that’s done is undermine investors’ confidence that their assets are actually ring-fenced within the client asset client money protections. In this scenario, what it’s demonstrated is that the Administrator can use these assets to pay their fees, which is what the law says.
But actually, shouldn’t businesses carry some form of insurance? Is there some way of covering those costs? If it was any other industry, where a business goes bust and it has no assets – which is effectively why it is insolvent, then the Administrator has to be paid somehow from somewhere. In the financial services industry there happens to be the luxury of having a large pool of client assets and it seems somewhat anomalous, just because it’s in financial services, that the Administrator can actually go after those, even though they are not actually assets of the underlying company.
I think that’s the bit that needs looking at. It’s the impact it’s had.
I’ve had a lot of queries from our own customer base about “what would happen if The Share Centre went bust” – “I thought my assets were ring-fenced, but this would seem to imply they are not” – and it dents investor confidence in the market.
I think it’s one of our big challenges as an industry. One of the reasons why I am very keen to have got involved, and to be offering a home to the clients of Beaufort, is that we need to rebuild their trust and confidence in us as an industry. And we will continue to campaign to do that. The Share Centre has always had a very strong campaigning role for the interest of personal investors and this sits very comfortably alongside that and we will continue to do that.
Q. I’m sure people will be encouraged by that. So there’s £1.5bn of additional Assets under Management coming in. That looks really huge on top of the £5bn total you have just reached.
Richard Stone: The £1.5bn of additional assets is across the whole of the three books of customer accounts being acquired, not just from the Beaufort book. And yes, it’s a decent increase.
Of course, going back to your earlier questions around charges, the level of assets under administration or assets on the platform, doesn’t really impact our level of revenues directly because we don’t charge an account administration fee that is linked to the value of those accounts.
It is really about customer numbers, more than the assets. But that said, the higher value accounts, or customers with larger pools of investment tend to have multiple accounts, or tend to deal more frequently, so you do generate more revenues as the assets under administration do increase. Fundamentally, that’s why the fixed charging structure makes sense.
Q. Looking at the numbers, obviously the profitability hasn’t arrived yet, but we have a really interesting increase in your interest income, which has more than doubled.
When I’ve analysed you as an investment proposition before, I’ve come to the conclusion that interest is the key in terms of profitability, because it is “free money” that would arrive in a higher interest rate environment.
How important is that interest line? It looks very important to me, in terms of the opportunity for higher interest rates. Is that going to be the driver of profitability in the next year or two?
Mike Birkett: Well, interest is still a relatively small proportion of our overall revenues, and it is certainly not as high as it was historically if you go back five or six, seven years. But you are right in a sense that there is no real associated costs with interest.
On £400m of client money there will be a material improvement in profitability with rising interest rates as that flows down to the bottom line.
Richard Stone: The potential increase in profitability over the next year or so, is going to come from a mix of the benefit from that interest, but also the benefit from new customers coming onto the platform, including those we’ve talked about acquiring, and some of those measures that we’ve put in place in the second half of this year to counter some of the increased cost we saw on the back of regulatory change in the first half. So we’ve increased our minimum tariff for offline dealing, for example, and that will start to feed through in the second half as well.
I would say that any potential improvement in profitability comes from a combination of things, of which interest is a part, but if the interest bit wasn’t there I’d still expect to be making the same comments.
Q. Is it worth advertising the credit rating or the credit worthiness of the counter parties you are using for your interest generation, because it may be a differentiating factor versus your peers?
Correct me if I’m wrong, but I have the impression that you are leaving some interest on the table by using safer counterparties. Is that true?
Richard Stone: We’ve always had a policy, effectively set by our Board, which signs off our treasury policy and the counterparties that we use, to use what I would describe as mainstream, highly credit worthy counterparties. So, could we go and get higher rates by banking with a more ‘exotic’ counterparty? Yes, potentially. But we don’t do that.
As the CEO, one of the reasons why we don’t do that, because I think if I went up to somebody in the street who was a customer and I said, “Oh, do you realise that your client money that The Share Centre is holding on your behalf is held with a little known overseas bank?”, I think that they would be somewhat alarmed because they would have an expectation that they were dealing with a UK broker and that their cash would all be here with a counterparty that they would recognise.
We publish the names on our website of all the counterparties that we use and they are all relatively familiar household high street names that you would expect to see. That I believe is what our clients would expect to see. Yes, we probably do take a more prudent approach than some of our competitors have in the past.
Q. I think it is worth mentioning because, a lot of people won’t appreciate that is a reason why your interest levels aren’t as high as they could possibly be, and some of your competitors may be funding cheaper fees to their clients because they have got riskier counterparties, potentially.
Richard Stone: Correct. The other thing that drives interest income on some of our peers, and you’d have to delve into their business models a little bit, is that some of our peers offer clients the ability to go overdrawn on their accounts, and effectively trade on credit, and charge an overdraft interest rate, essentially on that balance.
We don’t do that. We have a very conservative operating model, so that a customer of ours has to have the cash on their account, or the stock on their account, before they buy or sell and trade. We don’t allow customers to sell short and we don’t allow customers to trade on overdrafts. That’s not part of our model, but it also means that we don’t have interest income from charging clients interest as a function of funding overdrawn type positions.
Q. Finally, can you just explain the London Stock Exchange and Euroclear holdings? Are they strategic?
Richard Stone: Essentially they are strategic holdings.
Just dealing with each in turn – with the LSE, The Share Centre was a member of the LSE. When The Share Centre started as a business, the LSE wasn’t a publicly quoted company. It was effectively a mutual that was owned by its members. It demutualised and as a result gave shares to all of its members. And we’ve held on to a rump of those over the years since. So that’s where that came from. It also helpful because we can go to the London Stock Exchange both as a retail broker, as a shareholder and as a quoted Company. I can knock on their door wearing various different hats, and that’s helpful from time to time, particularly when we’re looking at the interests of personal investors.
The Euroclear holding is one that we acquired many years ago. I think that was before it was acquired by Euroclear. It was a stake we purchased in the clearing and settlement system at the time. Again, it’s a strategic holding because we use CREST, which is the Euroclear system, for holding and clearing the vast majority of our equity positions.
Q. So you’re not intending to sell down? If LSE shares looked terribly expensive to you, you wouldn’t be selling down, you’d be keeping them for this strategic reason?
Richard Stone: We’re not looking to buy any more, but there’s no active plans to try and sell them at the moment.
Q. Those are all my questions and thanks to both of you for taking the time to talk to me.
Richard Stone: Good to talk to you, Graham, and thank you very much.
No payment was made in relation to this interview. The transcript has been edited prior to publication. At the time of publication, Graham Neary does not own SHRE shares. This interview is for journalistic purposes only and does not constitute investment advice.