Philip Stepp has ambitious growth plans for Newell Palmer Group, aiming to develop it into a much larger regional firm, and has been taking advantage of the unique opportunity for making acquisitions created by the RDR.
Philip Stepp, managing director of Newell Palmer Group, is obsessed with tightening systems and processes. He is growing his large regional Midlands-based firm aggressively to take advantage of the one-off acquisition opportunities thrown up by the retail distribution review (RDR). The firm’s growth has been accompanied by challenges, with several complaints being upheld against it between 2005 and 2009. Stepp blames these on the lack of central processes at the time, which he has addressed and continues to work at.
Stepp is a mild-mannered man who likes to trek up some of the world’s highest mountains in his spare time. He started Newell Palmer (named after his father) in 1993 and quickly charted a route towards steady growth via a series of joint ventures with accountants.
‘At one point we had four accountancy joint ventures and one with an insurance broker,’ he says. ‘But we decided some years ago that wasn’t where we wanted to be. Different interests complicated it, so we decided to pull out by buying the accountants out, closing down or selling our shares. We started the first joint venture in 1999 and we bought out the last one a few months ago.
‘Initially they were a great way of building the business, but once we had the clients, there was little the accountants could offer to the relationship. You also have them interfering with the way you run your business and, in terms of future exit, it is not an attractive proposition to sell on.’
Having so many joint ventures left the group with a messy structure, which Stepp plans to address by merging the firm’s three current entities into one called Newell Palmer Group by September next year. It will keep its three offices, in Bromsgrove, Wolverhampton and Nuneaton, but is already building a much more centralised process and structure.
Part of the team: (L-R back row) Richard Worrall, financial adviser; Claire Allen, accounts administrator; Peter Bannister, director of investments; Laura Hinton, accounts administrator; Niro de Silva, financial adviser; Jenny Hubble, financial adviser; Martyn Billings, financial adviser; (front row) Hayley Bayliss, financial adviser; Philip Stepp, managing director
The firm has 31 advisers, all employed, which has helped Stepp keep control to an extent. However, it did not stop the firm from having to pay out on 11 complaints received between 2005 and 2009 and upheld by the ombudsman.
They were small amounts apart from one of £94,580 regarding suitability of advice on spread of risk for a drawdown client. ‘The client panicked when the market dropped in 2008,’ explains Stepp.
‘Contrary to our advice, they went into cash, missed the uplift and then complained. The adjudicator came up with a wacky decision that we should have put him into 75% cash and 25% fixed interest. But our suitability report should have been tighter. It hurt but taught us lessons.
‘Taken in proportion to our size [the amount of complaints] is small and none were from clients on the centralised model portfolio investment service that we set up in 2007,’ says Stepp. ‘To address this, we are bringing all systems into one procedure manual. We will bring in a project manager who will monitor and test that people are following the systems.
‘You have to get people to buy into the process, so we set up our treating customers fairly committee three years ago. It meets quarterly to talk through systems and processes. The same committee has worked on preparation for the retail distribution review (RDR).’
The hardest RDR-related task the committee has faced was tuning the service proposition to make sure each service level was suitable and clients understood what they were receiving for the fee.
Growing client numbers and assets
Through its busy acquisition strategy, the firm has built up funds under management from £115 million in January 2010 to £380 million to date. In 2012 alone, it has bought six adviser firms and it is due to complete two more acquisitions in 2013.
It now has 55,000 private clients of one form or another, although only 1,500 currently receive regular reviews.
Marketing and IT manager Alan Martin says the firm is in contact with a far larger number: around 19,000. ‘We always try to contact every client when we acquire a company. If we don’t have their details, we will go to the providers. It is very labour-intensive,’ he says.
‘Other acquiring companies often go after the 20% of clients that generate 80% of business, but we have discovered there are loads of opportunities and have picked up a tremendous amount of business. Also, if we are receiving small amounts of commission from a client, we have an obligation to offer a service to them.’
Stepp says the RDR has presented a unique opportunity. ‘We are taking advantage of an opportunity we won’t see again, with a lot of small, quality businesses suddenly coming up for sale because they can’t cope,’ he says. He thinks the firm is probably buying more than it can cope with at present, but says: ‘We will digest them all next year.
‘The people we are buying from are tied in for two years [on buy-out deals] so if we lose a client, they lose. We have been writing to these firms regularly over the years, so people are ringing us now to say they are ready to sell.
‘The key is making sure you buy the business of someone who cares about their clients, so the clients are loyal. Make sure they are retiring. It’s a big risk buying from someone who wants to go out on a whim and may come back in three years to take back the clients.
‘There are many consolidators looking for big firms and paying silly money for them. We have been buying smaller IFAs. We would not have bought a business with £2 million turnover. Something could go wrong and it would be big enough to take you down,’ says Stepp.
‘We buy businesses with the least amount of baggage – it isn’t nice to make people redundant but you have to sometimes – and with trail of 0.5%. It shouldn’t be higher unless you are offering something beyond; we can charge 1% for enhanced services, such as four updates a year.
‘We pay three times multiples if we are buying the shares in the business where they get the tax advantages, or a maximum of four times for the goodwill, although we find we are paying less than that now. Many firms say they are interested in acquiring but not many are doing it,’ he says.
‘If the adviser cares about who will look after their clients, it shows: you quickly pick up what is most important to them. They may not have adopted the latest Financial Services Authority (FSA) requirements but, fundamentally, they are good people. With our resources, we can offer better service, so we have found their clients are very sticky.’
Benchmark-beating model portfolios
Newell Palmer has five model portfolios, which it set up five years ago. The team does its own asset allocation and fund selection.
As well as benchmarking against the usual Investment Management Association (IMA) sectors, the firm likes to compare itself with multi-manager funds and ‘benchmark against ourselves’: in other words, track the portfolios to see what they would have done had the team not made certain changes.
This exercise results in a tree-like chart showing one line for each change made since 2007. It shows nine changes, only one of which (the last in April 2012) resulted in a (tiny) reduction in performance.
Newell Palmer director Peter Bannister, who heads the investment committee, says: ‘We came out of property in 2007 and that is where a lot of our outperformance to the sector comes from.’
Since then most changes have been minor tweaks. ‘In April 2012, we derisked the portfolio by reducing equity exposure and focusing on funds that provide lower beta and hopefully higher alpha,’ says Bannister.
‘We introduced the Standard Life Global Absolute Return Strategies (GARS) fund and the defensively positioned Troy Asset Management’s Trojan fund.
‘What is going on around us is uncertain and we wanted to focus on minimising drawdown if markets became unfavourable. They did, not long after that, but then rebounded again recently.
‘It will lag [behind] a bit if there is a strong rally, but we feel it is the right call. Our portfolio is still doing much better than the [IMA] benchmark.
‘I also did a survey [measuring performance] against multi-managers two weeks ago. We are doing about the same as Jupiter Merlin and beating most other multi-managers in terms of performance and volatility.’
Bannister agrees that the majority of absolute return funds have not delivered on their promises but says: ‘With GARS we keep asking the questions, but its track record is 5% above cash and the volatility is in the expected range. It has diversification of strategy, with about 20 or 30 different strategies [working within] it.
‘We look at all of our funds every month to make sure they are doing what we want them to, in both directions,’ he says.
As well as using models portfolios, Newell Palmer provides bespoke portfolios, mainly for wealthier clients. It also uses multi-manager solutions for investments of less than £50,000, including the Standard Life MyFolio range.
Bannister says: ‘I have just been to a BlackRock seminar about its Consensus range [portfolios investing in index funds with an asset allocation overlay]. With a 0.24% total expense ratio (TER), that is going to take some beating. We have a committee meeting next month and I will be bringing that up. Standard Life My Folio TERs are about 0.75%, or just under 1.5%, including adviser fee.’
Keeping profits up
Newell Palmer maintains reasonably good profit levels for such a large company. ‘Our net profits in Bromsgrove are 23%, Wolverhampton 18% and 9% in Nuneaton,’ says Stepp. ‘Our aim is to hit 20% net profit, so we are expanding the business in Nuneaton to help achieve that.’
He is not worried about growing too big and says team structure is the difference between a successful and an unsuccessful large IFA. ‘The teams are split into manageable units. That means we don’t lose track of who we are there to serve, which is the client. If you get too big, an extra layer of management comes in and you lose focus on the front line,’ he says.
‘The people running our teams have been there for 12 or 13 years. We want the managing director of each office to focus on what the advisers are doing and on growing the company. Also, our strategy is to systemise as much as possible.
‘We are RDR-ready now, and our project for next year is to keep tightening consistency of systems throughout the group. We are considering getting the British Standard 8577 – financial advice and planning services [certificate] – next year as a way of achieving that.’
Plans for 2013
The plan next year is to ‘slow up’ on acquisitions, says Stepp, although his definition of that phrase is probably different to many. ‘We have a lot of digesting to do. We will probably have two or three small acquisitions for Wolverhampton next year and I am keen to get two or three into Nuneaton.
‘I am 50 and I think my endgame will come before my 60th birthday. I enjoy what I do and I’m excited by the future. But the natural progression for us in the next five to six years is that we will become the Midlands hub of a larger firm, which I would like to continue working in.
‘I want something that will keep the structure, and where the team will add value. We have been approached in the past by [firms that I] don’t sit comfortably with. I don’t want to destroy the model.’
Philip Stepp CV
- 1993-present Newell Palmer Group, managing director and major shareholder
- 1991-1993 Corporate Investment Services, IFA
- 1988-1991 Bayliss & Lindsay (Sydney, Australia), IFA
- 1984-1988 Newell Palmer & Associates (Sydney, Australia), director and shareholder
- 1982-1984 Anthony Bryan & Co (Sydney, Australia), self-employed insurance consultant
CII Diploma in Financial Planning
- Australian certified investment planners certificate
Aiming for the summit
Stepp seems surprisingly calm and reserved for the leader of such a forcefully expanding company. He has an American father and spent 10 years working in financial advice in Australia before returning to England, giving his deep voice an unusual hybrid accent.
In January, he went to Argentina to climb Aconcagua, the tallest ‘trekkable’ mountain outside the Himalayas.
‘I was wrecked from the climb,’ he says. ‘I am doing Kilimanjaro in February, which is easier. The trekking started as a hobby with friends: we did all the mountains here, then Mont Blanc and Elbrus in Russia. You see interesting places, the mountains are beautiful, but it is tough.’
He has three children. ‘I work to live,’ he says. ‘Spending time with my family and going on regular holidays with them is important. I am slightly reserved but I am what you see. I care about people, though I will make difficult decisions when I have to. I have learned that to be yourself, you can’t be liked by everyone.’
With all the challenges associated with leading such a large IFA company, Stepp will surely need this quiet but steely resolve as he embarks on the final push towards the summit of his career.
Five top tips
- Put your client first, and never lose sight of this.
- Employ capable staff.
- Ensure you put robust processes and systems in place to ensure consistency.
- Watch your cashflow.
- Keep it simple.