Brewin Dolphin gave the market an early insight into the impact of the retail distribution review (RDR) last week after posting a 5% quarter-on-quarter fall in income following a cut in trail commission.
Investors anticipate the removal of trail and move to a new unified rate card could eat into income over the next few quarters. However, they believe the repricing exercise and planned operational improvements can still power Brewin’s long-term profitability and share price. This is no small ask, given its share price has already risen 41.7% over the last 12 months, and now hovers around 214p.
Total income for the three months to the end of January was 13.7% up on the previous year at £67.8 million versus £59.7 million. Discretionary funds rose by £100 million to £18.5 billion, although advisory assets fell £200 million to £7.5 billion.
Brewin, led by Jamie Matheson (pictured), admitted moving the client base to a new rate card had been slower than anticipated, as had increasing its proportion of recurring fee income.
However, Citywire AAA-rated Alex Wright, who counts Brewin as one of the larger positions in his Fidelity Special Values trust and Fidelity UK Smaller Companies fund, says its multi-year turnaround story remains intact, particularly given its target of boosting operating margins to 20%.
Wright says of the new rate card: ‘Some degree of short-term client attrition is inevitable given these changes, but over time should be a net positive for the company.’
As Brewin gets to grips with its inflated cost base by investing in new IT systems, he said, ‘such programmes are rarely concluded without a hitch, and while costs have come in a little higher than anticipated, it is a necessary part of the journey’.
Peel Hunt analyst Stuart Duncan says a reduction in trail could have an impact over the next one or two quarters, but expects the benefits of new pricing to feed through long term. Previously, he forecast a £28 million revenue hit for Brewin as a result of the trail cut over the next few years.
‘The other aspect of the repricing of its book to an extent will counter the removal of trail commission. The timing does not quite match up so you have got a shortfall [in income] in the interim,’ he said. Further share price rises will depend on whether the team delivers operational improvements but he notes Brewin is still on a cheaper valuation than its peer group, particularly Rathbones, given rising discretionary assets.
AAA-rated Martin Cholwill, who holds Brewin in the Royal London UK Equity Income fund, agrees. ‘If implemented correctly, the organisational change and investment in systems should narrow the gap in profits between them and a Rathbones, for instance.’
He expects the stock to benefit from healthier markets, particularly a potential rise in share trading commission.