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Wealth Manager: 7IM CEO Sheridan - a small ship is better than a sea of mediocrity

Wealth Manager: 7IM CEO Sheridan - a small ship is better than a sea of mediocrity

7IM chief executive Tom Sheridan may have been born in the Bronx, but he can come across more John Wayne than Al Pacino. ‘I find you are better off with a small number of people who know what they are doing,’ he growls at one point, reflecting on the small number of people in his investment team, 'than with an army of idiots'.

In sober tie and immaculate white business shirt, he looks a lot like Wayne’s taciturn, hard-boiled parachute commander lieutenant colonel Benjamin Vanderoot from D-day drama The Longest Day would have done, had he gone into a career in financial services rather than the US armed forces.

That air of crisp, almost military, efficiency offers an obvious point of comparison with his business partner of almost 20 years and 7IM marketing director Justin Urquhart Stewart, who during a short intervention into the interview is as ebullient and expansive as ever in his trademark red braces, floppy hair and beard.

Having been a driving force behind two of the best-known financial brands of the last 20 years – the two met at Barclays Stockbrokers in the 1990s as its annual turnover went from £5 million to £50 million, they have apparently found some complementary qualities, however. In the decade since 7IM launched it has gathered £4.6 billion in assets managed on behalf of almost 10,000 advisers. While its first-mover advantage may have been eroded by sector rivals, recent growth has shown no sign of slowing down, with assets growing 21% last year, following 14% growth in 2011.

The company continues to innovate, with an asset-backed lending service introduced this year, and restructuring as a partnership within the last 12 months. All of this points to the no-nonsense, hard-headed business sense you might expect from a near 40-year veteran of financial services.

This comes through as Sheridan explains the original conception of 7IM as a way to maximise the efficiency of assets drawn from the then largely unconsolidated mass of British money under the direction of advisers, while minimisin`g the traditional downside manager risks.

‘Having worked in the US, I knew the Merrill Lynch style of broker platform, which came with cash management, [tax] wrappers and which would give you a cheque book and credit card if you wanted them,’ he says.

 

‘Brokers had got tired of being sued. The advisory model puts all the liability for market decisions on the adviser. In a very litigious country, when performance fell short, they would end up with a legal letter and would end up having to write a big cheque

‘Eventually they realised they need to start managing this thing centrally, and turned the traditional Merrill Lynch brokers into asset gatherers – they would introduce the client to the manager, who would run the assets centrally with rules consistently applied by people who just ran money.’

If the proof of the principle is in its enthusiastic replication, then the business is an unqualified success. As of the end of 2012, according to sector analyst Platforum, £223 billion in advised assets was registered with UK platforms on services from more than 20-odd providers, in a rich ecosystem ranging from the biggest asset managers and insurers down to niche boutiques.

Some of the efficiencies of the model 7IM has built are evident in its stripped back investment team. While the company employs 140 overall, just nine work on asset allocation, although they are assisted by an eight-strong external investment committee and by US-based consultancy giant Ibbotson Associates.

Some of Wealth Manager’s readers might feel those efficiencies steamroller any sense of sentiment or personal stewardship the team might have about what they do, of course. Sheridan is a vigorous proponent of the company’s unitised investment service, and is reluctant to concede that bespoke management can claim any intrinsic advantages.

‘We have built the capacity to handle a multiple of what we currently run. I wouldn’t say we are relaxed about it, but we have room to continue to grow. We might go to 10 [investment managers]. We are not intending to go to 28.

‘We have centralised and unitised asset management. If you run individual portfolios – particularly if it is the responsibility of a single person at the front-end who will go on holiday – even with quality management, you will end up with differences [between client portfolios].

‘When we talk to trustees, pretty much their first question is about the dispersion of returns. When you unitise, the dispersion is zero. It also allows you to manage capital gains much more efficiently, and manage currency risk through much more efficient hedging.

 

‘You have to decide what business you are in, and we hope to be a dependable business partner, not a star manager.’

After charges, over the 10 years from launch at the end of 2002 to December 2012, the company’s principal 7IM Balanced portfolio has returned an annualised 6.4% versus the IMA 20/60 Mixed Investments peer group average of 5.2%.

If the investment service is semi-commoditised, then the company has, in the face of fierce sector competition, continued to innovate elsewhere. Specifically, the company's facility to provide a lending service via its platform, allowing up to half of qualifying, relatively liquid assets held to be counted as collateral against lines of credit, launched this year.

While the service will not be a huge money-spinner for the business, which will act only as an administrator to credit supplied by Pershing Securities over periods of up to 36 months, it will serve as a differentiator and as a means to diversify and deepen its relationship with advisers.

‘It’s designed to allow IFAs to compete with the private banks,’ says Sheridan. ‘At the bottom-end of the banking sector – the £500,000 to £3 million area – I am not sure they tend to cover themselves in glory. It’s a largely undifferentiated area of the market with relatively high costs. We tend to hear people saying that they weren’t happy with the service that they were receiving, but their bank ended up offering them a line of credit, so they stayed.

‘We are responsible for monitoring the collateral in the loan and the interest rate and if it falls below a certain level of cover, we notify Pershing. We are not an authorised lender and are not taking on credit risk. It’s taken around a year’s worth of research on each element. Some platforms can offset deposits, but they have not come up with very elegant solutions.’

The company has also shaken up its corporate structure, moving to a partnership basis with the external shareholders – insurers Zurich and Aegon, which between them hold 36% of equity – maintaining their share of profit via a separate holding company.

While the exact division remains to be finalised, equity will be broadly spread among around 40 staff members, says Sheridan, with the partnership allowing profit share to be linked to a new, long term incentives programme.

 

He adds the company will also save around £600,000 a year via lower regulatory capital requirements.

‘The LLP structure engenders longer-term thought. It’s not just a case of awarding bonuses; there will be a minimum of three years’ investment period before you get the reward,’ he told Wealth Manager in 2012.

‘So if we make an award to someone in 2013, they get the money in 2016, although it will be somewhat dependent on each year, otherwise some people may have a great year and then disappear. It’s part of the longer-term mentality. The FSA is trying to get people away from short-termism.’

That emphasis on the longer term suggests Sheridan has no intention of slowing down yet. Just shy of his 60th birthday, he was born in New York to a housewife mother and a father who rose from a blue collar job repairing phone lines at ATT to a director in its marketing division.

Initially he studied engineering at university before moving to finance, and getting a job as a broker in the mid-1970s, initially with Bache & Co, before its merger with Prudential.

After a globe-trotting decade in which he worked in 16 countries from Japan to Europe and Latin America and rose to become chief operating officer of the company’s international division, he joined Barclays Stockbrokers in the mid-1990s. ‘It was a sleepy little backwater, and we had a couple of very interesting years,’ he says.

The company initially flourished by designing a mechanism to allow building society members to cash in on their post-mutualisation equity, before recognising the transformative impact of the internet.

‘We built an online architecture that was able to search money markets to come up with the best price – which is still in operation today. We got out just before the [Gerrard] deal. I wouldn’t have done it. They paid £210 million for something that made £3 million [annually], and the clients belonged to individual brokers – without keeping staff you would lose the clients.

‘And I have never liked the advisory business model: it is not scalable and you have all sorts of suitability issues.’

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