Tatton’s trading statement for the half-year ending 30 September 2019 confirmed continued momentum in AUM growth, which increased to £7.0bn, up 14.8% over the half-year (from £6.1bn on 31 March 19) and 23% year-on-year. The group’s first acquisition since its 2017 listing (a strategy made explicit at that time) has also been announced, which contributed £135m of the £0.9bn AUM increase. Organic AUM growth was 12.5%. We see significant opportunity for the asset management side of the business to scale quickly and be the primary driver of strong future earnings growth as operational leverage kicks in.
The statement also confirmed that the number of consulting clients had reduced slightly from 390 to 385 member firms, principally due to consolidation activity, while the mortgage business, still the smallest business unit, continued to impress with member firms growing from 1,392 to 1,466 over H1.
Tatton Investment Management (TIML), the largest of the three group business units, sources funds exclusively through UK-based, FCA ‘directly authorised’ independent financial advisers (IFAs). IFAs place client assets into a range of TIML investment portfolios through the ‘WRAP’ platform of their choice (a WRAP platform is an on-line administrative service that combines all client investments into a single account – such as Nucleus, Transact, and Aviva). TIML is platform-agnostic. The ‘sweet spot’ target market of the group is the smaller IFA firm, with the client base having, on average, three individual advisers.
TIML is the growth engine of the group, is highly profitable, and is set to benefit from further economies of scale. It makes up 50% of group revenue (£8.7m in FY19), AUM has increased from £3.9bn at the end of FY17 to £7.0bn at the end of H1 2020, and contribution margins have risen from 28% in FY17 to 53% in FY19.
Paradigm Consulting (PPC) was the genesis of the group in 2007, and provides regulatory and compliance consulting and outsourcing services to IFAs. PPC ‘members’ pay a recurring fee for a suite of services such as compliance process set-up and monitoring, advice, training, manuals, technical support and general business consultancy. Ad-hoc consultancy projects are also undertaken.
It is a mature business, with members increasing slowly but steadily from 352 at the end of FY17 to 390 at the end of FY19, but is both financially and strategically important. PPC revenue (£6.0m in FY19) accounts for 35% of the group’s total and its contribution margins have consistently been around 50% over the last three years. PPC members are also an important source of AUM for TIML (contributing 75% of AUM in FY19). In addition, according to group CEO Paul Hogarth, the PPC business is the ‘glue’ that binds all three businesses together, and provides deep insights into current IFA needs and trends, which in turn helps with new service and product design across the group.