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Edited Transcript of RAT.L earnings conference call or presentation 24-Jul-19 8:30am GMT

Half Year 2019 Rathbone Brothers PLC Earnings Call

London Aug 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Rathbone Brothers PLC earnings conference call or presentation Wednesday, July 24, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer Elizabeth Mathias

Rathbone Brothers Plc - Group Finance Director & Executive Director

* Mark Patrick Nicholls

Rathbone Brothers Plc - Independent Chairman

* Michael Mark Webb

Rathbone Brothers Plc - Head of Group Marketing & Distribution and Chief Executive of Rathbone Unit Trust Management Limited

* Paul Robert Stockton

Rathbone Brothers Plc - Executive Director & CEO

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Conference Call Participants

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* Benjamin Edward Bathurst

RBC Capital Markets, LLC, Research Division - Research Analyst

* Neil Thomas Welch

Macquarie Research - Analyst

* Paul McGinnis

Shore Capital Group Ltd., Research Division - Research Analyst

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Presentation

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Mark Patrick Nicholls, Rathbone Brothers Plc - Independent Chairman [1]

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Good morning, everybody. What a morning.

Welcome to interim results. The presentation will be given by Paul Stockton, our Chief Executive; and Jennifer Mathias, our Group Finance Director. And as usual, Mike Webb is here, sitting in the front row, to answer any questions about our Unit Trusts business.

Before I hand over to Jennifer and Paul, just a couple of comments from me as Chairman. As you know, it's been a very busy first half for Rathbones as we successfully migrated Speirs & Jeffrey, our largest acquisition to date. And alongside that, we've also carried out what I think has been a very smooth transition of our leadership with Jennifer joining us as Finance Director in April and Paul taking over as Chief Executive in May. I would just say that our Board are delighted with how well the team is working together. The current focus of the team -- yes, I really mean that. The current focus of the team is working on the next phase of our strategy, which we plan to deliver to the market in October.

So with that, I'll hand over to Jennifer to take you through the financials.

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Jennifer Elizabeth Mathias, Rathbone Brothers Plc - Group Finance Director & Executive Director [2]

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Thank you, Mark. Good morning, everyone, and thank you for joining us here today. I'm -- I've been pleased to be here for the last 3 months. Rathbones have -- had some fabulous achievements in recent years, and I'm really delighted to be part of the future and joining the team with Paul and the rest of the Board.

So now let's turn to the first 6 months financials. Against a volatile market backdrop and mixed client sentiment and activity, Rathbones has delivered record funds under management, strong income and profit -- strong underlying income and profit, alongside the transfer of 95% of the funds under management from the Speirs & Jeffrey acquisition at GBP 6.5 billion, all at the same time as maintaining a robust and resilient capital position.

I'm very pleased to announce an interim -- an increase to the interim dividend of 25p -- to 25p. I'll go into some more detail now. But just before I do, I'd like to remind everyone that the first half of 2018, Rathbones did not own the Speirs & Jeffrey business. As you'll recall, that transaction completed on the 31st of August 2018 and you'll see that coming through in the comparative today.

So turning to funds under management. In spite of difficult market conditions, we attracted nearly GBP 2 billion of inflow into the investment management business and over GBP 1 billion into the Unit Trusts business. But we did have outflows, and those in part with some Speirs & Jeffrey managed attrition as of low-margin and execution only accounts as we work through the client transition. Organic growth is not where we want it to be. During the first half, we've seen mixed client activity, given the political and market backdrop. 70% of the outflows in Rathbones have been from retained accounts. You'll see the GBP 1.3 billion there. So that is a continuation of clients withdrawing or cashing in, given market performance. And to detail that a little further, 10 of the largest client withdrawals only totaled 15% of that outflow that were demonstrating a lot of people are taking cash and taking profit.

During the same period, our investment management teams have been quite internally focused and being busy upgrading client documentation instead of seeking that new growth opportunities. In Speirs & Jeffrey, the focus has clearly been on the migration of the clients and preparing them for moving to the Rathbones infrastructure in place of organic growth on their existing infrastructure. The outflows we've seen at Speirs & Jeffrey include some material but short-term execution-only mandate.

Our Unit Trusts business continues to deliver a strong performance in funds despite Brexit uncertainty as to whether to commit to funds and some actually considering to withdraw. So I'm really pleased that Mike and the team have bucked this trend and performed really well with 11.7% growth in the first 6 months.

Moving on to income, a very strong income performance. The top right there, year-on-year, a slight deterioration in the overall margin, but that's the S&J book moving into the business and you are all aware of the mix there. It was not present in the first half of 2018 and it was present for 4 months of -- the back end of 2018. We expect the margins to be broadly static here on, yet the composition will shift over time.

You'll see the great shift between the fee and commission growth. Growth in the commissions, 31.9%, is a product of the Speirs & Jeffrey business. And those of you familiar with that, they had a lot of that business over time. Our goal is to normalize this growth mix as we deliver on our Speirs & Jeffrey revenue synergies.

Other fees, they are impacted by the decline in box profits in RUTM, which was previously signaled. Despite that, RUTM have offset some of that with income growth in other areas, plus the continued growth of our Vision and trusts businesses in the first half.

Moving on to how we've been investing in the business over the last year and during the first half. Investment in the last 12 months includes both the full cost of S&J in 2019, alongside nearly 100 hires in Rathbones since last June. 80% of those hires were in the second half. So we're now seeing the full year effect of that cost coming through in the first half results. The investment was split across client facing, investment process and client support. 40% was in client facing, similar in support, but a lot of this was contract resource to support the client's work we've been focused on and the projects running alongside Speirs & Jeffrey. We have not only been dedicating all of our resource to Speirs & Jeffrey. We have had Rathbones projects underway.

2019 has rightly seen a slow of this growth with only 20 hires in the last 6 months and over 50% of those are client-facing revenue generating.

Moving on to variable staff costs. As previously guided, the variable costs as a percentage of underlying profit were likely to reach 40% due to the investment in the new equity -- this new Staff Equity Plan in 2018. The full year costs are now coming through. The slight overshoot is an unexpected cost in the acceleration of some deferred awards. We do not expect the percentage to change materially from hereon in, i.e. our forecast is to be 40% or below.

On to other direct costs. This is where we have the FSCS cost that is coming through. That is not only unexpected but unwelcome increase. As a reminder, the FSCS is a Financial Services Compensation Scheme for failures in the sector. Notification of the impact, the quantification of that was received in June, as we've seen increased failures in the sector over the last 6 to 12 months. The increase for Rathbones was GBP 1 million year-on-year, giving a GBP 3.8 million estimate for the full year. You can see that, that was -- it was -- the actual whole charge was GBP 1 million back in '17. It is unknown whether that is fixed full year or there are further failures to account in this accounting year.

Other increases include the impact of higher IT investment last year and this year, again, further investment in our infrastructure to give us the scale to grow. We will continue to invest selectively in growth initiatives and people but maintaining an eye on market volatility as we do.

So moving on to profit. Underlying operating margin at 27% largely reflects the items I've just referred to. Acquisition-related costs have been well guided with nearly GBP 19 million in this half and a further GBP 10 million expected for the full year, driving the GBP 29 million that most of you will be familiar with. Similarly, the tax rate reflects the disallowable costs of the deferred consideration to the sellers of Speirs & Jeffrey, which will continue however our underlying basis. You'll see the effective tax rate is 20%, and we're targeting 18% thereafter.

Finally, on to our balance sheet. We continue to maintain a very robust and conservative balance sheet. Growth in the business is reflected here. You'll see an increase in risk-weighted assets, which is the increase in the client deposits as a consequence of growth in the business over the period. Very pleased with the performance here as we move forward. So in summary, funds under management at an all-time high, resilient income levels, mindful of market volatility but also appropriate to invest and improve what we do to consolidate what we've done to date and be ready for the future.

Now I'll hand back to Paul.

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Paul Robert Stockton, Rathbone Brothers Plc - Executive Director & CEO [3]

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Jenny, thank you. It all sounds so simple, doesn't it? I think -- can I -- my job here, I guess, is just to give a little bit of a highlight as to the sorts of things that we've been up to in the first half and maybe give you a little bit of a steer as to what we're trying to do certainly for the next 6 months. I've put a slide here called successful migration of Speirs & Jeffrey, mainly because that's quite a hackneyed phrase now. If you read the media, it's sort of all done and dusted, isn't it? But of course, in reality, the migration of Speirs & Jeffrey is the biggest acquisition we've undertaken, certainly, since I've been here at Rathbones. So operationally, this has taken an awful lot of time and an awful lot of effort. So I thought it's worth just reminding everybody that integration and making acquisitions does have an impact on the business. But to be reporting this successful migration is a very positive affirmation of Rathbone's ability to integrate and attract acquired businesses. So as Jenny said, GBP 6.5 billion, 96% of funds under management and growing. We're not done yet, migrated onto Rathbones systems, and that's -- they are using them today. So with effect from 1st of July, that migration is live.

And then the statistics there as well on the left-hand side of the slide just gives you some idea of the other stuff that goes along with funds under management. I think it's always important, as an analyst, obviously focused on funds under management. But operationally, we're talking as well about cash records. We are talking about AML records. We're talking about client records. It's a lot of data and it's a lot of data to get right because, clearly, the key point here is twofold: firstly, to ensure that the client experience that new Speirs & Jeffrey clients have with the Rathbones systems is good; and secondly, the investment managers and the support staff that make that happen is good. So that's just as important, culturally, as it is just to return results. So in working together, it's -- we had about 30 work streams. You can see a broad time line here, including a number of dry runs and data migration. It's maybe not very sparking news for you all, but actually, it's -- they're really important parts of what Rathbones has been doing over the last 6 months.

I would point as well to a strong level of collaboration and I would also point to a level of sharing of intellectual property as well. We've actually learned a bit from Speirs & Jeffrey, as I hope they have of us. So it's been a very collaborative environment. For instance, when discussing where to put research resources, some resources we've left in Glasgow because deeming that the proximity to the investment teams there is an important part of their -- remember, they've got a big advisory book. It's an important part of revenue generation going forward, continuing to maintain stock ideas. So originally, we would have said that's all London. So a good example there, I think, of how we've worked well together. I think the other thing that we've been seeing even now is that our very size in Scotland is having an impact in the market. We are also -- we're getting more calls, certainly introducing things like financial planning expertise into Speirs & Jeffrey, a business that has not historically had much financial planning orientation, equally looking at the building relationships with intermediaries as well. Again, Speirs & Jeffrey has not had much of that experience. And the experiences we're having with the team now are very positive ones, so they all bode well for how we will work well in the future. So developing marketing plans for Scotland. Remember, Scotland is now a material part of the Rathbones Group, much more balanced than potentially it was before, so it's important that we take advantage of those marketing opportunities.

So next step, of course, will be looking at our operational target model and making sure that, operationally, that's right over the next 6 months with the right headcount and the right people supporting it. And then we'll be chasing further synergy, both cost and revenue. So I hope that's given you at least some idea of what we've been up to in the first half.

That's not to say that we've been ignoring organic growth. I think it is undoubtedly lower than -- we all expected this year for the reasons that Jenny has just highlighted. But what's also been important is, as we've got through quite a bit of workload in our front office teams, we're continuing to invest to support them. So the recruitment that Jenny was talking about, it's really important that we put that into investment teams to make sure that they're not suffering from a lack of capacity, and we continue to do that. I think if you look at the headcount addition over the last sort of 6 to 12 months, it's been more in that front office support area, but it has -- in the overall revenue-generating side, that's been very deliberate. But what that gives us now is a platform to invest in more of the revenue-generating side, as we go forward.

The other thing is looking very carefully at our business development capability. Rathbones is of a size now where we can afford to have 2 channels to market: a direct-to-client channel, and equally, a direct-to-financial-adviser channel, and you can see that in the chart towards the bottom here. So we have a dedicated team, dedicated to working with financial advisers, nationals, networks and ring of financial advisers that we have set now a much broader remit to work developing business across Rathbones. So a dedicated group of people who spend time with financial advisers and the panels, and we're looking to extend that with some more DFM specialist resource that will add to our capability to grow in that space.

Clearly, there's a suite of product that is very attractive. We have anything from MPS all the way through to fully-tailored discretionary in that space. We have Greenbank. We have charities specialists as well. And it's quite important that, that is a range that's available to financial advisers these days. Equally, there's a structured investment process behind that, and that's something as well that we think is an advantage with our financial adviser group. So plenty, I think, to begin to form, shape and grow in our overall financial adviser interaction. Equally, appointing ahead of client development is anything that isn't financial adviser and we've got plenty of that. That's essentially day-to-day discretionary. It's also a high net worth. So the Rathbone Private Office has been repurposed to a business development team that's going to plug in high net worth -- ultra-high net worth opportunities into our existing resources, be they financial planning, be they Greenbank, be they our DFM team. So really important that that's an alignment now and in much closer alignment with our core business. Not that we're moving out of that sector. That sector still remains a very important sector for us, but the way we're attacking it is slightly different now.

Aside from that, we have an international business as well. So putting all of that under one roof, that makes a lot of sense and gives a focal point, I think, for business development that is non-financial adviser today, so certainly not forgetting the importance of driving organic growth going forward. In addition, we're working very hard on a small portfolio solution. We have all the pieces within Rathbones to deliver that, so that's just a matter of getting on with it, but they always tell me it's more difficult than I say it is, but we'll be working very hard on that one and making sure that as clients experience a smaller portfolio solution, they continue to get a high level of service as they transition away.

We've been gradually growing financial planning. Headcount is up roughly 12% year-on-year. So that's another increasingly important part of Rathbones, not a dominant part of Rathbones, but a very good support mechanism and putting financial planners in some of our key offices, as I mentioned earlier, is already having some impact. It's also worth mentioning, I think, that where I call specialist mandates, our charity specialists and our expertise, the right vision and our Rathbone Greenbank, you can see that statistically that they're all growing pretty healthily as well. So they're parts of Rathbones that are not quite really up to the surface in terms of a major part of Rathbones yet, but they've been steadily increasing over the last 2 or 3 years.

Adding to that, obviously, not to have much to what Jenny said on Unit Trusts, the performance numbers are in the back and those performance numbers are pretty good. So we have a pretty good shot window, I would say, and we've taken a bit of a hit in profitability as we anticipated post-MiFID II, but we're not resting on our laurels there. There's some good -- an increasingly good industry recognition. We're well up in Defaqto ratings and things like that, so a good proposition that we're pleased with. Plenty of work to do. And of course, part of the work that Mike and his team have been doing this year is, so far, is to be -- make us Brexit-proof as much as that is possible, given the announcement yesterday. But we have been working hard to make sure that our fund distribution is uninterrupted in the event of a hard Brexit. I'll take bets on that a little bit later on.

So second half, our focus is very much going to be on improving client service. Anything we can do to do that, we will, but looking more at productivity in the organization as a theme. So more on that, I think, later. I mentioned Speirs & Jeffrey. The focus there will be considerable. And of course, we're continuing to look at our inorganic opportunities, but that never stops in Rathbones and never should it, but we have the same criteria. It will always be an opportunistic source of growth for us, but we will continue to shepherd and manage the cultural change as much as we already have.

And a little bit more from me and a bit more detail on some of these initiatives and a few more initiatives as we launch an Investor Day in October. So very much look forward to having those discussions with you at that time and plenty to do in the meantime. So at that juncture, could I suggest that if everybody has got any questions, please do let us know who you are first. But I would be very happy to answer them.

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Questions and Answers

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Benjamin Edward Bathurst, RBC Capital Markets, LLC, Research Division - Research Analyst [1]

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It's Ben Bathurst from RBC. One question, firstly, on distribution. I was just wondering, of the proportion of the organic flows you delivered in the first half, what proportion of those are already linked to a financial adviser? Are you coming through the intermediated route? I wondered what proportion of those were linked to Vision. And then a second question, just on the investment split. On Slide 29, I see the percentage allocation to U.K. equities continues to come down. It's come down, I think, from 39% in 2016 down to 34%. Just wondering if any way that's linked to Brexit or a house view? Any sort of color you can give on that will be much appreciated.

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Paul Robert Stockton, Rathbone Brothers Plc - Executive Director & CEO [2]

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Very broadly, you'll see some more disclosure in the back, Ben, about our funds that are linked to IFA. So you'll be able to get those numbers quite -- a little more clearly than you have done before. So -- but broadly, we're still getting 1/3 or so, a little bit more of funds coming in from IFAs or IFA-linked accounts. Still, a good proportion of that is Vision orientated. But I think as well, we're growing the number of strategic partnerships we have as well. So that's gradually on the up as well. So I think, generally, IFAs are a more important part of our distribution. And I think you'll be able to see that in the numbers in the back.

In terms of the sort of the waiting away from the U.K. and the U.S., I mean, I think, generally, there has been a house view and I think it is towards the U.S. rather than the U.K. more generally, I think, for pretty obvious reasons. I mean we're investing globally here. So it is about -- not necessarily Brexit specifically. It's a little bit more about sort of global positioning, trade wars between U.S. and China, and in a way, more important macro trends to the global economy than just little old Brexit. But of course and in terms of the client mindset, Brexit, if you're particularly a U.K. client with no Sterling effect, you're spending in Sterling and you're owning in Sterling, it's much more of an important issue. Paul? Apologies, Paul. Mr. Welch stole the mic again. Neil, welcome.

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Neil Thomas Welch, Macquarie Research - Analyst [3]

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Sorry, Neil Welch from Macquarie. So I just want to delve a little bit into organic and inorganic flows. On the investment management business, could you just categorize how has the sort of organic rate looked for intermediary and direct? Because we have seen that distinction in the platform businesses that intermediary has been down further than direct business. So it'd be interesting to know whether you're seeing that in terms of what you can self-generate versus what's going through intermediary. I'd also like to just get any sense was there any particular Southeast flavor to that, whether the higher level of withdrawals was perhaps Southeast-driven? I'd be interested to know that. And then on the Unit Trusts business, again a fabulous flow number from there. I'd be interested to know where -- what products are delivering that flow in view of what has been a very difficult period for particularly equity flows in retail assets and whether that's most sustainable? I'd be interested in that.

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Paul Robert Stockton, Rathbone Brothers Plc - Executive Director & CEO [4]

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Good word, sustainable, Neil. I think that's very, very popular. Just to try and recall your initial question, I think it's a balance of sort of intermediary flows versus self-generating. I think Rathbones has been relatively late to the intermediary party. So I think where we're seeing at the moment is that the impact of work we've been doing over the last 2 or 3 years is still growing that quite a lot. So I don't think we've seen what you just described, which is a bit of a reduction really in the amount of FUM that we're getting from intermediaries. What we're seeing is a trend where intermediaries, particularly at the lower end of the wealth curve, are looking for cheaper solutions but in a way that's not necessarily Rathbone's core offering. And of course, we have offerings there in terms of our MPS multi-asset portfolios and what we call our unitized portfolio service as well. So we really haven't seen that dynamic happen in Rathbones to date. So as far as we're concerned, it's sort of full-on direct as well and full-on intermediaries with no real change in the mix of that. That was your first question? Yes. I think the Southeast, difficult to really draw from that. We're looking at a lot of data. We have a lot of clients in our Edinburgh office that live in the Southeast. So it's kind of hard to see. So I don't think specifically there's any particular regional trend that I would point you to.

Jenny, anything to add on organic flows or...

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Jennifer Elizabeth Mathias, Rathbone Brothers Plc - Group Finance Director & Executive Director [5]

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No, no, no. Just whether the detail on Page 27 will help you further. That's new disclosure from us. Comes to Ben's point as well.

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Paul Robert Stockton, Rathbone Brothers Plc - Executive Director & CEO [6]

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So on Unit Trusts, yes. I mean I think, as I was sitting here a decade ago, our Unit Trusts business had an income fund that was very dominant. What we've now got is a Global Opportunities fund which has proved extremely successful. We have an Ethical Bond Fund, which, 10 years ago, people would have smiled at and said, "What's the mandate for that?" But now is very much in mainstream, together with an income fund. So what I would say is in terms of the breadth of offering here, that's what's really driving -- all 3 of those have done pretty well, by the way. And you can see from the performance stats in the back that the overall performance still is a decent shot window, as I mentioned earlier. So I think it's the balance and the mix of that that's continued to help to drive flows, whereas some sectors in the industry have struggled and we continue to grow. Mike, given that you're here, is there anything you're particularly wanting to add to that? There's a mic for Mike.

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Michael Mark Webb, Rathbone Brothers Plc - Head of Group Marketing & Distribution and Chief Executive of Rathbone Unit Trust Management Limited [7]

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I think -- Hello. There are 4 main franchises that are all in net sales: income, Global Opportunities, the fixed income team generally. So Ethical Bond, obviously, at the foremost, but we're also seeing much more interest in our strategic bond fund, which we look at the performance numbers, looks awful. But from a risk-adjusted perspective, is one of the best in the sector. And that's how we set up that fund and high-quality bond fund, which is a liquidity-based fund. And then the multi-asset funds are -- continue to get a lot more interest, probably -- particularly as some of the absolute return-type funds are becoming under pressure, particularly in the financial adviser market.

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Paul Robert Stockton, Rathbone Brothers Plc - Executive Director & CEO [8]

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Thank you, Mike. Thanks -- and thanks, Neil. Paul?

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [9]

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It's Paul McGinnis from Shore Capital. A couple of questions. Just stick with the intermediary channel for a second. Just when you're talking through the slide, did I get the impression that, that's now being -- having more a dedicated resource to -- as opposed to -- my impression was that was originally an extension of the Unit Trusts sales force in terms of a channel. Is that plan now being sort of changed to something different in terms of it's getting its own dedicated resource? Question one.

And then question two is just to check my clarification. Just on Slide 5 in terms of the overall revenue yield, I think, at 69 basis points. I think, Jennifer, did you say that you would now expect it to be stable from that level? It's just that its composition might change? Did I hear that correctly?

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Jennifer Elizabeth Mathias, Rathbone Brothers Plc - Group Finance Director & Executive Director [10]

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So that's stable from here to the year-end and because next year is the focus of the switch within Speirs & Jeffrey from commission to fee where we then expect to return to something slightly higher than 69.

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [11]

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Okay. That's what I was just trying to clarify.

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Jennifer Elizabeth Mathias, Rathbone Brothers Plc - Group Finance Director & Executive Director [12]

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Depends on market backdrop, of course.

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Paul Robert Stockton, Rathbone Brothers Plc - Executive Director & CEO [13]

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Paul, on the Unit Trusts team, yes, we set up a dedicated distribution team from our Unit Trusts distribution team, but focusing very much on DFM distribution as well. And that's been the case now for 4, 5 years. What we've done recently is added to that team, and we will continue to do that over the second half. Recognizing that they're inevitably DFM specialist skills required that we felt Mike and I needed to add to the team. So that team's identity still stays the same thing. The remit stays the same thing, except they were a bit limited in terms of what financial adviser groups they went for. We've opened that up a little bit, but equally, we'll add now resource to that team to increase their breadth and scale. So it's the same team. The team is still selling Unit Trusts units all the way through MPS funds, multi-asset funds, all the way through to DFM. We just needed, I think, to bolster the resources focused on the DFM proposition and that's what we're planning to do.

Any other questions on this bright and sunny day? In that case, thank you very sincerely for coming over. Nice to see you, and we'll see you again in October. Look forward to it. Thank you.