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Why Charles Stanley Group plc Is Falling Today

Investment manager Charles Stanley (LSE: CAY) is falling today, after the company warned that thanks to a lower than expected number of client transactions, trading results will be materially below current market expectations.

In what can only be interpreted as a profit warning, Charles Stanley warned that despite improving fee income on discretionary funds, rising costs and a lower level of commission income had put pressure on profit margins. 

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The good news is that at the end of August, total client funds stood at £20.5bn, an increase of 1.9% from the level recorded at the end of March. Total managed funds expanded by 4.7% over the same period.

What’s more, Charles Stanley’s low-cost online trading platform, Charles Stanley Direct designed to take on the likes of industry leader Hargreaves Lansdown reported an 18% increase in assets over the same five month period.

Passive investing stock exchange

Still, despite an increase in client assets under management, lower trading volumes have hit the stockbroker, as clients move to a passive investing approach. Additionally, like many of its peers, Charles Stanley is now having to struggle with rising regulatory costs, which are putting profit margins under pressure. 

Nevertheless, over the long term, Charles Stanley is well placed to profit. The broker has a wide branch network spread out across the UK, which gives it a local feel and enables asset managers to connect with their customers. Additionally, with over 200 years of history behind it, customers look to the Charles Stanley brand as a mark of quality. 

It’s these factors that put the asset manager in a great position to benefit from the UK’s aging population and pension changes over the next few years. For example, when sweeping changes to the pension system come into effect next April, potential customers will look to wealth management companies like Charles Stanley to offer them advice and look after their investments. 

And the company offers more than just stockbroking and asset management services. Indeed, Charles Stanley has a financial services division, which manages SIPP and SSAS administration and employee benefits. The group also provides advisory, broking and corporate finance services for smaller and mid-cap listed companies.

With its reputation behind it, Charles Stanley is likely to see a strong and continual demand for its services over the long-term. However, as trading volumes slide, the stockbroking side of the business will struggle. 

Long-term nature

Investing and wealth management is a marathon, not a sprint. So, Charles Stanley’s asset management fee income gives the company a recurring and predictable income stream, perfect for supporting the company’s dividend payout. 

At present levels, the company offers an attractive dividend yield of 3.6%, covered twice by earnings per share. City analysts expect the broker’s dividend yield to hit 3.9% next year and then 4.2% the year after. So, even though Charles Stanley’s growth has hit a speed bump, investors will be paid to wait while the group gets back up to speed.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of Charles Stanley. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.