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OPINION

Saga the stock broker

Saga the stock broker
May 20, 2014
Saga the stock broker

But the listing documents also give a more subtle reason: to build the brand. "The company is making the offer in order to raise further consumer and investor awareness of Saga," states the share prospectus. This is particularly interesting in light of a growth prospect the directors seem excited about - wealth management. They cite "the increasingly complex financial planning needs of [Saga's] customers, the need for a trusted brand in the space, and the high proportion of household wealth held by the over-50s demographic". The size of the market, they estimate, is about £14bn, "based on an assumed 2 per cent management fee on an estimated £700bn of over-55s financial wealth".

Saga, it seems, wants to slip into the gap being vacated by high-street banks on the one hand and independent financial advisers on the other. Both these groups have come under attack from regulators. Banks are closing branches because higher capital requirements are depressing their profits. IFAs are closing because the Retail Distribution Review, which banned commission payments, has made old-school sales businesses unviable. The end of compulsory annuities, announced in the March Budget, only adds to the market's attractions for Saga. Pensioners can now choose from a vast array of different investment and drawdown options. That choice will require advice.

Saga's opportunism has precedence. The company started out in the 1950s by offering package holidays - then a major growth industry - and listed on the stock exchange in 1978 as Saga Holidays. That eventually provided a platform for its diversification into insurance, which now accounts for about 70 per cent of profits, before it was taken private again by the founding family in 1990.

The company already offers some investment services, having received a license to offer stock broking on an 'execution-only' basis in 1996. But its platform, Saga Share Direct, is actually provided by Barclays Stockbrokers. A big push into wealth management will presumably involve setting up an independent operation.

This may involve some capital, but that's not the main reason why it makes sense for Saga to go public. This is instead the high degree of overlap that exists between stock pickers and wealth-management customers. If Saga wants to build its brand with the latter, what better way than to generate hype among the former with an IPO? Just as people are more likely to invest in a company they know at a consumer level, they are more likely to consume the services of a company in which they invest.

Saga has made the link between its customers and its potential investors unusually explicit. It has offered its customers a deal on the stock: they receive 21 shares for the price of 20. And it is offering between 30 and 50 per cent of the stock to individual investors - far more than is common. Most flotations these days have no 'retail' element at all; even Royal Mail (RMG) gave four-fifths of its stock to institutions.

The same overlap between customers and investors explains why so many online stock brokers are public companies, despite their limited capital requirements. Publicity, as well as succession planning, was the main reason for Hargreaves Lansdown's flotation in 2007. The most recent addition to the fold is Plus 500, which listed last summer even though it had net cash on its books.

This is part of a long-term stock market trend. A century ago, the London Stock Exchange (LSE) was dominated by capital-intensive sectors like mining, shipping and railways, which needed public equity to fund their expansion plans. But as the British economy has moved away from its Victorian role as the world's workshop to focus on the provision of services - which typically require little capital - the stock market has gradually turned into a public-relations machine.

It would be hard to prove it empirically, but this may have lowered the risk profile of equity investment. Stock pickers can still give their money to speculative mining ventures, but they can also entrust it to companies that could, if they wanted, fund their own growth. Welcome back, Saga.