Morning everyone, and welcome. Back in February at the time of our full year results, I shared my thoughts on why we've been consistently successful to date, and the reasons why I was confident that we will be as successful in the future as we have been in the past. Just to recap, the size of the market is large and growing, with a considerable savings gap that needs to be bridged. The need and demand for trusted face-to-face advice has never been greater, whilst at the same time, the number of qualified advisors in the U.K. is insufficient, creating an advice gap. The perfect environment for client-focused advice business like St. James's Place. This environment means that we remain confident we can achieve our medium-term growth objectives.
Inevitably, as we have experienced historically, we will have quarters where we exceed our medium-term objectives and quarters where we may not. Such events do not impact our medium-term view. In February, I went on to say that what makes St. James's Place an attractive proposition for clients is first and foremost our partnership. The best and most experienced advisors in the industry spread throughout the U.K., and now with offices in Hong Kong, Singapore, and Shanghai. With our focus on developing long-term relationships that span both clients and advisor generations, our partners can provide a level of tailored and expert advice and service that clients truly value. Advice that is ongoing and relationship-based, not transaction-driven. At the same time, clients have the security of dealing with St. James's Place partner, knowing that the supervision and support of a FTSE 100 company stands behind everything that they do.
Without doubt, the strong relationships our partners have with their clients, coupled with the ongoing advice and service, are major contributors to our excellent and improving retention of existing funds. Consequently, we continue to see stronger growth in net flows than gross flows, with the net flow, of course, being the more important measure. Given the importance of the partnership to our ongoing success, in addition to Craig covering the results, Ian Gascoigne will provide an update on the partnership, our growth engine. I will then wrap up at the end before opening up to the usual Q&A. Before handing over to Craig, a few words on the other announcement this morning. As you have seen, David Lamb has informed the board of his intention to retire in early 2019.
David joined the company in February 1992, a few weeks after we opened for business, and was appointed to the board in 2007. On his retirement, David will have completed 27 years of service to the company and the last 12 as a main board director. He has made an enormous contribution to the success of St. James's Place, spanning many areas of the business over the years. David was particularly instrumental in the development and operation of our investment management approach. I'm therefore delighted that once David has retired, he has agreed to continue to chair our investment committee. I am also very pleased to announce that Rob Gardner will be joining St. James's Place in January 2019. Rob will take over from David on the executive board and lead our investment proposition going forward, working closely, of course, with David during a handover period.
Rob is 39 years of age and is co-founder of Redington, one of the U.K.'s most respected investment and pension consultancy businesses. Having worked closely with us for the last six years, Rob comes not only with a wealth of business, pensions, and asset management experience, but also extensive knowledge of our business as well as knowing many of our partners and people. Rob is an important and significant new hire for St. James's Place. I'm delighted he has agreed to join, and we very much look forward to working with him over the coming years. I'll now hand you over to Craig to run through our financials.
Thanks. Thanks, Andy. Good morning, everyone. My presentation of our half year results is going to take a familiar course. Excuse me. Ian is going to cover developments in the partnership, so I'll provide a very brief update on the way in which our advisor numbers have continued to grow during the first six months. I'll then comment on both our growth in gross and net flows, followed by commentary on the cash result for the first half. I'll then cover EEV, IFRS, and capital. Finally, I'll comment on the interim dividend that we announced this morning. The number of advisors has grown from 3,661 to 3,810 at the 30th of June, which is an increase of 4%.
We continue to attract high-quality people from all over the financial advisory sector. Our academy continues to play an increasingly valuable contribution to our growth, with 95 having graduated between January and June. Andy's mentioned the advice gap that we have in the U.K. Our growth strategy of not only attracting the best existing talent in the industry, but also providing an environment for new talent to flourish, is turning this gap to our advantage. During the first half, our gross inflows grew by 15% and amounted to GBP 7.9 billion. Importantly, net inflows grew by 21% and amounted to GBP 5.2 billion. This growth, together with global market performance that was challenging in the first quarter but stronger in the second, has resulted in funds under management of GBP 96.6 billion at the 30th of June.
Our growth in the second quarter for gross and net flows was 10% and 13% respectively, a little lower than the growth we reported in the first quarter. It is important to remember that in the second quarter of 2017, we grew by 29%. The reality of this is that individual quarterly growth percentages will fluctuate, but we remain confident in our medium-term growth target. All in all, a very strong half year on top of what was a record year in 2017. Turn to the cash result, which is the most important performance indicator for our business, as it reflects the way in which cash emerges from both existing and new business. In the past two comparative years, there have been a number of changes to the pattern of cash emergence following our unit liability reassessment at the end of 2016.
I'm pleased to say that we're now in a steady state, therefore, the pattern in 2018 is the same for 2017, which should make modeling and comparisons more straightforward. The increases in net income from funds under management of 12% to GBP 332.5 million, and margin arising from new business of 18% to GBP 70 million, are therefore directly attributable to the profile of funds under management during the half, together with flows out of gestation and the increase of 15% in new business year-on-year. There's been no change to the blended margin of 77 basis points. It's worth emphasizing that we now have GBP 33 billion of funds under management within the gestation period. Whilst these are yet to contribute to the cash result, they will do so in time.
These are funds that have already been secured and which we expect will exhibit the same consistently high levels of persistency that we experience as a group. Each of the cohorts will start to contribute to cash emergence six years after being written. As a guide, once the entire balance matures, it will contribute an extra quarter of a billion pounds of net income to the underlying cash result without any further attributable cost. This will, of course, be supportive for future dividend growth. Expenses are being in line with our expectations, there are two pre-operating cash items that merit comment. Firstly, the FSCS appears on the face of it to have shown some improvement, I'm afraid this isn't the case.
What has actually happened is that the billing period for our 2018 accounts has been reduced from 12 months to nine months, reflecting a decision by the FCA to move its compensation levy period in line with its own financial year. This is therefore a one-off timing difference that will only benefit 2018. The underlying reality is that although we are supportive of the importance of FSCS for clients of our industry, the costs associated with supporting it remain at a frustratingly high level. Secondly, briefly, tax relief from capital losses has run at a faster rate in the first half, this is largely driven by market conditions, particularly in the first quarter. Operating cash has therefore increased by 18% to GBP 164.3 million. You will, however, recall that for the full year, we said we're going to move Academy costs to above the operating cash line.
Investments in the Academy, which in the first half amounted to GBP 4.2 million, represents a significant current investment in future growth and cash generation. Past investments in the Academy is already contributing very strongly to our results, so we now see this change as the best way to present future results. There's a pro forma in the back of your packs which shows the operating cash results, including Academy above the line, it therefore shows the comparatives you can expect to see in future statements. Our other areas of investment below operating cash continue to grow and develop in line with plan. As I mentioned back in February, the strategies for both Asia and DFM remain one of continued investment, with growth in income from these businesses offsetting much of that additional cost of investment.
Our underlying cash result, taking these investment activities into account, has increased by 20% to GBP 147.1 million, which results in an underlying basic cash EPS of GBP 0.28, which is 19% up on the last half year. The first half has seen significant activity levels on back-office infrastructure development and migration. In June, we successfully migrated our drawdown plans, which involved over 38,000 accounts and GBP 5.3 billion of funds under management. I'm pleased to say this migration went smoothly. We've also this month started to migrate part of our pre-retirement account pensions book using a phased approach by location. This is the start of a significant phase, and once again, I'm pleased to say that it's progressing well. We now have GBP 40 billion of our funds under management on Bluedoor, and 70% of all new business written in the first half of 2018 was written on the new system.
We continue to approach the system's migration with great care, and our number 1 priority is to do it well and to do it safely. We continue to expect to have substantially all activity on migration complete by the end of 2019. At which point, you'll see a substantial fall in the associated costs. I'll now turn to the embedded value results, where EEV operating profit has increased by 23% to GBP 489.6 million. There are a number of factors that contribute to this increase, the most obvious one being the growth in new business. We're also, however, benefiting from the longer-term contract boundary within the new retirement account, which, whilst leaving costs for the clients unchanged, allows for the full benefit of pension business pre- and post-retirement to be recognized in embedded value. Investment return variances reflect market conditions, with a weak first quarter somewhat offset by a positive second.
Taking all of this into account, our EEV net asset per share now stands at GBP 11.15. As a reminder, our pre-retirement account book, currently in the course of migration onto Bluedoor, has a significant embedded value attaching to it that is not recorded in our statement because of the way in which the contract is written. We have no plans to novate these contracts, if we were to, modeling periods would be extended, and we would record somewhere in the region of GBP 400 million of additional embedded value, which would increase embedded value per share by around GBP 0.75. I won't comment too much on IFRS, the background is very much the same as it has been, and as usual, there's a reconciliation to the cash result in your packs.
If you focus, however, on IFRS profit before shareholder tax, you see modest growth of 3.6% to GBP 82.5 million. There's also little for me to say about capital, since very little has changed since we presented our results for 2017. As I indicated then, our capital needs will grow broadly in line with growth of the business. It's worth reiterating, however, that our business model, which involves ensuring client assets are matched at all times, means that not only are clients' investments with us supported by the specific underlying assets that they've selected, but that as a result of that, the shareholder is not exposed to the financial and therefore the capital risks that would otherwise be present.
Finally, I'll turn to the interim dividend that we announced this morning. We've taken a very simple and consistent approach to the interim dividend. The growth of 20% is a direct reflection of the increase in the underlying cash result. As we said back in February, we expect to distribute around 80% of our underlying cash result for the year, which we believe strikes a sustainable balance between providing returns to shareholders and continuing to grow the business. In summary, advisers are up by 4%, gross inflows are up by 15%, net inflows are up by 21%, underlying cash is up by 20%, and there's an interim dividend reflecting this success, also up by 20%. A very strong performance during the first half that we look forward to building on over the coming months.
I'm now going to hand over to Ian, who's going to speak a little bit more about developments in the partnership.
Thank you, Craig. Good morning, everyone. I'm delighted to be speaking today. Andy has asked me to say a few words about the partnership and to try and give a real flavor of what's happening under the bonnet of what Andy correctly refers to as our growth engine. Those of you who've followed us for some time will already be familiar with our growth model. A very simple model to understand, quite complex and challenging to execute. However, we have been extremely successful. We have grown by 9% compound across both metrics over the last 10 years. However, this only tells half the story. Andy wanted me to bring some real-life case studies into the meeting this morning. When he asked me to do this, I wanted to find something that was recent, relevant, and representative.
I looked through my diary and came up with my attendance in June at an office opening of a practice I've known for over 20 years. Now, to counter any accusation that I have cherry-picked this business, it is based in the financial hotbed of Wrexham, one of the most deprived parts of the U.K. The story starts in 2001 with two bancassurers leaving NatWest and Lloyds Bank respectively to form two sole trader businesses with SJP. In 2006, they approached us to merge into one joint business. At that time, I must confess, we were slightly reluctant. Obsessed with our gross partner numbers, such a merger would be a minus off the partnership total. Those two individuals were bringing in between about GBP three and a half million and GBP 4 million of gross funds each on an annual basis.
Solid citizens of the classic model. Since then, they have, with our help, been developing their business, just like hundreds of other partners at SJP. Last month, as I said, I attended their office opening. They've moved into the old Wrexham Brewery building. Just to prove the point, here is a picture of me at the event. Let's take a closer look at just how this business has developed. Here we see Warren and Medwin joined by a new co-director, James. James is a 28-year-old graduate who joined SJP in 2013 and the practice in 2015. He bought into the business utilizing access to loan capital facilitated by SJP, and as such, he became a shareholder and co-director of the business. The first step in a sensible succession plan. The advisory team has grown significantly since the days of those two single partner businesses.
Here we see Tom, Gwyn, Ben, and Howard, each with an interesting story to tell and representative of the interface between the partnership and SJP. Tom and Gwyn are the sons of the founders, university graduates, and graduates of our own Next Generation Academy, as is Ben. Ben and Gwyn are both chartered advisors, having benefited from our own in-house workshops as we look to increase the professionalism and the qualifications of the partnership. Such is our commitment in this area, you may be interested to know that 40% of all chartered advisors in the U.K. who qualified in 2018 currently work for St. James's Place. Howard is interesting for another reason, representing our ability to retain talent at the other end of careers.
Having run his own practice, Howard wanted to work part-time. He sold his practice into Hadlow Edwards, allowing him to capitalize his business, to continue to work part-time with his key valued clients, something appreciated by them, and allowing Howard to focus on advising, with the practice providing the support and all the other mechanisms that are necessary. Two further advisors, Mandy and John, complete the advisory team, with John specializing on the provision of mortgages. A team of nine advisors in 2018 needs specialist support. This is provided by a fully qualified paraplanning team. The whole business is supported by a further nine PAs and secretaries. This whole operations team is managed and supervised by Dom Richmond, who is an experienced manager, who himself is also a chartered financial planner.
The business utilizes its own website hosted by SJP, which provides access to regular e-briefings to clients and updates on developments to our fund range, any changes to taxation, et cetera. When we talk about the development of small SMEs, this is what we mean. Warren and Medwin, the senior directors in this business, are now responsible for total funds under management of GBP 400 million, and are on track this year to attract gross inflows of GBP 60 million. As you've seen, the two sons of the founders are in the business, ensuring stability and succession and reassurance for the 2,700 clients of the business. The business also provides strong support for our own charitable foundation. The business supports three local charities in Wrexham. Social responsibility and giving something back being important components of our culture.
The business coexists with SJP, and here we see how the practice is supported by us. We provide support across a range of areas, ranging from training and development, technology, technical support, marketing, risk management. Am I confident about the business? Yes, I am. Is it unique within the partnership? No, it isn't. We currently have 637 multi-member businesses on the very same journey as this one. Beneath our headline numbers, you will see the development of an increasing number of multi-member practices, co-investing, developing, and building for the future. Here you can see how the development of these businesses has been taking place over the last five years or so. The dark blue columns are the numbers of our high-performing single partner practices. In 2012, you can see this stood at about 1,500.
On the top of the dark blue column, you can see our small, medium, and large businesses. In 2018, our single partner businesses have grown, the major growth is in the small, medium, and large businesses. Such has been the growth that now over 50% of our capacity is in such business structures. 58% of the advisors within these businesses have been with us for less than three years. We know that their productivity will increase dramatically over time as they mature and become more experienced. I went to Wrexham for that example, I could have just as easily selected almost any town in the U.K. It's a good representative of what we're seeing across the country.
Investment by partners in their own infrastructure and support, the development of the next generation of advisors, client retention through ordered succession, the ability for new advisors to buy into existing businesses, facilitating that succession, younger, next-generation advisors accessing younger, next-generation clients, and businesses that are terribly future oriented. That's enough of Wrexham. I now wish to move on to the Academy. I mentioned how the Academy had assisted the development of that business, and I thought it might be worth updating you on the increasing contribution it is making to our business. Our earlier Academy intakes were predominantly London-based, and it's here where the graduates are making a significant contribution to the new business. They have been with us a little bit longer. Here we see the percentage of new business that our graduates are making to our London offices.
That over a quarter of our new business from one of our largest offices comes from Academy graduates is a strong testimony to the success of the program. Nationally, across the business, the total Academy contribution is about 11% of new business. That will increase as the graduates start to develop from our centers in Solihull, Manchester and Edinburgh. We currently have over 300 individuals across the four centers in training, with an average age of 37 and with a far more representative gender split. They also bring a great energy and diversity into our business. That doesn't mean we're not continuing to grow our capacity through traditional recruitment. We've had a record number in the first half for recruitment, a record number of applications this year, such that our advisor numbers, as you've heard, are up 4%.
We continue to turn away applicants who do not meet our entry standards. Within those new joiner figures is our largest ever recruit business, a firm with 10 advisors within it. We've also beginning to attract a few significant joiners from stockbroking backgrounds. This is a new source of recruits for us, and they're beginning to see SJP as a suitable home for them to advise and service their clients. We're sifting through 41 applications in the first half of the year to join our Asia business, and we've already appointed some significant hires in Singapore and Hong Kong. We try not to PR in the trade media every time a significant hire joins the partnership. We prefer to grow organically, modestly, but relentlessly. I hope that's given you a flavor of what's happening under the bonnet of the business.
The organic growth of our partner businesses, the continued and growing contribution of the academy, and of course, our commitment to attracting the very best professionals throughout the country. We often say our business model is simple, not easy. It requires relentless focus and high levels of partner contact and a certain resilience. It is not easy to replicate, because as well as the hard yards, it has to be underpinned with a strong culture and a set of values. It also needs a large number of high-quality employees who care about the partnership and their clients, which is something we're very lucky to have. You cannot replicate this model based on random acquisitions thrown together under the banner of industry consolidation.
The demand for high-quality advice has never been higher, I remain extremely confident and I very much look forward to the partnership continuing to provide for their clients with the advice they need in a time of increased complexity and uncertainty. Thank you very much.
Thank you, Ian. Hopefully that provides you with a good insight on how our partners are investing in their businesses, their infrastructure and their future. Corporately, SJP is also investing for the future across a number of initiatives. Let's have a look at these. Firstly, the key priority is to maintain and develop the support to our partner businesses, in particular, providing the tools to support their client relationships. Here we use technology far more than I believe is understood. Ian showed the partner website for Hadlow Edwards, which we design, we maintain and we host. Through which we can send out e-briefings and other communications direct to clients, but personalized from the partner business.
To support partners in their client relationships, we also have our client portal called the Online Wealth Account, which enables clients to access up-to-date valuations of their investments, as well as see detailed performance reporting. Performance reporting which allows not only for all charges and fees specific to each individual client, but also taking into account the client's own actual cash flows. We believe this is unique in the industry. Clients can also, through their Online Wealth Account, choose electronic or paper correspondence for business administered on the Bluedoor platform. They can receive notifications by email or by text, and of course, make online payments. This Online Wealth Account is also available to clients as an app for both iOS and Android phones. We also provide digital tools to help partners run their business through their partner portal, which we call My Practice.
This enables partners to see key information about their business, such as continuing professional development records, information about clients and the ability to identify, for example, which clients have not used our ISA allowance this year. All this is about making it easier for partners to do business with SJP and for clients to do business with their partner. Partners also have access to our portfolio app, which we have developed in-house. This app incorporates the client's actual investment holdings along with BlackRock's Aladdin system, featuring portfolio construction as well as stochastic modeling. This enables a partner to work with their clients to understand their investment experience, and if necessary, rebalance so that the client stays on track to achieve their overall objective. Alongside this, a number of partners use a CRM system called Curo, which integrates with both SJP and third-party systems.
Curo also integrates with Voyant, a cash flow planning tool enabling partners to create bespoke personal financial plans for their clients. Another key system we provide for our partners is called iBusiness, our partner back office system. This is integrated with SJP systems to produce illustrations as well as third-party tools to source, for instance, whole of market protection quotes. Partners are able to electronically submit business to both SJP systems as well as many of our third-party providers. We will continue to invest to make SJP the place of choice for advisors and clients, a place where it is easy to do business by using relevant and appropriate technology.
Staying with the partnership, Ian touched on the Academy, an initiative where we are investing GBP 10 million in 2018 and have recently agreed to increase the spend in future years, an investment that will play an important and growing role in developing our next generation of financial advisors. This will provide partner succession, support retention of long-term client relationships, as well as build an intergenerational bridge to both manage and capture the significant intergenerational transfer of wealth in future decades. Craig has also covered the progress of our Bluedoor program, a significant multi-year investment. Such major IT transformations can be tricky, as the experience of others over the years have shown. Hence, we are being cautious, going for bite-sized developments and migrations rather than attempt a one-off big bang. Whilst this caution means the project takes longer and costs more, it is safer and therefore it is the right approach.
While we have broken the back of the project and can see the end in sight, we still have much to do and we're not complacent. This is an important and necessary investment for us to ensure that we have the right processes and systems for the future. It will provide the capacity and capability for our future growth and supports the continued development of those client and partner portals I spoke about a little earlier. As well as making it easier for partners to do business with us and investing in our administration capabilities, it is of equal importance we continue to invest in our investment management approach, thereby ensuring we always have sufficient investment capacity for our future growth. We are doing exactly that and have just announced the launch of a new diversified asset fund that will be managed by KKR.
This provides an exclusive opportunity for our clients to invest in a diversified portfolio of public and private market assets within a single investment fund, a strategy which has historically only been available to institutional investors. We have also announced the appointment of Impax Asset Management to manage the renamed Sustainable and Responsible Equity Fund. With the addition of the diversified asset fund, together with the recent appointments of Impax, GMO, Wellington, and Jennison, we now have an investment approach that spans 39 investment management firms from across the globe, with 36 exclusive strategies for U.K. retail investors. In the first half of 2018, we also continued to enhance both the depth and breadth of the services we make available to our clients, adding, for example, new protection and medical insurers to our approved third-party providers, as well as introducing a new foreign exchange and international payment service.
We also continue to invest in other areas. Our Asian operations are progressing well, and they have had a good first half. Gross inflows were up 51%, ahead of plan, while net flows were up 47%, taking funds under management to over GBP 550 million, increasing by 32% during the six months. In addition, we have launched an international discretionary fund management service in Hong Kong with a view to replicating this offering in Singapore and Shanghai in due course. Rowan Dartington also continues to build scale, with funds under management now above GBP 2.3 billion, having almost doubled since the business was acquired in 2016. The number of investment executives continues to grow, up from 46 to 51 since the start of the year.
Of note, the current slide shows the growth in RD funds under management month by month, the yellow bars, together with the proportion of total funds that have been introduced by the partnership, represented by the black line, and which now stands at 25%. Hopefully, this gives you more information on how we are investing to support our future growth and how we are scaling our business to manage this growth. To summarize, the challenges individuals face in planning for and managing their wealth both before and after retirement, as well as when considering the transfer of wealth to their next generation, are considerable. Consequently, we continue to see a growing demand for trusted face-to-face client focus, financial advice, and support. At the same time, it is a fact that there are not sufficient qualified individuals to meet this growing demand, and an advice gap exists.
Furthermore, we, and very importantly, our partner businesses, continue to invest in our respective infrastructure to ensure we are well-placed for future growth. The environment we are operating in, together with these investments, provides us with the confidence that we can continue to achieve our medium-term growth objectives. Supporting these objectives is a strong balance sheet with the knowledge of a growing income from existing business. Both of these are supporting a growing return to shareholders, as shown by the 20% increase in the interim dividend. Thank you for your attention. A summary of the key financials are shown on the current slide. Continued strong growth across all key financial metrics. I will now ask Ian, Craig, and David to join me for the usual Q&As. Thank you. Got a couple at the front here.
Got a pen now.
Thanks very much. It's Blair Stewart from BOA. Couple of questions. Firstly, could you talk a little bit about the Bluedoor costs? The operational aspects seem to be on track. I just wonder if you can update on costs and the outlook. By 2019, does that just drop away completely? Secondly, just interested if you can put any numbers around the productivity opportunity. I think you talked about a significant number of the advisors in the larger firms being inexperienced with less than three years experience. Wonder if you could just talk about that productivity opportunity. Finally, just on some of the other investments you were talking about at the end there, Andy, with technology, it seems very interesting. Just wondered what you're spending there and where that's shown. Does that just come through in establishment costs or is it somewhere else? Thank you.
Yeah. If I take the last one first. Look, we are spending all the time on IT, and that's just included in the establishment costs. There is no separate line that we'll be showing you in the future.
Above the line.
Above the line, yes. Yes, it's above the line.
Is it accelerating?
I wouldn't say as particularly as a proportion of total cost, no. It's going up every year, but our costs are going up every year as well. Another major area we invest in is cybersecurity, quite naturally. Craig, do you want to take the question on Bluedoor costs?
Yeah. The guidance we gave back in February was that this year would see an annualized run rate equal to the run rate that we saw in the second half of last year, which I appreciate is a bit of a mouthful, but there was a change in intensity at the back end of last year, which continues into this. That guidance largely holds. I think if you look at the result in the cash result, it's probably running somewhere at around GBP 1 million ahead of where we might have expected. As Andy referenced earlier, the important thing with this is to get it done well and to get it done right. We're not taking the cheapest approach to this. I mentioned the migration of pensions business. I think if you took a pure cost-based approach to that, you'd go for a big bang approach.
You'd do everything at once. Our experience, and I think the experience of others is that that might not be the best approach, so we are taking this piecemeal because it gives us an opportunity to check, fix, check, fix all the way through. Having said all of that, I would say the guidance for this year, keeping it simple, if you were to look at somewhere in the region of double what we have for the first half, that would be, I think, a fairly accurate position.
That's good. Ian, do you want to take the productivity question?
Yeah. I'm not sure I've got the actual numbers for you, but what we do know is that partners in their first three years are not as productive as partners who've been with us five to seven years. We also know that at seven years, there are some partners who plateau and some partners who continue to grow. I think we're very confident that we can look at the population of the people who joined us in the last two or three years, which is quite a substantial population, and we know they're going to grow their productivity year on year on year for the next four to five years.
How many partners are less than three years?
How many partners have we got? How many advisors and partners? Less than three. Let me come back to you, I'd rather give you the exact number of the number we've got in the first three years.
We have some questions from Oliver next.
Morning, Oliver Steele, Deutsche Bank. You said that the quarterly performance was occasionally above and occasionally below the long-term target. In the second quarter, gross sales were only up 10%. I didn't quite get the explanation for that, because I think in the first quarter of 2017, you grew gross sales by 32%, then you did 21% in the first quarter of this year. Second quarter of last year, it was 29, I think, then it's suddenly 10. If we look at the third and fourth quarters of last year, it was up about 27. Clearly something did happen, whether it was consumer confidence or something else between the first and second quarters of this year. I'm just wondering what makes you so confident that that can then bounce back in the third and fourth?
Okay. Well, I think as a long-term business, we're not focused on sort of discrete quarters quite naturally. There's quite a lot of difference between 2017 and 2018. For instance, in 2017, the ISA allowance went up 33%, from 15,000 round some to 20,000. It didn't go up this year, so you wouldn't have seen a repeat of that. If you look at I know these all sound small things, but they all count. If you look at where Easter fell in 2018, more tax year-end business would've been done in the first quarter than in the second quarter, as compared to 2017. We just look at the whole long-term, medium-term developments in the market and remain confident that over that period, we can continue to grow our medium-term growth objectives. Guys, I don't know whether anyone wants to add anything else at all?
Obviously not, yeah.
Well, I could throw in the Harry Kane card here and say that if we'd have got knocked out in the first round, we would've had a stronger June. I don't see any evidence of a slowdown at all amongst the partnership. The hot weather and the World Cup may have deflected attention for a short period of time, but the trend's very positive, and I don't sense anything happening out there.
Right. Can I just follow up on that?
Yeah.
Because actually again, if I look at the growth year-over-year, it's all in pensions. I think you're actually down in the other two product areas. Again, any explanation for that?
Well-
Well-
Sorry, go on, Ian.
Partners are in the advice business. They will go where people are wanting advice. There is no doubt, in the last 12 months, there's been an explosion in consumers wanting to talk to their advisers about their pensions options. Now, that doesn't necessarily mean it immediately leads to a pension business. That is what we're experiencing that people are wanting to talk about. It's no surprise that our pensions business is up compared with other areas to me.
I was going to say exactly the same. Also, again, the ISA allowance wasn't increased this year.
You wouldn't naturally have seen the growth you would've done in the ISAs. Right behind you, Oliver, actually. Just pass it to Ed, so it's easier.
Just to pick up on Ollie's question. It's Edward Houghton from Bernstein. To Ollie's point, pensions have been a significant proportion of net flows. Do you think those pension net flows might fall away as pensions for higher allowances in prior years now also fall away? You've had a boost, but does that fall away? Relatedly, what proportion of those potential lost flows in pensions would you expect to see picked up in other product lines, ISAs, for example?
Could I just say to the support team, we're picking up some noise at the back here. Someone talking, so I don't know whether that's something you can have a look at. Sorry, David, do you want to take that question?
Yeah. I think what's interesting about the pensions market is it's still in a state of change, and it's been in a state of change, I think as many years as I've been here, which is, as you now know, 27. The current debate is about what's happened to lifetime allowances and tax rules and things like that. My guess is that that amount of uncertainty is not going to go away overnight, and therefore pensions is not going to suddenly be a topic people won't want to talk about. Alongside that, one of the things we haven't spoken about in terms of where partners spend their time, that Ian talked about, is intergenerational advice and the whole rationale where people are looking at how do we help our families and how do we look after our wealth? That is a growing marketplace.
I think the marketplaces are moving, and the demand for advice is very clear. What tax wrappers you end up investing in is a question of legislation and how legislation changes. Sometimes it's, like now, it's pensions are being talked about. It could be ISAs, it could be yet another version of something that comes out in a government budget in November or in future governments. The background is one of change, and change drives demand for advice, and advice ends up being invested in different tax wrappers. That isn't going to alter.
Can I follow up with one more as well?
Yes.
Again, I think this one's for David. You announced the launch of this Diversified Assets Fund with KKR, that allows your clients to invest in public and private assets. I'm interested in how you've approached the potential liquidity requirements of your clients in respect of what are potentially relatively illiquid assets.
Absolutely. We spent a long time looking at the design of the portfolio to enable us to balance these two things. How do you capture illiquidity premium ?
Recognizing, though, you've got a fund which is essentially an open-ended fund. That's not traditionally what happens in private assets markets. The way we've solved this is to have roughly 50/50 between private assets and liquid credit and other forms of quoted assets. We can capture illiquidity for part of the portfolio, but maintain liquidity the other part of the portfolio. That's a diversified approach, but it's also managed by a single manager. That helps us in terms of deciding which parts of the illiquid market we're going to go into from one time to another, and which parts of the liquid market we will counterbalance that with. The ultimate journey for us will be to launch a fully private assets fund. This is a very important step on that journey. I think it'll be very well-received, looking at the conversations we've had with people.
It's about getting that balance right. We spent a long time with KKR working on that balance. Let's try one from the other side of the room.
Hi, it's Haley Tam from Citi.
Hi.
Could I ask a quick follow-up question on the back office infrastructure? Could you give us an idea of how much of the spend in the first half was actually the dual running cost? We can maybe think about that being an ongoing cost for next year, but the rest may be dropping out. The second question, I'm sorry to come back to new business as well, but if we think about some of the longer-term trends, perhaps, and the changes year-over-year, I noticed you didn't mention anything specific about transfers from DB to DC. I wonder if you could comment there. Also, if there's any change in the competitive environment for your partners, perhaps some other businesses emulating your business model. Thank you.
Craig, do you want to take the dual running costs first?
Yeah. We haven't given an analysis of the figure, so we don't publish a dual running cost proportion. I think the simple way to look at that figure within the cash results is that the whole lot falls away once migration is complete and we turn the old systems off. Gradually, where we're able to identify clear, obvious dual running costs, we're building that into a figure that will disappear from the cash result.
Sorry, so if migration completes at the end of 2019, how much longer will you run?
Sorry, I can't quite hear the
At the end of 2019, does the dual running cost fall away?
Yes. I mean, in any project you're going to get some decommissioning. I think we referred to that at the previous results presentation. Yes, essentially, the dual running costs cease the moment we get everything on the new systems and we switch the old ones off. It's not just the systems, it's the surrounding bits of the system as well that create that dual running inefficiency when you're going through a migration.
I'll just add that obviously we're showing it all separately so it's not impacting the underlying cash result and therefore not impacting the dividend sort of conversation. If I do the transfers, there's two parts to the transfer market. I'm going to talk about the defined contribution market first. More and more people don't have the benefit of defined benefit pensions. They've all been sort of accumulating funds in DC pots. They no longer need to take an annuity. Actually, in our marketplace, they probably didn't have to previously. More and more individuals are going into income drawdown. We expect that market to continue to grow. All the statistics we got from other external commentators would suggest that. We see that as a big market. People accumulating their various small pension pots, and bringing them into one to go into income drawdown.
The second part where we've seen more interest, if you bear in mind we're the sort of largest advice brand in the U.K., it's not surprising. There's a lot more interest in DB transfers. This is a very complex area. For lots of people, it just isn't appropriate. We are taking a continued cautious approach to this. We see relatively low numbers in absolute terms, but each number tends to be a larger transfer. We haven't disclosed it, we're not planning to disclose it. That market is still there, but we are just treating it with real caution. Question about competition. Oh, sorry. The competition. Thank you.
Yeah. I don't think our partners are experiencing any increase in competition for business at all. Compared with the kind of massive opportunity in terms of the baby boomer generation, the advice gap, increased IHT, pensions complication. The opportunity far outweighs any experience of a new kid on the block or anything, which I'm not aware of, and I don't think any of our partners are saying to me that they're finding competitive pressures at all.
Okay. I think should we try down the side there? We've got Gordon and Ben. Gordon goes first, and then over to Ben.
Thanks. Gordon Aitken from RBC here. Just a first question, follow up on the pensions. Obviously such a big part of gross sales now. Can you give a rough split of You talked about consolidation of pots and then DB to DC, and we've always said it's consolidation of pots that's the big driver. Is that continuing to be still the case? The second question on outflows, I guess the two main buckets that you lose flows to are probably number 1, deaths, and number 2, Bank of Mum and Dad. Can you talk a bit about both of those and what you're doing to reduce the impact? Maybe Bank of Mum and Dad, is it becoming a bigger threat?
I'll do the outflows first. Where we see outflows are people taking regular income withdrawals, I mean, that's exactly what we expect. They're into income drawdown or in the investment bond arena, they're taking regular income. The other area we're seeing is, as you say, through deaths, where we will see some money that leaves because people have reached the end of their investment time horizon. I'm sure there's some to do with Bank of Mum and Dad. The other thing that we have is the ability for Bank of Mum and Dad to borrow funds secured on their investments, and that certainly is quite a popular thing. I wouldn't say we're seeing any large outflows as a result of Bank of Mum and Dad.
In terms of pensions, again, I might turn to David in a minute, but how much an individual can save in pensions on a regular basis these days, isn't a huge sum of money. The majority of the pensions business will be transfers and predominantly DC transfers. David, I don't know whether you want to add anything to that.
No, I'll just point out demographic move. We talk about intergenerational wealth transfer, but there's a big demographic move in terms of people coming into that stage where they're thinking about retirement, and I have some experience with that process. What that means is we're seeing that's still ongoing right now. That's a very live marketplace, and it's a growing marketplace. The transfer market, DC, DB, and the ability to not have to take an annuity via an income and use a pension plan as an IHT planning tool. That's a large part of the conversation in retirement marketplace in terms of planning terms. That cohort, that demographic cohort, is not yet mature. That's still coming. We're probably just beginning to see the first generation of non-final salary pension retirees in the U.K. There's quite a lot of growth in this part of the market.
Gordon, do you want to pass the mic over to Ben?
Hi. Ben Bathurst from Société Générale. First question's on the Academy. I think Andrew mentioned that you've agreed to increase the spend in that area. I just wondered if you could give some guidance on the quantum of that increase. I think that's new information today. Then secondly, on interest rates, I think market expectations for the MPC to increase interest rates this week, at what level do you think the attraction of the higher returns from cash might start to eat away at demand for your investments?
Craig, do you want to do the academy?
Yeah. The academy investment that we were referring to, it sort of starts now and continues. I would imagine if we were to think of it in terms of somewhere between 10% and 15% for next year, subject to an update at the end of the year, I think that would be a reasonable amount to go for.
Not material amounts. David, do you want to do the interest?
On the interest rate one, it's interesting. When we talk to clients about investing, we try and make it really clear that you need to keep some money to one side for all the emergency things that happen in lives you don't expect, and that's the cash element. Whether you earn a quarter or a half or three-quarters of a %, that is not a conversation about investment. When you're investing, you're investing for the longer term, and there your expectations of return are much higher, albeit there are different risks. A move from a half to three-quarters on base rate is not going to alter that conversation or alter the demand for investments.
A few more on down this side, if we may.
Hi, Ashik Musaddi from JPMorgan. Just a couple of question on investment performance. I mean, first half has been a bit volatile. First quarter more volatile than second quarter. Any thoughts on how your active investment managers have done relative to their peers? Any numbers on that would be really helpful. Secondly, I mean, given that you're adding KKR, which is more of a alternative investment idea, how should we think about the fees that you're paying to them? Is it similar to what you have been doing with others around 30, 35 basis point, or is it more on the higher side? Any thoughts on that? Does that lead to any sort of margin contraction overall? I know it could be very small because this is just one of the many 39 you have, but any implications for the forward-looking margins? Thank you.
I'll let David take both of those. Good job he's not retired yet.
KKR, no impact on margin whatsoever because we have our standard charge and any external management fees added on to that. The KKR fee will be on top of our normal charge to the margin, no impact. In terms of Q1, Q2, it's really interesting this year. First quarter, negative. Second quarter, much more positive for the markets. If you look at the fund performance and look at both relative in terms of their peer groups and other competitor funds, this time last year, our overseas funds and global equity funds are doing really well. U.K. equity funds were behind the curve. This time this year, our U.K. equity funds are way ahead of the curve in terms of markets, but overseas funds are about 50/50.
The interesting one to look at, though, is look at rolling three-year, rolling five-year client returns. It's been really stable over the last four or five years now at 7%-9% in that sort of relatively tight band. That's still happening, and I think that's the important thing to focus on.
I'm conscious of time, we'll take two more questions. Barrie and Andrew. We're around afterwards for coffee, I know some of you need to get away. Andrew.
Good morning. Andrew Crean at Autonomous. Can I go back to the Bluedoor thing? Could you be clear, what is the likely spend in 2019 over 2018, the drop-off in 2020? I think that's what people are trying to ask for. Secondly, a slightly more nebulous question. You talk about growth in funds under management related to the number of partners and things like that, do you do any analysis of the amount of money that you manage for each customer and whether you can capture more of their assets? I suppose related to that, you were talking about the apps and stuff like that, which the clients can get access. Do they actually use them? Is there much engagement?
Who can answer the app question?
The partners, there's a range of partners, and there's a range of partner styles in their interactions with their clients. Some partners are very techy, use cash flow forecasting, use all the technology, and work with their clients in a very in-depth and analytical, report-driven approach to financial planning. Other partners don't do any of that, and are more talk about concepts and savings, and having a relationship, and I'll look after you, and it's a touchy-feely journey with the person, both trying to help the client achieve their financial goals. Who uses what is very relative to the actual style of the specific advisor and the practice they're in. Some are very techy, some aren't. The important thing is that we facilitate all approaches and styles, and we have that available.
The important thing is that we want to see technology supplementing the partner relationship, not replacing the partner relationship. That's the key of our approach.
On the funds under management piece, what's interesting is that you see clients' funds under management where there's increase with the relationship duration. In other words, you look at the average investment in the first three years and look at it again three or four years later, you'll see an increase, not just because of fund growth, but actually, as the relationship develops and mature, we end up having a deeper relationship with our clients, and it increases over time.
Craig, do you want to just do the?
You don't You can't measure that at all, can you?
We do measure some of those metrics, yes, we do. We don't publish them, though.
Craig, do you want to just clarify the Bluedoor point?
Yeah. The figure that I'm referring to that will fall away, in the cash result for the first half of 2018, there's GBP 15.2 million net. Just for the sake of really simplistic modeling, let's imagine that that GBP 15 were to turn into GBP 30 to the end of the year. This isn't guidance for next year yet, but let's imagine that that also repeated itself in 2019 as we complete the migration of bonds. That same GBP 30 million would not reappear in 2020. Thanks.
Okay. Just pass it back to Barrie. We called this the last question. I know there's a few other hands, but we are around afterwards. I'm conscious people need to get away. Barrie.
Thank you. A couple of questions. Barrie Cornes, Panmure. Andy, you mentioned the, not everyone takes the DB to DC transfer. It's not appropriate for everyone. Can you just give us a flavor of what sort of percentage either don't get advised or don't take that switch, please?
Poor. Again, that's quite hard. We have advice guidelines. On a regular basis, our clients will be Well, clients will be having conversations with partners where the partner says, "You should not even contemplate transferring a pension." We don't actually capture that information. I can't give you an accurate one. What I will say is every defined benefit pension transfer we do has to be pre-approved by an independent compliance team in Cirencester.
Okay. Thank you. The other question I had was on the FSCS. Appreciate there's a timing issue this year around, going back a few years, I think you talked about how high it was for specific reasons and hoped that it would come down. Any sign of that happening?
Craig, your world now.
I still hope it'll come down. It's probably the main thing. I think the construct of what it is FSCS is dealing with has probably changed and evolved over the last few years. What we saw a few years ago was some very big obvious cases that required attention and bailing out. It's still not uncommon to read of organizations that you've never heard of that impose actually a pretty heavy demand on FSCS. Whilst I'd love to say that there'll be a beneficial impact of improvements in the way the world is working, I'm not sure I can point to anything like that. There are also some consultation papers out there that could reshuffle the way FSCS is charged, I don't actually see there being a terrific amount of net threat or net benefit in that either.
I'm afraid other than that, there's not much more I can say. I like to be positive and hope that it stabilizes and come down.
Okay. Thank you.
Okay. Thank you very much, everyone. I appreciate there were a couple of hands we didn't get to, but we are here, as I say, if you want to come up and grab us. Thank you for coming today.