Brooks Macdonald Regulatory News (BRK)

17 September 2020

BROOKS MACDONALD GROUP PLC

Final results for the year ended 30 June 2020

Strong financial performance with record revenue, profit and margin

Now a more robust business, confident and ambitious, ready to move on to the next stage of our strategy

Brooks Macdonald Group plc ("Brooks Macdonald" or "the Group") today announces its audited results for the year ended 30 June 2020.

Underlying results2

Statutory results

Dividends

1 Comparative figures have been restated to reflect the correct recognition of the Authorised Corporate Director fees and associated costs in respect of one of the Group's managed OEICs and the correct VAT treatment on the fees recognised on the Managed Portfolio Service offered through third party platforms as detailed in the Financial review.

2 The underlying figures represent the results for the Group's continuing activities excluding certain adjusting items as listed in the Financial review. These represent an alternative performance measure for the Group. A reconciliation between the Group's statutory and underlying profit before tax is also included in the Financial review.

Caroline Connellan, CEO of Brooks Macdonald, commented:

"I am delighted with our strong financial performance and the continued disciplined execution of our strategy, particularly given the context of a challenging year with the unprecedented backdrop of COVID-19. We increased our profit margin, delivered record revenue and underlying profit, and announced two high-quality acquisitions. This has been made possible by the actions we have taken over recent years as well as our "protect to thrive" approach through COVID-19, allowing us to operate successfully in this uncertain and ever-changing world. I would like to thank the advisers we work with, and our clients, for their continued support and our people for their dedication and hard work.

"We are now nearing the completion of the strategy we announced in 2017, having done what we said we would do and delivered the outcomes we promised. We are now a more robust business, confident in our vision for Brooks Macdonald as the leading investment manager for intermediaries, leveraging our strengths. We are working to deliver best-in-class adviser experience and client service levels, to complement our compelling investment proposition and robust investment performance.

"The short-term outlook is uncertain, driven by both the progress of the pandemic and events surrounding Brexit. Nonetheless, the fundamental opportunity for Brooks Macdonald remains strong, we are uniquely positioned in the market and confident about what the future holds."

Financial highlights

· Underlying profit margin up from 19.6% to 21.2%, in line with the Group's commitment to increase profit margin in the medium term

· Record Group revenue of £108.6m, underlying profit of £23.0m, and year-end FUM of £13.7bn

· Strong overall investment performance for the financial year to 30 June of 1.0%, protecting our clients' wealth in volatile markets, well ahead of the MSCI PIMFA Private Investor Balanced Index which declined by 3.5% over the same period

· Improved underlying profit in all three segments, including International which is delivering increased momentum in its profitability

· Total dividend increased by 3.9% to 53.0p (FY19: 51.0p) reflecting the Board's continued confidence in the strength of the underlying business and commitment to a progressive dividend policy, and continuing the Group's record of increasing the dividend every year since beginning trading on AIM in 2005

· Committed to delivering top quartile underlying profit margin over the medium term

Strategic progress

· Nearing completion of the strategy announced in 2017, to deliver improved returns from a sustainable and scalable business, achieving year-on-year improvements in profit margin:

o Reinforced the foundations of the business, exiting non-core activities

o Improved our proposition, launching Responsible Investment and Decumulation services, and invested in our people and infrastructure

o Increased efficiency and effectiveness, through cost discipline, process improvement and centralisation of client operations

o Complemented our organic growth strategy by announcing two high-quality acquisitions, both meeting the Group's strict acquisition criteria - strong businesses, good strategic and cultural fit, high levels of EPS accretion

· Been through a period of change, emerging a more robust business ready to capitalise on the significant growth opportunities we see ahead

· Moving to a new stage of our strategy, based on our vision for Brooks Macdonald as the leading investment manager for intermediaries, with best-in-class adviser experience and client service levels, complemented by our robust Centralised Investment Process and compelling investment proposition

· Committed to driving value creation through organic growth, service and operational excellence and further selective high-quality acquisitions

· Strategy enabled by our people and culture, focused on attracting, engaging and retaining the best talent in the industry

· In advanced discussions on a partnership agreement with a leading wealth management technology and services provider to support the transformation of the adviser experience and client service levels.

Conference call and investor presentation details

There will be a presentation for analysts and investors at 9:30am today via webcast and conference call. For details please contact MHP Communications on +44 (0)20 3128 8147 or r.collett-creedy@mhpc.com

Presentation slides will be available from 7:00 a.m. today by going to the Investor Relations section of Brooks Macdonald's website using the following link:

https://www.brooksmacdonald.com/investor-relations

Enquiries to:

Notes to editors

Brooks Macdonald Group plc, through its various subsidiaries, provides leading investment management services in the UK and internationally. The Group, which was founded in 1991 and began trading on AIM in 2005, had Discretionary Funds under Management of £13.7 billion as at 30 June 2020.

Brooks Macdonald offers a range of investment management services to private high net worth individuals, pension funds, institutions, charities and trusts. The Group also provides financial planning as well as offshore investment management and acts as fund manager to two regulated OEICs (the IFSL Brooks Macdonald Fund and the SVS Cornelian Investment Funds) providing a range of risk-managed multi-asset funds and a specialised absolute return fund.

The Group has twelve offices across the UK and the Channel Islands including London, East Anglia, Hampshire, Leamington Spa, Leeds, Manchester, Taunton, Tunbridge Wells, Scotland, Wales, Jersey and Guernsey.

www.brooksmacdonald.com / @BrooksMacdonald

LEI: 213800WRDF8LB8MIEX37

Chairman's statement

Introduction

I am pleased to report that, despite the challenging backdrop of continued Brexit uncertainty in the first half of our financial year, and then the COVID-19 pandemic in the second half, Brooks Macdonald has had another strong year. The Group has delivered further improvement in underlying profit and underlying profit margin in line with our medium-term commitments. Strong investment performance in extremely volatile markets and our acquisition of Cornelian Asset Managers resulted in us finishing the year with a new record closing FUM figure of £13.7 billion. This was despite the impact on client sentiment of ongoing macroeconomic uncertainty and outflows of mainly lower margin business as a result of the Group's focus on business quality.

Caroline Connellan and her team have continued their disciplined execution of the Group's strategy with a highlight being the announcement of two acquisitions meeting our strict criteria - first Cornelian in November and then Lloyds Banking Group's Channel Islands wealth management and funds business in June, complementing our organic growth strategy.

Our Centralised Investment Process continues to deliver robust performance particularly through the more recent volatile markets, underpinning our mission to protect and enhance our clients' wealth. Overall investment performance of 1.0% for the financial year to June was well ahead of the MSCI PIMFA Private Investor Balanced Index which declined by 3.5% over the same period.

The Group and our people responded well to the pandemic and the lockdown, moving quickly and smoothly to working remotely, leveraging our flexible working policies and the strong infrastructure we already had in place. Caroline prioritised the wellbeing and safety of our people while ensuring that the Group was able to support advisers and clients in volatile markets, for example increasing the frequency of contact with regular webinars and investment bulletins.

While the pandemic raised challenges, it also creates opportunities for firms willing to be positive in their actions, as with our Lloyds Channel Islands acquisition. Brooks Macdonald emerged from the lockdown a stronger organisation, well placed to take advantage of opportunities as they arise.

Delivering our strategy

We are now nearing completion of the strategy announced in 2017, having done what we said we would do and delivered the promised outcomes. We reinforced the foundations of the business, upgrading our risk management and operational framework and strengthening senior management. We increased the value of the business by enhancing what we do and how we do it, delivering the improvement in margin we had committed. We maintained focus on our clients and advisers, including revamping and launching a series of new offerings, including Court of Protection, Responsible Investment Service and Decumulation.

We drove greater efficiency and effectiveness, particularly with the changes in processes, centralisation of our client operations and headcount reduction announced in January 2019. We used the savings to invest in our talent and capabilities, with a number of key hires and development programmes at leadership and management levels, and in improvements in our digital infrastructure.

We are now moving into a new stage of our strategy, where we look to deliver further improvements in returns, building on the sustainable and scalable business model we are putting in place. Our vision for Brooks Macdonald is as the leading investment manager for intermediaries and we will work with our adviser network - present and future - to ensure we understand what they need from us.

A core element of our strategy will be to transform our adviser experience and client service levels. We are working with a leading wealth management technology and service company to deliver this transformation and we are close to agreement on a partnership, which will include material upgrade of our investment administration and operations activities.

We will look to create further value for shareholders through continued organic growth, service and operational excellence, and selective high-quality acquisitions. This will be underpinned by actions to further improve our successful Centralised Investment Process, to add to our investment proposition, and to deliver market-leading adviser experience and levels of client service. This will be complemented by a continuing focus on our people and on the culture of the firm, underpinned by our Guiding Principles.

Performance overview

The Group continues to make strong progress - our funds under management increased during the financial year from £13.1 billion to £13.7 billion, an increase of 4.1%. Our revenue growth was 2.7%, bringing the full year total to £108.6 million, a new high for the Group, despite the impact of lower markets at the end of our third quarter driven by the pandemic. We maintained our cost discipline, putting us in a strong position to deal with the uncertain environment. The increase in underlying profit before tax, of 11.1%, is ahead of both FUM and revenue growth, resulting in a figure of £23.0 million (FY19: £20.7 million).

Statutory profit before tax rose 26.6% to £10.0 million (FY19: £7.9 million). Statutory diluted EPS from continuing operations rose 1.2% to 43.1p (FY19: 42.6p), with growth constrained by the issue of 2.1 million ordinary shares in relation to the Cornelian acquisition.

Dividend

The Board has recommended a final dividend of 32.0p (FY19: 32.0p) which, subject to approval by shareholders at the AGM, will result in total dividends for the year of 53.0p (FY19: 51.0p). This represents an increase of 3.9% on the previous year and reaffirms the Board's confidence in the strength of the business even in the context of the COVID-19 pandemic, and our commitment to a progressive dividend policy. The final dividend will be paid on 6 November 2020 to shareholders on the register at the close of business on 25 September 2020.

Board changes

There have been several changes to the Board during the financial year and in the post-close period. Colin Harris had completed 9 years' service and therefore, in line with the UK Corporate Governance Code, did not seek re-election at last year's Annual General Meeting. He left the Board with effect from 31 October 2019. On 1 May 2020, we announced that David Stewart was taking up the role of CEO of LSL Property Services plc and would accordingly leave the Group Board on 31 July 2020. I thank Colin and David for their contributions to the Group.

On 9 June 2020 we announced that Dagmar Kershaw would join the Board with effect from 1 July 2020. On 16 July 2020 we announced the appointment of Robert Burgess effective 1 August 2020. We welcome Dagmar and Robert to the Board.

Governance and regulatory

The Group follows the UK Corporate Governance Code and this is our first full year of reporting against the 2018 Code. We have continued to keep abreast of regulatory change, where the major activity this year was the implementation of the Senior Managers and Certification Regime ("SM&CR") which went live on 9 December 2019. We also continued to embed the changes related to MiFID II and GDPR. The Group maintained high standards of compliance throughout the lockdown period.

Looking ahead

The macroeconomic outlook is highly uncertain in the short term, given the pandemic and the continuing negotiations on our post-Brexit relations with the EU, which will both have an impact on the economy, markets and client sentiment. We are positive that the fundamental opportunity for Brooks Macdonald remains strong, driven by demographic and policy trends as well as increasing adviser demand for outsourced investment management, where we will continue to work to be the partner of choice. The Group continues to have a strong balance sheet and supportive shareholders. I am confident that we will continue to create value for both shareholders and other stakeholders through organic growth, service and operational excellence, alongside selective high quality acquisitions.

Alan Carruthers

Chairman

16 September 2020

CEO's review

Introduction

I am delighted with what we have achieved this year ("FY20") in both financial performance and strategy delivery. We have continued to execute our strategy with discipline and rigour, not only taking the actions we said we would, but also achieving the outcomes we promised, including the continuing improvement in our underlying profit margin. In parallel, we delivered robust investment performance, despite volatile markets, protecting our clients' wealth.

These have been unprecedented times with the impact of Brexit and then the COVID-19 pandemic causing widespread disruption and anxiety. Many have been affected by the recent uncertainty and, throughout, our priority has been to support our people and deliver for advisers and clients. When the COVID-19 pandemic led to lockdown, our flexible working approach and adaptable technology setup meant we were able to move to a remote working model seamlessly. We significantly increased our focus on the health and wellbeing of our people, providing reassurance and stability, allowing us to continue to operate at our best for those we serve in this uncertain and ever-changing world.

Given the challenges we have all faced, I would like to thank the advisers we work with and our clients for their continuing support, which we do not take for granted. I also want to thank all the people who work for Brooks Macdonald. What we have achieved over the past year has only been possible because of their continued passion, commitment and hard work - regardless of whether that work was in one of our offices or at home during lockdown. I am hugely grateful for all that they have done and continue to do.

As we move into a new stage of our strategy, I am confident that the actions we have taken over recent times have resulted in a more robust business, and I am excited by the potential for Brooks Macdonald going forward. We have a bold vision for Brooks Macdonald as the leading investment manager for intermediaries, leveraging our strengths and unique position in the market.

Delivering our strategy

Our current strategy was agreed by the Board in November 2017 to deliver improved returns from a sustainable and scalable business. Since then, through each phase, we have done what we said we would do - reinforcing the foundations of the business, improving our proposition for advisers and clients, increasing efficiency and effectiveness, and investing in our people and our infrastructure. We have delivered improving underlying profit and profit margins year-on-year and, in the last 9 months, we have complemented our organic growth strategy with two high-quality, value-enhancing acquisitions.

As we near completion of the strategy we laid out in 2017, what we have delivered has made Brooks Macdonald a more robust business. We have been through a period of change to set the business up for the future and in parallel have delivered strong financial performance. Despite the near-term external headwinds, we are ready to capitalise on the significant growth opportunities we see ahead.

We are now pivoting from a focus on preserving value towards value creation, moving into a new ambitious stage of our strategy. We look forward with confidence, building on what we have delivered over the past three years and leveraging our strengths, with our vision of Brooks Macdonald as the leading investment manager for intermediaries. To enable this, a core element of our strategy, alongside our robust Centralised Investment Process and our compelling investment proposition, is to transform our adviser experience and client service levels to be best in class. Our digital experience for advisers and clients - complementing our face-to-face relationships - will be market-leading, including automated onboarding, full adviser and client portal functionality, and bespoke reporting. We are working with a leading wealth management technology and services company to deliver this transformation and we are close to agreement on a partnership to materially upgrade our operations activities.

Continuing the trajectory of the improving financial results we have delivered over the last three years, we will aim for top quartile underlying profit margin over the medium term. We are committed to driving value creation through a return to organic growth, market-leading service and operational excellence, and further selective high-quality acquisitions.

Financial performance

FY20 was another year of strong financial performance for Brooks Macdonald. We increased our underlying profit margin, up 1.6 points to 21.2% (FY19: 19.6%), in line with our commitment. We also delivered record revenue and underlying profit levels of £108.6m and £23.0m respectively (FY19: £105.7m and £20.7m respectively).

Our year-end closing FUM reached a new high, up 4.1% to £13.7bn (FY19: £13.1bn), driven by £1.2 billion from the acquisition of Cornelian Asset Managers and £0.1 billion in investment performance which was partially offset by £0.8 billion of net outflows, related to the Group's focus on business quality and the proactive actions we took to position the business for future success.

Revenue grew by 2.7% to £108.6 million (FY19: £105.7 million), and underlying profit before tax by 11.1% to £23.0 million (FY19: £20.7 million). Statutory profit before tax was also up strongly, increasing 26.6% from £7.9 million to £10.0 million. A full reconciliation of underlying and statutory profit is given in the Financial review.

We also announced two high-quality and value-enhancing acquisitions - Cornelian, announced in November and completed in February, and the Channel Islands wealth management and funds business of Lloyds Banking Group, which we announced in June and expect to complete before the end of the calendar year.

Despite the challenging headwinds and reflecting the strength of the Group today, we took a "protect to thrive" approach through COVID-19 making the health and wellbeing of our people our first priority, while providing reassurance to our advisers and clients (see Our response to COVID-19 after the CEO's review) and continuing to deliver against our strategic priorities. Our approach has allowed us to operate successfully and we are emerging as a stronger organisation, excited and optimistic about what the future holds.

Investment performance and market conditions

Our investment performance through FY20 was strong, at 1.0% compared to a decline of 3.5% in the MSCI PIMFA Private Investor Balanced Index. This maintained our position of being ahead of ARC benchmarks for almost all risk profiles over 1, 3, 5 and 10 years.

Investment performance in FY20 was all the more creditable given the exceptionally difficult markets, with Brexit uncertainty in the first half being replaced by the COVID-19 pandemic in the second.

This has further demonstrated the value of active investment management in protecting our clients' wealth in difficult times.

During the first half of the financial year markets were broadly constructive but with bouts of instability around Brexit deadlines, Sino-US relations and a German manufacturing slump.

This environment was disrupted by the rise of COVID-19 which led to widespread volatility in financial markets and the economy. After the March lows, the rebound in equities has been driven by three factors: the relative attraction of equities versus the low yields of safe haven assets, investors looking ahead to greener economic pastures and ultra-accommodative global monetary and fiscal policy which is expected to supercharge the recovery.

Both anecdotally via investor surveys, and looking at money market fund AUM, there is significant investor cash still on the side-lines and we believe the desire to achieve a positive real yield will drive reallocations into equities helping to support valuations.

Review of business performance

Robin Eggar took over as sole Head of UK Investment Management ("UKIM"), our largest and most profitable business, in January 2020. He and his team have continued to deliver for advisers and clients across the UK, supporting an increase in underlying profit. The enhancements we have made in our offering have delivered positive organic flows in our specialised Bespoke Portfolio Service ("BPS") variants - Court of Protection, Responsible Investment Service, and Decumulation - and in our Managed Portfolio Service ("MPS"), particularly our relaunched Platform MPS, as well as initial traction in our business-to-business BM Investment Solutions offering. Overall, we saw good momentum in inflows, growing through the last three quarters of the year, with full year inflows holding up well, at over 90% of FY19 levels.

This achievement was despite a weakening in net flows in BPS and Funds which were affected by the impact on client sentiment of ongoing macroeconomic uncertainty and outflows of mainly lower margin business as a result of the Group's focus on business quality and actions taken to position the business for future success. As examples, during the year we moved our office from York to Leeds, to access a larger group of advisers and greater pools of wealth, and the Group's investment management agreement for the Grosvenor Consulting funds was terminated.

The mandate came to an end when we were unable to reach a satisfactory commercial arrangement with Grosvenor for the purchase of the sponsorship company attached to the funds. This accounted for £244 million of FUM corresponding to annualised revenues of circa £0.6 million.

Andrew Shepherd continued to lead the reinvigoration of our International business, evidenced by improving commercial performance, and reinforced by the announcement in June of the acquisition of Lloyds Banking Group's Channel Islands wealth management and funds business. In FY20, robust investment performance did not fully offset improving albeit slightly negative net flows, resulting in an overall FUM decline of 1.6%. International improved its underlying profit margin to 18.7% and the team has a clear plan to bring margins to UKIM levels in the medium term, with progress toward that target accelerated by the Lloyds transaction.

Financial Planning, our in-house Independent Financial Adviser, made good progress in its restructuring under the leadership of Adrian Keane-Munday. In FY20, he and his team succeeded in materially reducing its underlying loss margin and they continue to see a positive client response to the changes they are making.

Client need and demand for financial advice and high-quality investment management remains strong, driven by underlying demographics and increasing policy onus on the individual to save for retirement. We continue to see a strong opportunity both to build relationships with more advisers and to extend our relationships with our current advisers, thereby returning over time to strong organic net flows. Our confidence in the opportunity is based both on feedback from the advisers in our network and from broader survey data which show more advisers planning to outsource and those who already do, planning to outsource more.

People

We have continued to invest in our people throughout the year, supporting the talent we have in the business and bringing in new high-quality hires. We aim to attract and retain the best talent in the industry, and, over the year, we have taken on key hires across our adviser and client facing teams and built further functional capability. We have continued to hire through lockdown with over 30 hires joining us since March. Notably, Lynsey Cross, formerly COO of Amtrust International and CEO of specialist insurer ANV Group before that, was fully onboarded to the Group remotely as Chief Operating Officer, effective 1 May 2020.

While we are always looking for individuals who complement our current skills, today we have a full and talented team in place to deliver our strategy. The teams across our business represent a powerful mix of those with long-standing Brooks Macdonald experience and those who have joined us more recently, with fresh ideas and different expertise.

We communicate frequently with our people and also gather their feedback through town halls, more informal sessions and Group-wide employee engagement surveys. It is pleasing to see that the focus we have put on our people agenda has led to a significant increase in engagement metrics over the year. As a result, we are emerging from lockdown with stronger engagement, creating a stronger organisation, better able to capture the opportunities ahead.

Outlook

We have executed our strategy with discipline over the past three years, and Brooks Macdonald is now a more robust business for it, ambitious for the future. I am excited by our bold vision for the company as the leading investment manager for intermediaries. We are uniquely positioned with our focus on advisers and trustees, and we will leverage our strengths in this area. We will build on our success to date - driving organic growth, ensuring service and operational excellence, particularly through our planned partnership to transform the adviser experience and client service levels, and seeking selective high-quality acquisitions. We will also continue to deliver strong financial performance with improving margins.

The fundamental potential for Brooks Macdonald remains strong, despite the short-term headwinds and impact on client sentiment from both the pandemic and renewed Brexit uncertainty. The disruption caused by COVID-19 has reinforced the importance of high-quality financial advice and investment management and we are well positioned to help clients, and advisers, realise their ambitions and secure their futures. The disruption has created a window of opportunity for bold strategic moves, we have a strong team and are well positioned for the future.

I would like to finish by reiterating my thanks to the advisers we work with and our clients for their continuing support, as well as to our people. It has been a year of many challenges, but also many positives, and we are emerging stronger from lockdown. I look forward with confidence to what we can achieve together.

Caroline Connellan

CEO

16 September 2020

Our response to COVID-19

Since mid-March, the COVID-19 pandemic has caused widespread disruption. Our response was to adopt a "protect to thrive" approach, making the health and wellbeing of our people our first priority, while reassuring advisers and clients. This enabled us to move seamlessly to remote working and to continue to deliver for our advisers and clients in volatile markets. We stepped up our support with more frequent contact, particularly aimed at advisers, including daily investment bulletins and regular webinars on thematic topics relevant to investing in such an unprecedented economic environment. We continued active management of client portfolios and again delivered robust investment performance, protecting our clients' wealth.

Our "protect to thrive" approach included a commitment during lockdown of no redundancies and no furlough. We had frequent communication with our people including regular wellbeing "pulse" surveys to track how they were feeling, which allowed us to understand what was important to them, and respond to their needs and concerns, getting positive feedback. Our pre-existing flexible working approach and robust technology support for working outside the office meant we had comprehensive homeworking capabilities from day one of lockdown. Throughout the pandemic we have worked as close to normal as possible.

Alongside the challenges, the pandemic has also created opportunities. We have been able to move to a different approach to engage with advisers and clients - more virtual and more frequent - which has worked well. We have fast-tracked a number of process improvements and reduced our reliance on paper with increasing use of digital. Looking forward, we believe the disruption caused by the pandemic is creating opportunities for players willing to do things differently.

Since the financial year end, we have started reopening our offices reflecting our desire, as a relationship business, to start bringing our people together again and, in time, to meet face to face with advisers and clients. We have worked hard to ensure our workplaces are safe and are encouraging our teams, where appropriate, to start returning to the office while still benefitting from the flexibility of home working. Enabling a balance of office and home working allows us to move forward in a way that is right for our people, to perform as a business, and to play our part in helping the economy to recover.

Our strategy

We are nearing completion of the strategy we announced in 2017. We have done what we said we would do and delivered the promised outcomes. Now we are moving into a new stage of our strategy, pivoting from value preservation to value creation.

We have done what we said we would do

We reinforced the foundations of the business and took immediate actions to improve profit margins. We exited non-core businesses and upgraded our risk and operational management framework. We strengthened the senior management, both by developing and promoting internal talent and by bringing in key hires, particularly in the functional and back office areas to complement the existing adviser- and client-facing expertise. We tightened cost discipline and launched a comprehensive people strategy aimed at attracting and retaining the best people in industry.

We maintained and strengthened the business's focus on our clients and advisers, with propositions like our new Decumulation and Responsible Investment Service and our revamped Court of Protection offering.

We also started considering selective, high-quality acquisitions to complement our organic growth. We established strict criteria for acquisitions - quality businesses, good strategic and cultural fit, and compelling economics - and announced two excellent deals meeting these criteria. We announced the acquisition of Cornelian Asset Managers, the Edinburgh-based investment manager, in November and completed the acquisition in February. Integration is now largely complete. Then in June we announced the acquisition of Lloyds Banking Group's Channel Islands wealth management and funds business, supporting the reinvigoration of our International business.

Looking forward

Our vision for Brooks Macdonald is as the leading investment manager for intermediaries. A core element of that will be to transform our adviser experience and client service levels. As part of this, the digital experience delivered for advisers and clients - complementing our face-to-face relationships - will be market-leading with, for example, automated onboarding, full adviser and client portal functionality, and bespoke reporting. We are working with a leading wealth management technology and service company to deliver this transformation and we are close to agreement on a partnership to materially upgrade our operations activities.

In parallel, we will maintain and enhance our robust Centralised Investment Process, delivering consistent strong investment returns for clients. We will continue to seek new opportunities for growth, looking to grow FUM organically with new segments and partnerships, further adding to our compelling overall investment proposition. We have added specialised products to our Bespoke Portfolio Service and we are broadening and deepening our offering in model portfolios, funds and unitised solutions, and in our business-to-business Investment Solutions offering, where we tailor our products and services to the needs and requirements of advisers.

Our go-forward value creation strategy has been approved by the Board, and is based on the three value drivers of strong organic growth, driving towards service and operational excellence, and selective high-quality acquisitions. We will deliver further improvements in returns, building on the sustainable and scalable business model we are putting in place.

Organic growth

· Maintain and enhance our Centralised Investment Process, delivering consistent investment returns for clients

· Continue to add to our compelling investment proposition in specialised bespoke portfolios, model portfolios and fund/unitised solutions, and in business-to-business solutions for advisers, all supported by a high-impact Take To Market strategy

· Deliver market-leading adviser experience and client service levels, through our planned partnership with world-class wealth management technology and service company, and related improvements

Service and operational excellence

· Continue high levels of cost discipline, freeing up investment into service differentiators

· Complete roll-out of new client administration processes

· Benefit from efficiencies of new technology and services partnership

Selective high-quality acquisitions

· Criteria are high-quality businesses, good strategic and cultural fit, compelling economics

· Leverage the scalability of the platform we are putting in place

This is all underpinned by our investment in people and culture with the objective of attracting, engaging and retaining the best talent in the industry.

Financial review

Review of results for the year

The Group had a strong year, delivering record income and underlying profit against the backdrop of political and macroeconomic uncertainty pre-Christmas, which was then further exacerbated by the market disruption caused by the outbreak of the COVID-19 pandemic. Our disciplined approach to the management of the firm's financial resources means we entered the crisis well placed and the payment of the interim dividend in April 2020, reaffirmed the resilience of our business model and our confidence in the future opportunity. This disciplined management, combined with the successful acquisition and integration of Cornelian have led to the delivery of both record profits and an improved underlying profit margin, which increased from 19.6% to 21.2%.

The table below shows the Group's financial performance for the year ended 30 June 2020 with comparative periods and provides a reconciliation between the underlying results, which the Board considers to be a more appropriate reflection of the Group's performance, and the statutory results. A breakdown of the underlying adjustments is shown further down in the Financial review.

Group financial results summary

Restatement of comparative figures

The Group's results for FY19 have been restated in respect of the following two matters which have come to light during the finalisation of the Group's results for the year ended 30 June 2020 which have been reflected in the Consolidated financial statements. These are explained in brief below and further details provided in Note 4 to the Consolidated financial statements.

ACD fees and associated costs

FY19 figures have been restated in respect of the recognition of the Authorised Corporate Director ("ACD") fees and associated costs for one of the regulated OEICs managed by the Group. In prior years these were recognised on a grossed-up basis in revenue and non-staff costs respectively. During FY20, the accounting was corrected to only recognise the investment management fees due to the Group from the ACD under the Investment Management Agreements. This adjustment has no impact on the underlying and statutory profits before tax.

VAT on Platform MPS

The Group has been undergoing a review of its Managed Portfolio Service ("MPS"), with a view to seeking a ruling from HMRC that MPS is not subject to VAT. When conducting this review, it was noted that the fees received on MPS offered through third party platforms (Platform MPS) were in part not being correctly accounted for and historically treated as exempt from VAT. As a result, income derived from this service was overstated, the VAT liability arising on the fees collected was understated and consequently the Group has under-recovered its entitlement to input VAT credit. Since previously reported revenue from Platform MPS was overstated, it was concluded that the error required correction in the Consolidated financial statements. Accordingly, the Group recognised a prior year adjustment of £0.4 million in respect of FY17 and FY18 and restated the results for FY19 by £0.3 million.

Revenue

The Group's total revenue for FY20 increased by 2.7% to £108.6 million (Restated FY19: £105.7 million). This was driven by higher average FUM levels, particularly in H1 and the contribution from the Cornelian activities during the latter four months of the year (£3.1 million). FUM related revenue increased by 2.4% in line with the increase in average FUM on the quarterly billing dates. The overall yield remained stable at 79.2bps. Non-FUM related revenue increased by 8.1% to £6.7 million (FY19 £6.2 million) due to higher levels of third party-administration fees.

Revenue, yields and average FUM

1. Average FUM for Cornelian time weighted to four months for the purposes of the yield calculation.

BPS fee yield increased marginally to 67.9bps (FY19: 67.5bps) given the continued shift to "all in" fees. BPS non-fee income increased to 24.0bps (FY19 23.3bps) primarily due to higher interest income in H1, however this was somewhat offset by the lowering of the Bank of England base rate in H2. MPS saw a slight increase in income to £8.0 million (Restated FY19 £7.8 million) due to growth in platform MPS and this was after the restatement of FY19 for the VAT related error detailed above. Overall MPS yield dropped slightly due to the mix of business in MPS in custody. Funds income was down £0.5 million primarily due to the exit of the Grosvenor Funds business in H1, as we failed to agree terms to buy the fund given our focus on value and strict acquisition criteria.

International income dropped by 8.1% (£1.1 million) to £12.4 million (FY19: 13.5 million) due to average FUM being down by 1.3% and lower FX related transaction income. The drop in average FUM was primarily due to the prior year's exits and the business put in a much-improved net flows performance, although it remained marginally negative in the year.

The successful acquisition and integration of Cornelian meant income increased by £3.1 million over the final four months of the year.

Financial Planning (UK) income increased by 5.6% year on year to £3.8 million as the impact of new business and the recent repricing initiative started coming through. Third-party administration fees and other income were up 26.7% to £1.9 million largely driven by the repricing of this business to better reflect the actual costs of servicing. The third-party administration business is currently in wind down as we simplify the business and focus on our core offering.

Underlying costs

Total underlying costs have gone up marginally by 0.7% to £85.6 million (Restated FY19: £85.0 million). The underlying costs of Cornelian in the period were £1.7 million, therefore excluding Cornelian underlying costs fell to £83.9 million or by 1.3%. The Group continues to focus on cost discipline and had adopted a "save to spend" approach to costs, with efficiency targets being set each year as part of the annual planning cycle. These benefits are then reinvested into the client and adviser experience or to offset inflationary increases elsewhere. The Group did not utilise any of the Government COVID-19 related schemes in the year. Being a relationship led business, our staff are our key resource and we took the decision early on to adopt a "protect to thrive" approach to our staff and we have not used the Government furlough scheme or made anyone redundant since the beginning of the COVID-19 pandemic.

Staff costs

Total staff costs fell by £2.0 million or 3.8% during the year due to full year benefit of last year's efficiency and effectiveness programme coming through and this was after the inclusion of additional £0.7 million of staff costs from Cornelian. The fixed staff increase of 7.3% to £39.8 million was driven by last year's changes to investment manager compensation, where we removed variable commission payments and replaced them with higher base salaries and higher discretionary bonus opportunities, inflationary pay increases to the rest of staff and the addition of Cornelian. The Group also continued to invest in talent, strengthening the highly skilled and experienced teams across the business and laying down strong foundations to deliver on our growth agenda whilst enabling us to better serve our clients and advisers. Variable staff costs fell by 30.3% to £10.8 million due to the changes in compensation for investment managers, however the cash bonus pool and share based payment charge for the year were broadly flat given the challenging macroeconomic background and our focus on protecting the jobs.

Non-staff costs

Non-staff costs amounted to £35.0 million, an increase of 8.0% on the prior year including the addition of £1.0 million for Cornelian non-staff costs. Therefore, excluding Cornelian non-staff costs increased by £1.6 million or 4.9%. The bulk of this increase, £1.1 million was driven by the FSCS levy which increased by 83.3% on the prior year, now reaching £2.0 million for FY20 (FY19: £1.2 million) with a further £0.2 million related to a prior year levy true up. The FSCS levy is becoming an ever more prominent cost driver across the sector and at such levels is not considered directly commensurate to the Group's regulated activities. Brooks Macdonald is a member of the FSCS working group established by the Investment Association and we continue to engage in discussing alternative ways of structuring and charging the levy in future years. The other contributors to this increase include higher IT spend as we invest in cyber security risk mitigation, and higher insurance and audit costs although these were in part offset by lower travel and entertainment spend in the second half due to the COVID-19 related lockdown.

Combined, the above gave rise to an underlying profit before tax of £23.0 million, representing an increase of 11.1% on the previous year and resulting in a profit margin of 21.2% (Restated FY19: 19.6%) delivering on our strategic objective of incremental progression in margin and the delivery of operational gearing.

The statutory profit before tax from continuing operations is also higher compared to the prior year at £10.0 million (Restated FY19: £8.3 million) giving rise to a statutory profit margin of 9.2% compared to 7.9% reported in FY19 (as restated). The underlying adjustments for the year of £13.0 million, comprising one-off costs, are broadly in line with the quantum of adjustments recognised in the prior year (FY19: £12.4 million) although the mix has changed, with a significant portion of the items now being related to acquisitions and the growth agenda, rather than last year's restructuring costs. A breakdown of the underlying adjustments together with an explanation of each item is included further down in the Financial review.

FUM movement in the year

1. Closing value of Cornelian Asset Managers Limited's FUM as at 31 March 2020.

2. Capital-only index.

Over the course of the year, FUM increased by £0.5 billion or 4.1%. This includes the assets acquired from Cornelian in February 2020 of £1.2 billion and positive investment performance of £0.1 billion, partly offset by organic net outflows of £0.8 billion. The net outflows were partly driven by softer client sentiment in the light of the macroeconomic uncertainty during the first half and market volatility arising from the outbreak of the COVID-19 pandemic in the latter part of the year, and the effect of outflows of mainly lower margin business as a result of the Group's focus on efficiency and business quality and the actions taken to support medium term value creation. Overall investment performance for the year to June of 1.0% was well ahead of the MSCI PIMFA Private Investor Balanced Index which declined by 3.5% over the same period.

As noted below, within UKIM, and including the impact of the acquired Cornelian assets, the BPS core offering remained stable over the year closing at £8.2 billion and we have seen decent growth in our MPS (6.1%) and Funds (29.5%) business. Within our International business, we have seen much reduced outflows, with a slight net inflow position during the last quarter as the business regains momentum.

Closing FUM by service and segment

The table below shows the closing FUM broken down by segment and by our key services within UKIM at 30 June 2020 and comparative periods.

Segmental analysis

The Group reports its results across three key operating segments, UK Investment Management ("UKIM"), International and Financial Planning. The tables below provide a breakdown of the annual performance broken down by these segments, with comparatives. The results of Cornelian since acquisition have been included in the UKIM segment.

1. Comparative segmental results have been restated to reflect the correct recognition of the Authorised Corporate Director fees and associated costs in respect of one of the Group's managed OEICs and the correct VAT treatment on the revenues recognised on the Managed Portfolio Service offered through third party platforms.

All three business segments reported an improvement in performance during the year compared to FY19. UKIM and Financial Planning recognised an increase in revenues during the period, up by 4.5% and 5.6% respectively.

Financial planning made decent progress against its three-year plan to return to profitability with further improvements expected in FY21.

International reported a decline in revenues of 8.2% driven by the marginal decrease in average FUM noted above and lower foreign exchange related transactional income. The business reinvigoration under Andrew Shepherd's leadership continues to progress well and the recent acquisition of the Lloyds Banking Group's Channel Islands wealth management and fund business will provide further positive momentum over the year ahead.

Reconciliation between underlying and statutory profits

Underlying profit before tax is considered by the Board to be a more accurate reflection of the Group's performance when compared to the statutory results as this excludes income and expense categories which are deemed of a non-recurring nature or a non-cash operating item. Reporting at an underlying basis is also considered more appropriate for external analyst coverage and peer group benchmarking allowing a more accurate like-for-like comparison. A reconciliation between underlying and statutory profit before tax for the year ended 30 June 2020 with comparatives is shown in the table below:

Goodwill impairment (£4.5 million charge)

Goodwill is reviewed annually for impairment based on the carrying value of the asset compared to its expected recoverable amount. The impairment charge recognised in the year relates to the Levitas transaction. Last year, the Group entered into a new five-year partnership with the distributor of the Levitas fund that carried a lower fund sponsorship fee, the aim of this reduction was to enhance FUM flows and deepen the relationship. Unfortunately for reasons beyond our control, the anticipated inflows have not been forthcoming and in fact the fund has recorded net outflows in the period therefore impacting its rate of growth and future cash flows. This partnership is still active and FUM flows could improve in due course, however given current market conditions and the situation at our partner firm, we have reassessed the carrying value of this intangible asset. As a result, the associated goodwill carrying value is no longer supported and triggered an impairment charge in the year. Refer to Note 9 to the Consolidated financial statements for more details.

Acquisitions related costs (£4.2 million charge)

i. Deal and structuring and legal costs (£2.8 million charge)

These represent costs incurred in relation to the acquisition of Cornelian Asset Managers Group Limited announced on 22 November 2019 and the acquisition of the Lloyds Banking Group's International Channel Islands wealth management and funds business announced on 24 June 2020. The costs incurred include corporate finance services, legal fees and due diligence fees.

ii. Integration and staff retention costs (£1.4 million charge)

These comprise the costs incurred in integrating the Cornelian acquisition which completed on 28 February 2020 into the Brooks Macdonald business including migration of client accounts, IT, systems and processes. It also includes payments made to key Cornelian employees who are being retained by the Group for a short period of time to assist with the integration of the businesses.

The above costs are being excluded from the Group's underlying performance as they were one-off in nature.

Amortisation of client relationship contracts and contracts acquired with fund managers (£2.9 million charge)

These intangible assets are created in the course of acquiring funds under management and are amortised over their useful life, which has been assessed to range between 5 and 20 years. The charge for the year includes the newly acquired investment management contracts arising on the Cornelian transaction. This amortisation charge has been excluded from the underlying profit since it is a significant non-cash item. Refer to Note 9 to the Consolidated financial statements for more details.

Head office relocation costs (£1.2 million charge)

The Group's previous London offices based in Welbeck Street and Bevis Marks have been relocated to a single site at 21 Lombard Street in the City of London. As a result of the move, dual running costs were incurred on the three locations until the office leases for Bevis Marks and Welbeck Street came to an end in March 2020. The dual running costs and other costs associated with the move have been excluded from underlying profit in view of their one-off nature.

Changes in fair value of consideration and related disposals (£0.2 million charge)

This comprises the fair value measurement arising on deferred payments and receipts from previous acquisitions and disposals carried out by the Group, together with their associated net finance costs and costs of disposal where applicable.

FY19 - Restructuring charge

This relates to the efficiency and effectiveness programme announced in January 2019. The Group identified a range of opportunities to streamline and remove duplication from core processes. The headcount reduction resulted in redundancy costs, payment in lieu of notice, settlement and other restructuring-related costs. These have been excluded from underlying earnings in view of their one-off nature.

FY19 - Client relationship contracts impairment

This impairment charge relates to the value of Spearpoint client relationships following the previously disclosed loss of a client-facing team. Refer to Note 9 to the Consolidated financial statements for more details.

Taxation

The Group's corporation tax charge on underlying profits for the period was £4.6 million (Restated FY19: £3.6 million) representing an effective tax rate of 20.0% (Restated FY19: 17.8%). The increase in the effective tax rate is largely due to an intangible asset impairment recognised in the prior period which is not allowable for tax purposes. The effective tax charge for the current year also includes the recognition of deferred tax on the acquired client-relationship intangible assets as part of the Cornelian transaction. Details on taxation are provided in Note 5 of the Consolidated financial statements.

Earnings per share

The Group's basic statutory earnings per share for the year ended 30 June 2020 was 43.2p (Restated FY19: 39.7p). On an underlying basis, diluted earnings per share of 123.7p is broadly flat on the prior year (Restated FY19: 123.5p) largely due to a higher weighted average number of shares in issue during FY20 following the share placing carried out by the Group in November 2019 and the shares issued as part of the Cornelian acquisition at the completion date on 28 February 2020. Details on the basic and diluted earnings per share are provided in Note 7 of the Consolidated financial statements.

Dividend

The Group has a progressive dividend policy growing dividends in line with underlying earnings. The Board recognises the importance of dividends to shareholders and the benefit of providing sustainable shareholder returns. In determining the level of dividend in any year the Board considers a number of factors such as the level of retained earnings, future cash commitments, statutory profit cover, capital and liquidity requirements and the level of profit retention required to sustain the growth of the Group.

Considering the Group's strong balance sheet and the current macroeconomic uncertainty, the Board has proposed a final dividend of 32.0p per share (FY19: 32.0p). Taking into account the interim dividend of 21.0p per share (H1 FY19: 19.0p), this results in a total dividend for the year of 53.0p per share (FY19: 51.0p), an overall increase of 3.9%. Refer to Note 8 to the Consolidated financial statements for more details. The recommended dividend is subject to shareholders' approval, which will be sought at the Company's Annual General Meeting on 27 October 2020.

Financial position and regulatory capital

The Group's financial position remains strong with net assets of £123.5 million at 30 June 2020 (Restated FY19: £86.9 million) and tangible net assets (net assets excluding intangibles) up to £39.7 million (Restated FY19: £36.7 million). As at 30 June 2020, the Group had regulatory capital resources of £46.6 million (Restated FY19: £39.0 million). The own funds calculation take into account the respective years' profit after tax as these are deemed to be verified at the date of publication of the annual results. The Group continues to be well capitalised with a total capital ratio of 20.7% over our Pillar I risk exposure requirement.

Brooks Macdonald Asset Management Limited, the Group's main operating subsidiary, is an IFPRU 125k Limited Licence Firm regulated by the Financial Conduct Authority ("FCA"). In view of this, the Group is classified as a regulated group and subject to the same regime. As required under FCA rules, and those of both the Jersey and Guernsey Financial Services Commission, the Group assesses its regulatory capital and liquidity on an ongoing basis through the Internal Capital Adequacy Assessment Process ("ICAAP") and Adjusted Net Liquid Asset ("ANLA") assessments, which include performing a range of stress tests and scenario analysis to determine the appropriate level of regulatory capital and liquidity that the Group needs to hold. Surplus levels of capital and liquidity are forecast, taking into account known outflows and proposed dividends to ensure that the Group maintains sufficient capital and liquidity at all times.

The FY19 ICAAP review was conducted for the period ended 30 June 2019 and signed off by the Board in December 2019. Regulatory capital forecasts are performed monthly and take into account expected dividends and intangible asset acquisitions and disposals as well as budgeted and forecast trading results.

The Group's Pillar III disclosures are published annually on the Group's website (www.brooksmacdonald.com) and provide further details about the Group's regulatory capital resources and requirements. The Group monitors a range of capital and liquidity statistics on a daily and monthly basis.

Cash flow and capital expenditure

The Group continues to have strong levels of cash generation from continuing operations. Total cash resources at the end of the year were £50.2 million (FY19: £34.6 million). The Group had no borrowings at 30 June 2020 (FY19: £nil).

During the year ended 30 June 2020, £1.7 million was capitalised on leasehold fit out works, office furniture and equipment as part of the fit out of the Group's new head office at 21 Lombard Street, London. Moreover, £1.6 million was spend during the year on the further development of the Group's adviser and client portal, risk systems and the core operational platform.

Financial outlook

The current outlook is highly uncertain given the ongoing impact of the COVID-19 pandemic, however the Group is well placed to continue its success. We have proven the resilience of the Group's business model and operating platform and this gives us a high degree of confidence in our ability to deliver for shareholders, advisers and clients in the months and years ahead. The continued growth in our core business profitability, combined with the successful integration of Cornelian and the acquisition of Lloyd's Channel Islands wealth management and funds business will allow us to continue to grow earnings, whilst investing in further enhancements to the adviser and client experience. The Group remains focused on the delivery of improved growth in organic net flows whilst actively looking for further high quality, accretive acquisitions.

Ben Thorpe

Group Finance Director

16 September 2020

Risks

Taking a dynamic approach to risk management

Over the past year, the Group has continued in its commitment to invest in compliance and risk management capabilities. Furthermore, the Group has sustained its focus on embedding the risk management framework, through greater business collaboration, streamlined analytics and enhanced governance reporting. This has led to efficient, data driven and evidenced based risk management, whilst facilitating the transition to an agile and dynamic approach to identifying, assessing, managing and monitoring risks. Not only has this proven valuable to the Group's acquisition of Cornelian Asset Managers and the Lloyd's offshore wealth and funds business, but also during the COVID-19 pandemic. Overall, the Group remains well capitalised and liquid with significant buffers above all regulatory requirements.

How we manage risk

The Group Risk Management Framework ("RMF")

Risk management starts with oversight through an appropriate governance structure using a board and committee structure, with individual and collective roles and delegated authorities and a set of core policies to provide guidance to staff.

Effective risk management relies on insight through robust and timely management information. We manage our risks by learning lessons from past events such as errors, breaches, near misses and complaints, by conducting point-in-time risk assessments in the present and attempting to predict what the future risk landscape might look like through our suite of key indicators.

The risk management methodology within the Group's risk management framework consists of the following six interlinked steps:

Risk identification. This takes place through regular business monitoring and periodic reviews, including risk mapping exercises and the risks arising from change or new products and services.

Risk appetite. Once we have identified risks, we set an appetite for each material risk. This defines the amount of risk that the Board is prepared to accept in order to deliver its business objectives. Risk appetite reflects culture, strategic goals and the existing operating and control environment.

Risk analysis. Having set the risk appetite, we can assess the impact and probability of each material risk against the agreed risk appetite. This can include the quantification of capital risk as part of the Internal Capital Adequacy Assessment Process ("ICAAP").

Assess controls. We also assess the effectiveness of controls in reducing the probability of a risk occurring or, should it materialise, in mitigating its impact.

Additional actions. Where differences exist between our risk appetite and the current residual risk profile, we take action either: to accept, avoid or transfer part or all of those risks which are outside our risk appetite; or to reconsider the risk appetite.

Reporting. Ongoing reporting of risks to senior management provides insight to inform decision-making and allocation of resources to achieve business objectives.

Overarching Risk Appetite Statement

• The Group's Overarching Risk Appetite ("ORAS"), as defined by the Board, sets out the acceptable level of current & emerging risk we are willing to take to achieve our strategic business objectives. It provides a framework to allow the Group to effectively balance the risk and reward relationship in decision making.

• Clients, both existing and prospective, are at the heart of everything we do. As such, we will operate a sustainable business that conducts itself in a reputable and prudent manner, taking into account the interests of our clients through providing products and services suited to their needs and risk profile, which demonstrate value for money.

• As the business continues to grow through sustainable organic growth and strategic value-adding acquisitions, the ORAS will help ensure our key stakeholder obligations are met, supported by internal policies and regulatory requirements. We commit to using this framework to ensure we make strategic and business decisions that do not exceed our overarching risk appetite.

• In all of the Group's decisions and operations, we balance risk versus reward and we consider the following three dimensions:

Client Outcome

• We will put client interests at the heart of everything we do to ensure appropriate client outcomes.

Control Environment

• We will, at all times, operate within our risk appetite, operational risk parameters and regulatory framework, ensuring a robust control and oversight environment.

Financial Performance and Resources

• We will optimise profitability and use resources efficiently to drive financial performance.

• We will, at all times, maintain adequate capital and liquid assets to meet financial and funding obligations as they fall due.

• We will invest in the development and wellbeing of our employee.

Key risks

We have identified our risks at Group and business line levels to help manage our key risks in a consistent and uniform way with oversight from relevant Committees and Boards.

Group level risks

Business level risks

New and emerging risks

Consolidated statement of comprehensive income

For the year ended 30 June 2020

1. See Note 4 for details regarding the restatement as a result of the Authorised Corporate Director ("ACD") fees and associated costs and also the output VAT on Platform MPS.

2. The comparative weighted average number of shares and therefore basic and diluted earnings per share have been restated for the effect of the share placing issued in November 2019.

Consolidated statement of financial position

As at 30 June 2020

1. See Note 4 for details regarding the restatement as a result of the output VAT on Platform MPS.

The Consolidated financial statements were approved by the Board of Directors and authorised for issue on 16 September 2020, and signed on their behalf by:

Caroline ConnellanCEO

Ben ThorpeGroup Finance Director

Company registration number: 4402058

Consolidated statement of changes in equity

For the year ended 30 June 2020

1. See Note 4 for details regarding the restatement as a result of the output VAT on Platform MPS.

Consolidated statement of cash flows

For the year ended 30 June 2020

Notes to the consolidated financial statements

For the year ended 30 June 2020

1. General information

Brooks Macdonald Group plc ("the Company") is the Parent Company of a group of companies ("the Group"), which offers a range of investment management services to private high net worth individuals, pension funds, institutions, charities and trusts. The Group also provides financial planning as well as offshore investment management and acts as fund manager to two regulated Open-Ended Investment Companies ("OEICs") (the IFSL Brooks Macdonald Fund and the SVS Cornelian Investment Funds) providing a range of risk-managed multi-asset funds and a specialised absolute return fund.

The Company is a public limited company, incorporated and domiciled in the United Kingdom under the Companies Act 2006 and listed on AIM. The address of its registered office is 21 Lombard Street, London, EC3V 9AH.

2. Principal accounting policies

The general accounting policies applied in the preparation of these Financial statements are set out below. These policies have been applied consistently to all years presented, unless otherwise stated.

a. Basis of preparation

The Group's Consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and IFRS Interpretations Committee ("IFRS IC") interpretations, as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. The Financial statements have been prepared on the historical cost basis, except for the revaluation of financial assets at fair value through other comprehensive income, financial assets and financial liabilities at fair value through profit or loss and deferred consideration such that they are measured at their fair value.

At the time of approving the Financial statements, after making enquiries and the work performed and actions already taken by the Group in response to the COVID-19 pandemic, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Financial statements.

b. Basis of consolidation

The Group's Financial statements are a consolidation of the financial statements of the Company and its subsidiaries. The underlying financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. Subsidiaries and structured entities are all entities controlled by the Company, deemed to exist where the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of the subsidiaries are included from the date on which control is transferred to the Group to the date that control ceases.

All intercompany transactions and balances between Group companies are eliminated on consolidation.

The Group has interests in structures entities, with one consolidated structured entity, being the Brooks Macdonald Group Employee Benefit Trust. The Group has interests in other structured entities as a result of contractual arrangements arising from the management of assets on behalf of its clients, but are not consolidated as the Group does not commit to financially support its funds, nor guarantee for the repayment of any borrowings.

c. Changes in accounting policies

The Group's accounting policies that have been applied in preparing these Financial statements are consistent with those disclosed in the Annual Report and Accounts for the year ended 30 June 2019, except as explained below.

New accounting standards, amendments and interpretations adopted in the year

In the year ended 30 June 2020, the Group adopted one new standard being IFRS 16 'Leases'. The Group did not adopt any other new standards and amendments issued by the International Accounting Standards Board ("IASB") or interpretations issued by the IFRS IC in the year ended 30 June 2020.

IFRS 16 'Leases'

IFRS 16 removes the classification of leases as either operating leases or finance leases for lessees. The standard introduces a single, on-balance sheet accounting model, which requires:

• recognition of a right of use asset and corresponding lease liability with respect to all lease arrangements in which the Group is the lessee, except for short-term leases and leases of low value assets;

• recognition of a depreciation charge on the right of use asset on a straight-line basis over the shorter of the expected life of the asset and the lease term; and

• recognition of an interest charge arising from the unwinding of the discounted lease liability over the lease term.

Transition

The Group holds property leases in relation to offices which have previously been considered operating leases under IAS 17. On transition to IFRS 16, the Group was permitted to choose from the following transition approaches:

• full retrospective transition method, whereby IFRS 16 is applied to all its contracts as if it had always applied; or

• a modified retrospective approach with optional practical expedients.

The Group has chosen to apply IFRS 16 using the modified retrospective approach resulting in no restatement of the comparative information which continues to be reported under IAS 17 and IFRIC 4.

On adoption, lease agreements have given rise to both a right of use ("ROU") asset and a lease liability. For leases previously classified as operating leases at 30 June 2019 under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 July 2019. ROU assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments on the Group's Consolidated statement of financial position at the date of transition. On 30 June 2019, the Group had prepaid expenses and lease incentive balances in line with IAS 17 on the Consolidated statement of financial position, to be unwound over the life of remaining leases. The prepaid and lease incentive balances at 30 June 2019 have been recognised as a depreciation charge to the ROU asset on day one of the transition to IFRS 16.

The lease liability is subsequently measured by reducing for lease payments made, adjusting the carrying amount to reflect the interest charge and any reassessment or lease modifications.

The ROU assets are subsequently measured at cost, less accumulated depreciation on a straight-line basis over the shorter of the expected life of the asset and the lease term, adjusted for any remeasurements of the lease liability, for example a change in lease term, or payments based on an index. In accordance with IAS 36, ROU assets are assessed for indicators of impairment at the end of each reporting period.

The Group has used the following practical expedients when applying IFRS 16 to leases that were previously classified as operating leases under IAS 17 at 30 June 2019:

• applied the practical expedient to grandfather the assessment of which contracts are leases and applied IFRS 16 only to those that were previously identified as leases. Contracts not identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether there is a lease. The identification of a lease under IFRS 16 was therefore only applied to contracts entered into (or modified) on or after 1 July 2019;

• the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;

• the accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short-term leases. The Group recognises the lease payments associated with these leases as an administrative expense in the Consolidated statement of comprehensive income on a straight-line basis over the lease term;

• the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and

• reliance on previous assessments on whether leases are onerous.

Impact on the relevant extracts from the Consolidated statement of financial position as at 1 July 2019

The adjustments to the Consolidated statement of financial position reflect the initial application of IFRS 16.

The table below presents operating lease commitments disclosed at 30 June 2019 and lease liabilities recognised at 1 July 2019.

On transition to IFRS 16 on 1 July 2019, the current lease liability was £530,000 and the non-current lease liability was £1,269,000.

Impact on financial statements for the year ended 30 June 2020

During the year ended 30 June 2020, the Group recognised an interest charge arising on lease liabilities of £304,000 and a depreciation charge on the ROU assets of £1,256,000. Included within the interest charge and depreciation charge was £236,000 and £763,000 respectively for new leases that commenced during the year ended 30 June 2020.

An analysis of ROU assets is presented in Note 10 and lease liabilities presented in Note 13.

The Group applied judgement in calculating the discount rate to be used in computing lease liabilities. The Group performed research into issued corporate debt in the comparable industry given the Group does not have any debt of its own, resulting in estimating its incremental borrowing rate of 4.5% to measure lease liabilities.

Other new standards, amendments and interpretations listed in the table below were newly adopted by the Group but have not had a material impact on the amounts reported in these Financial statements. They may however impact the accounting for future transactions and arrangements.

New accounting standards, amendments and interpretations not yet adopted

A number of new standards, amendments and interpretations, which have not been applied in preparing these Financial statements, have been issued and are effective for annual years beginning after 1 July 2019:

1. Not yet endorsed by the EU.

The impact of these changes is currently being reviewed and there is no intention to early adopt.

d. Critical accounting estimates and judgements

The preparation of financial information requires the use of assumptions, estimates and judgements about future conditions. Use of currently available information and application of judgement are inherent in the formation of estimates. Actual results in the future may differ from those reported. In this regard, the Directors believe that the accounting policies where important estimations are used relate to the measurement of intangible assets, deferred consideration, the estimation of the fair value of share-based payments and client compensation provisions.

There have been no critical judgements required in applying the Group's accounting policies in this period, but there have been the use of important estimations detailed separately below.

The underlying assumptions made are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised only if the revision affects both current and future periods.

Further information about key assumptions and sources of estimation uncertainty is set out below.

Intangible assets

The Group has acquired client relationships and the associated investment management contracts as part of business combinations, through separate purchase or with newly employed teams of fund managers, as described in Note 9. In assessing the fair value of these assets the Group has estimated their finite life based on information about the typical length of existing client relationships. Contracts acquired with fund managers and acquired client relationship contracts are amortised on a straight-line basis over their estimated useful lives, ranging from 5 to 20 years.

Goodwill recognised as part of a business combination is reviewed annually for impairment, or when a change in circumstances indicates that it might be impaired. The recoverable amounts of cash generating units are determined by value in use calculations, which require the use of estimates to derive the projected future cash flows attributable to each unit. Details of the more significant assumptions are given in Note 9.

Deferred consideration

As described in Note 12, the Group has a deferred consideration balance in respect of the acquisition of Levitas Investment Management Services Limited in July 2014 and Cornelian Asset Managers Group Limited in February 2020. Deferred consideration is recognised at its fair value, being an estimate of the amount that will ultimately be payable in future periods. For Levitas, as at 30 June 2020, there is one fixed payment remaining. For Cornelian, the deferred consideration has been calculated allowing for estimated growth in the acquired funds and estimated cost savings, discounted by the estimated interest rate.

Share-based payments

The Group operates various share-based payment schemes in respect of services received from certain employees. Estimating the fair value of these share-based payments requires the Group to apply an appropriate valuation model and determine the inputs to that model. The charge to the Consolidated statement of comprehensive income in respect of share-based payments is calculated using assumptions about the number of eligible employees that will leave the Group and the number of employees that will satisfy the relevant performance conditions. These estimates are reviewed regularly.

Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event, where it is probable that it will result in an outflow of economic benefits and can be reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation.

Where the outflow is not probable or cannot be reliably measured, the potential obligation is disclosed as a contingent liability in the Financial statements.

Insurance recoveries relating to legal fees are recognised when, and only when, it is virtually certain that reimbursement will be received if the corresponding obligation is settled. Reimbursements received are disclosed net in the Consolidated statement of comprehensive income and gross in the Consolidated statement of financial position.

The Group may receive complaints from clients in relation to the services provided. Complaints are assessed on a case-by-case basis and provisions are made where it is judged to be likely that compensation will be paid.

As described in Note 14, the Group has recognised a provision in respect of exceptional costs of resolving legacy matters. The Group has a present obligation relating to a number of discretionary portfolios formerly managed by Spearpoint which was acquired by the Group in 2012 and the provision has been reliably measured at the value of expenditures expected to be required to settle the obligation.

3. Segmental information

For management purposes the Group's activities are organised into three operating divisions: UK Investment Management, International and Financial Planning. The Group's other activity, offering nominee and custody services to clients, is included within UK Investment Management. These divisions are the basis on which the Group reports its primary segmental information to the Executive Committee, which is the Group's chief operating decision-maker. In accordance with IFRS 8 'Operating Segments', disclosures are required to reflect the information which the Board of Directors uses internally for evaluating the performance of its operating segments and allocating resources to those segments. The information presented in this note is consistent with the presentation for internal reporting.

The UK Investment Management segment offers a range of investment management services to private high net worth individuals, pension funds, institutions, charities and trusts. The International segment is based in the Channel Islands and offers a similar range of investment management and financial planning services as the UK Investment Management segment and the Financial planning segment. Financial planning offers wealth management services to high net worth individuals and families, giving independent "whole of market" financial advice enabling clients to build, manage and protect their wealth. The Group segment principally comprises the Group Board's management and associated costs, along with the consolidation adjustments.

Following the acquisition of Cornelian (Note 6), the activities since acquisition have been included in the UK Investment Management segment.

Revenues and expenses are allocated to the business segment that originated the transaction. Sales between segments are carried out at arm's length. Centrally incurred expenses are allocated to business segments on an appropriate pro rata basis.

1. See Note 4 for details regarding the restatement to the UK Investment Management segment as a result of the Authorised Corporate Director ("ACD") fees and associated costs and also the output VAT on Platform MPS.

4. Revenue

Portfolio management fee income comprises revenue earnt in the UK Investment Management and International segments (Note 3). The financial services commission and advisory fees are generated by the Financial Planning Segment, and some of this revenue is also generated in the International segment. Fund management fees revenue is earnt in the UK Investment Management segment.

Restatement - ACD fees and associated costs

During the year ended 30 June 2020, the Group noted that the recognition of the Authorised Corporate Director ("ACD") fees and associated costs in respect of the IFSL Brooks Macdonald Funds, one of the regulated OEICs managed by the Group, were not in line with the investment management agreement between the Group and the ACD. The revenue recognised in the Group was grossed up whereby the Annual Management Charge and other associated fees levied by the ACD to the OEICs were recognised as revenue, and the fees that are subsequently paid out from this fee recognised as expenses. The Group has no legal obligation to pay the ACD fees and other fund associated costs; therefore, only the investment management fee paid to the Group for acting as the OEIC's Investment Manager should have been recognised in the Group's books as a revenue item. As a result, for the year ended 30 June 2019, reported revenue and costs were overstated by £1,212,000. Accordingly, the Consolidated statement of comprehensive income has been restated by this amount to reflect the correct accounting treatment. There was no impact to total comprehensive income and retained earnings. The restatement has impacted the UK Investment Management segment in Note 3, the Portfolio management fee income in the revenue table above and the revenue generated in the United Kingdom per Note 4(a).

Restatement - VAT on Platform MPS

In the light of recent case law, the Group has been undergoing a review of its Managed Portfolio Service ("MPS"), with a view to seeking a ruling from HMRC that MPS is not subject to VAT. When conducting this review, it was noted that the fees received on MPS offered through third party platforms ("Platform MPS") were not being correctly accounted for and historically treated as exempt from VAT. As a result, income derived from this service was overstated, the VAT liability arising on the fees collected was understated and consequently the Group has under-recovered its entitlement to input VAT credit. Upon identification of this error, the Group notified HMRC of the situation and is currently awaiting a response on the resolution of the matter. Since previously reported revenue from Platform MPS was overstated, the Directors concluded it prudent to rectify the error in these Consolidated financial statements.

Accordingly, the Group recognised a prior year adjustment to reduce revenue by £408,000 for the output VAT on platform MPS and reduce administrative costs by £77,000 for the entitlement to input VAT credit. The decrease to profit before tax as a result of this restatement for the year ended 30 June 2019 was £331,000. This reduction in profit before tax has resulted in the income tax expense to be reduced by £63,000. The total reduction to total comprehensive income for the year ended 30 June 2019 was £268,000. The restatement has impacted the UK Investment Management segment in Note 3, the Portfolio management fee income in the revenue table above and the revenue generated in the United Kingdom per Note 4(a). The Consolidated statement of financial position at 30 June 2019 was restated to reflect this increase in trade and other payables to recognise the additional VAT liability due to HMRC of £331,000 and reduce current tax liabilities by the reduced income tax expense of £63,000. The opening balances to the comparative information at 1 July 2018 were also restated to reflect the reduction in retained earnings of £431,000 and an increase in trade and other payables of £431,000.

a. Geographic analysis

The Group's operations are located in the United Kingdom and the Channel Islands. The following table presents external revenue analysed by the geographical location of the Group entity providing the service.

b. Major clients

The Group is not reliant on any one client or group of connected clients for the generation of revenues.

5. Taxation

The tax charge on profit for the year was as follows:

1. See Note 4 for details regarding the restatement as a result of the output VAT on Platform MPS.

Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

The tax on the Group's profit before tax differs from the theoretical amount that would arise using the time apportioned tax rate applicable to profits of the consolidated entities in the UK as follows:

1. See Note 4 for details regarding the restatement as a result of the output VAT on Platform MPS.

During the year, the Group made a claim for research and development tax relief in relation to qualifying expenditure on software development incurred in the year ended 30 June 2019. This resulted in a reduction in the Corporation Tax liabilities in the respective years, and a repayment of £87,000 (FY19: £325,000) is due from HM Revenue and Customs. The Group will consider whether claims can also be made for qualifying expenditure incurred in the year ended 30 June 2020 and thereafter in due course.

The deferred tax charges/(credits) for the year arise from:

On 1 April 2017, the standard rate of Corporation Tax in the UK was reduced to 19%. As a result the effective rate of Corporation Tax applied to the taxable profit for the year ended 30 June 2020 is 19% (FY19: 19%).

It was announced on 11 March 2020 (and substantively enacted on 17 March 2020) that the UK Corporation Tax rate would remain at 19% and not reduce to 17% (the previously enacted rate) from 1 April 2020. As a result, the relevant deferred tax balances have been remeasured. Deferred tax assets and liabilities are calculated at the rate that is expected to be in force when the temporary differences unwind, but limited to the extent that such rates have been substantively enacted. The tax rate used to determine the deferred tax assets and liabilities is therefore 19% (FY19: 17%) and will be reviewed in future years subject to new legislation.

6. Business combinations

On 28 February 2020, the Group acquired the entire share capital of Cornelian Asset Managers Group Limited ("Cornelian"), an Edinburgh based independent, well-established wealth manager with national distribution reach. Cornelian Asset Managers Group Limited had two wholly owned subsidiaries: Cornelian Asset Managers Limited and Cornelian Asset Managers Nominees Limited, which also formed part of the Group on acquisition.

The acquisition has been accounted for using the acquisition method and details of the purchase consideration are as follows:

i. The Group issued 1,690,141 ordinary shares in November 2019 to fund the cash consideration, based on the share price on 21 November 2020 of £18.25 discounted by £0.50 to £17.75 per share.

ii. The Group issued 453,172 ordinary shares to the previous shareholders of Cornelian Asset Managers Group Limited at a price of £19.86 per share, based on the share price at 28 February 2020.

iii. The total cash deferred contingent consideration is £8,000,000, payable in up to three instalments in March 2021, October 2021 and March 2022, based on the future value of the funds under management acquired, and cost savings and synergies achieved on integrating the business.

The fair value of the deferred consideration liability has been remeasured at 30 June 2020, and remains unchanged, which assumes the deferred consideration criteria will be met resulting in the full £8,000,000 to be paid at the various payment dates. The growth of funds under management ("FUM") has been forecast using a similar growth pattern to that experienced by the rest of the Group. The future value of the FUM is dependent on several unpredictable variables including client retention and market movements. The cost savings and synergies are expected to be yielded in full, which has been forecast based on the Group's five-year Medium-Term Plan ("MTP").

Client relationship intangible assets of £25,623,000 were recognised on acquisition in respect of the expected cash inflows and economic benefit from the discretionary and fund-management contracts acquired. Goodwill of £16,111,000 was recognised on acquisition in respect of the expected growth in the funds under management and associated cash inflows. The fair value of the assets acquired are the gross contractual amounts and all are considered to be fully recoverable. The fair value of the identifiable assets and liabilities acquired, at the date of acquisition, are detailed in (a) below.

Directly attributable acquisition costs of £2,229,000 and integration costs, including staff retention costs of £1,426,000 were incurred in the acquisition and integration of Cornelian, which have been charged to administrative costs in the Consolidated statement of comprehensive income but excluded from underlying profit.

a. Net assets acquired through business combination

The trade and other receivables were recognised at their fair value, being the gross contractual amounts.

b. Impact on reported results from date of acquisition

In the period from acquisition to 30 June 2020, Cornelian earned revenue of £3,048,000 and statutory profit before tax of £452,000. Had Cornelian been consolidated from 1 July 2019, the Consolidated statement of comprehensive income would show revenue of £7,328,000 and statutory profit before tax of £1,685,000.

c. Net cash outflow resulting from business combinations

7. Earnings per share

The Directors believe that underlying earnings per share provide a truer reflection of the Group's performance in the year. Underlying earnings per share, which is an alternative performance measure, are calculated based on 'underlying earnings', which is also an alternative performance measure and is defined as earnings before finance costs of deferred consideration, finance income of contingent consideration, changes in the fair value of deferred and contingent consideration, goodwill impairment, client relationship contracts impairment, amortisation of client relationships and contracts acquired with fund managers, acquisition related costs, head office relocation costs, restructuring charge, business disposal costs and profit or loss from discontinued operations. The tax effect of these adjustments has also been considered.

Earnings for the year used to calculate earnings per share as reported in these Consolidated financial statements were as follows:

1. See Note 4 for details regarding the restatement as a result of the output VAT on Platform MPS.

Basic earnings per share is calculated by dividing earnings attributable to ordinary shareholders by the weighted average number of shares in issue throughout the year. Diluted earnings per share represents the basic earnings per share adjusted for the effect of dilutive potential shares issuable on exercise of employee share options under the Group's share-based payment schemes, weighted for the relevant period.

The weighted average number of shares in issue during the year was as follows:

2. The comparative weighted average number of shares have been restated for the effect of new ordinary shares issued at a discount to their market value as part of the share placing issued in November 2019.

Earnings per share for the year attributable to equity holders of the Company were:

1. See Note 4 for details regarding the restatement as a result of the output VAT on Platform MPS.

2. The comparative weighted average number of shares and therefore basic and diluted earnings per share have been restated for the effect of new ordinary shares issued at a discount to their market value as part of the share placing issued in November 2019.

8. Dividends

Amounts recognised as distributions to equity holders of the Company in the year were as follows:

The interim dividend of 21.0p (FY19: 19.0p) per share was paid on 24 April 2020.

A final dividend for the year ended 30 June 2020 of 32.0p (FY19: 32.0p) per share was declared by the Board of Directors on 16 September 2020 and is subject to approval by the shareholders at the Company's Annual General Meeting. It will be paid on 6 November 2020 to shareholders who are on the register at the close of business on 25 September 2020. In accordance with IAS 10 'Events After the Reporting Period', the aggregate amount of the proposed dividend expected to be paid out of retained earnings is not recognised as a liability in these Financial statements.

9. Intangible assets