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Seven issues facing the UK wealth management sector

Date: 27 Oct 2016

Bumblebee Design

Keith Baird, financials analyst at Cantor Fitzgerald Europe, which this month initiated coverage of the wealth management sector, says that while wealth managers face a range of pressures, existing players can thrive with the right integrated strategy.

Below, Baird – whose preferred stocks are currently Brooks Macdonald and Rathbones – identifies a number of opportunities and challenges facing wealth managers both now and in the future.

 

AUM churn / replacement rate

The peer group over time has succeeded in achieving positive net client inflows through a mixture of new money from existing clients, new clients, and acquisitions of both teams and whole firms. On the one hand there are the positive factors: pension provision is generally inadequate, there is a range of attractive tax efficient savings vehicles such as SIPPS and ISAs, and the death of the occupational pension couple with new freedoms to manage financial affairs. On the other hand, there might be a demographic “time bomb” in terms of the baby boomer generation, as well as what Rathbone refers to as ‘the low wealth generation outlook in the UK’.

Investment management and financial planning: integrated offering critical

New pension freedoms have meant the increased need for professional advice and financial planning. Big banks and insurers have pulled out of offering advice. Provided the wealth manager has this integrated offering, it will be more successful.

Pricing and competition

Despite the low return investment world that we have been living in, wealth managers can be competitive for clients with this integrated offering coupled with delivering excess investment returns above the cost of fees. In this environment, investment managers without adequate investment performance and an integrated offering will suffer from competition. We don’t thinks there will be any material fall in fees or commissions.

Regulatory risks

The bulk of increased regulation has already been introduced (know your client, suitability, anti-money laundering, increased capital). The core bespoke model of client portfolio management backed by a centralised investment process is sustainable in our view. One focus is on conflicts of interest where the traditional half-commission model appears to be anachronistic. The increased regulatory burden is now widely seen as having raised entry barriers for firms unable to spread higher costs over a sufficient asset base.

Robo-advice and online

We see online as a delivery mechanism rather than a new, disruptive model. Although clients are now better informed thanks to the internet we don’t think that robo-advice will be a threat in the near term.

Low interest rate environment

Low rates have cut into wealth managers margins and this situation does not look like it will change in the foreseeable future. With the disappearance of the interest turn, it has placed more importance on fee earning via discretionary asset management.

Scope for consolidation

Organic growth remains the focus for wealth managers, supplemented by inorganic growth through attracting new teams or buying whole firms. The wealth management sector remains fragmented and we assume that there remain plenty of opportunities to make acquisitions provided the fit is good and the price attractive. One current theme is vertical integration involving buying IFA firms as a way of acquiring new clients and strengthening distribution.