Traditional wealth managers have proved themselves to be scalable and profitable businesses despite the hype caused by robo-advice models, analysts say.
Wealth managers have also been shown to be more robust than pure asset managers amid mounting pressure on fund performance and fees.
While Hargreaves Lansdown and St James’s Place continue to make the headlines as the titans of the UK wealth management industry, headwinds are set to challenge the pace of their growth and client acquisition.
Fund Strategy’s sister title Money Marketing has canvassed the market to see which traditional wealth firms and robo-advisers are best placed to win the wealth management race.
Hargreaves and SJP are still considered to be both the largest and fastest growing companies in the market, dominating the direct-to-consumer and the face-to-face advised markets respectively. However, analysts say a raft of mid-sized players are edging ahead in the race for inflows and sustainable business.
Shore Capital analyst Paul McGinnis says discretionary fund managers such as Rathbones, Brooks Macdonald and Brewin Dolphin have all seen “decent net flows” over the past few years, each with varying levels of success.
McGinnis says: “Brooks Macdonald and Brewin had a formal target of 5 per cent growth for net inflows over the past two years, and, despite only reaching 3 per cent, as of
December, that level was closer to 7 per cent for Brewin and it is the first time they’ve performed as strong as that for a while.”
Brooks Macdonald has positioned itself as the firm with the most developed links to the advice sector, with 90 per cent of its business coming from advisers and £9bn assets under management.
For this year, Shore Capital forecasts inflows for Rathbones and Brewin at a net 4 per cent compared with 8 per cent for Brooks Macdonald, while the forecast for Hargreaves is closer to 10 per cent.
Hargreaves’ pre-tax profit surged to £131m last year, driven by higher trading volumes in the wake of the Brexit vote. But brokerage Liberum equity research analyst Justin Bates says competition and regulatory pressure will gradually slow down the firm’s rate of growth and customer acquisition.
Bates says: “The FCA is focusing on profit margins for asset managers, saying 50 per cent is too high compared with 10 per cent for other industries in financial services. Hargreaves makes a return on equity of 70 per cent and the regulator is not going to be happy about that. Also, there is the emergence of a real competitor of Hargreaves Lansdown in the UK which is going to be the newly merged TD Direct Investing and Interactive Investors backed by JC Flowers, although that will take time.”
Hargreaves has increased its market share for the fourth consecutive year, now accounting for 38 per cent of the direct platform market. The combined market share of TD Direct Investing and Interactive Investor will be 11 per cent, Platforum data shows.
Hargreaves Lansdown chartered financial planner Danny Cox says: “The growth in our market share and the tens of thousands of new investors joining each year shows we are delivering exceptional services which are highly valued by our clients. We are not complacent and continue to listen closely to feedback from our clients.”
Among other “winners”, Wealth Management Association deputy chief executive John Barrass thinks independent UK platforms such as AJ Bell will prosper, as will wealth management units belonging to banks, for example, Barclays Stockbrokers and JP Morgan Private Bank.
He says: “These firms are international but they’ve got the picture about handling their business in London and they get a lot of high-net-worth individuals coming from Asia and there’s no evidence of lessening of that flow.”
Wealth managers vs asset managers
Analysts argue wealth managers are much better positioned than pure
asset managers when it comes to profits and flows.
McGinnis says gross outflows for wealth managers such as Rathbones, Brooks Macdonald and Brewin could range between 5 and 7 per cent, while this could range between 25 and 35 per cent of the total assets under management for fund groups every year. He says: “The standard valuation I apply to wealth managers is 25 per cent premium to the one I would apply to the pure asset manager and it is partly because of their higher quality of profits.
“Asset managers are much more sensitive to the performance of the underlying funds as you get periods of poor performance and the assets can leave very quickly, whereas in wealth management unless there is a very sustained period of weak performance it doesn’t cause clients to leave.”
Bates says wealth managers have a “very high” retention of funds, low real volatility in flows, and can maintain revenue margins.
He says: “You see more pricing pressure for asset managers and it is easier for wealth managers to maintain margins. You are going to find the big asset management players getting bigger in brand and scale or alternatively you’d become a specialist in a market to maintain control on pricing, such as Liontrust Asset Management.”
Some robo-advice models, as well as “old school” wealth managers, are looked on less favourably.
McGinnis is concerned that some robo-advice firms will not achieve the necessary scale or differentiate themselves. He says: “If you look at Hargreaves where average revenue is around 42 basis points, they can make 70 per cent operating margins, but they can charge that way because they have £70bn of AUM.
“Nutmeg, for example, said their average client only has over £20,000 on the platform and given they aim for an all in charge of around 100bps per annum, some of that is spent on buying the underlying investments for 70bps of that 100.
“But when you apply that 100bps to £20,000 of assets you are talking around £150. It’s all they are charging per client per year so it is very hard for them to make enough money.”
However, he says: “Nutmeg did a couple of fundraising rounds at the end of last year but it didn’t look like Schroders or other investors participated in those. It was new investors coming in so the implication being some of their existing investors were quite happy to be further diluted.”
Barrass argues there is a “mismatch issue”, with firms spending a lot on technology and then still struggling to find clients, but says firms run by the old generation who stick with an older client base “are on the way out”.
PwC director of wealth management Sarah Newman adds while “everyone has a finger in the pie” in the wealth market, firms have only taken “baby steps” into the digital space. She says: “Wealth managers are very behind on digital, we are seeing a few players entering this market now but they do need to evolve.”
Analysts agree post-RDR the boundaries between DFMs, and the “straightforward” IFA have been blurring.
But McGinnis claims more IFAs will begin managing clients’ money indirectly, despite a number of firms launching their own fund management services.
He says: “Through tighter regulation, IFAs have become more nervous about doing the investment piece themselves. They’ve got plenty of other services they can charge their clients for rather than get caught up by the FCA on being able to demonstrate suitability on the investment they are recommending.”