Role reversal: How advisers stole a march on high-net-worth market

Advisers, discretionary fund managers and private banks are rethinking how they engage with wealthier clients

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The line between advice and private investment management continues to blur as more high-net-worth clients shy away from traditional private banks.

Flows into discretionary management portfolios have increased in recent years while private banks explore new ways to gain business.

A number of private banks have moved beyond their traditionally niche, uber-wealthy clientele to include those with lower levels of investable assets, with more weight given to technology. Others, however, have further increased minimum investment requirements.

But as the likes of Vanguard come to the market, challenges mount for those private banking models solely focused on managing assets.

Here we look at how advisers, discretionary fund managers and private banks are engaging with wealthier clients and how their established client base is evolving.

Blurring the line

Advisers and DFMs are increasingly attracting more high-net-worth-clients, who often come from traditional private banks.

At the same time, some private banks are venturing into allowing clients to access investment services online and from a much lower sum than usual.

Earlier this year, private bank Coutts launched an online, non-advised service for its clients.

Coutts has maintained its £1m minimum assets requirement in order to take on clients, but they can then use the service to invest £500 or more, as well as regular contributions of at least £50. A maximum charge applies of 0.95 per cent.

Standard Life head of adviser propositions and strategy David Tiller argues the lines between the adviser market and the private client market are blurring.

Tiller says: “Historically the two sectors have been seen as quite different, with advisers the financial planning specialists and DFMs the investment specialists. But now the adviser and DFM markets are coming together around the client. And this makes perfect sense.

“With many more people facing complex tax planning and investment challenges as a result of pension freedoms, clients need these two disciplines to work more collaboratively than ever before.”

Tiller estimates the private client market to have about £850bn assets under management and the adviser market to have £650bn putting the total market at between £1.2trn and £1.5tn.

Average portfolio size within the advice market is £120,000, according to financial services research firm Owen James.

Personal Investment Management and Financial Advice Association deputy chief executive John Barrass says more wealth managers are “spreading sideways” into financial planning as they start adding tax planning services to their propositions, especially when it comes to Sipps.

Seven Investment Management head of relationship management Stewart Sanderson says a key trend has been clients moving over from private banks, many of whom have been increasing their minimum entry levels.

Since April 2014, 7IM’s average discretionary portfolio size has increased from £475,000 to £625,000, and it has gained more than 200 clients.

Barrass says: “You will see firms, which didn’t use to take up clients, doing so now as it is more important and this is becoming more prevalent in firms that we represent.

“Firms such as advisers are taking more high-net-worth clients as it enables them to move into the DFM area as well as offering planning and advice.”

Pushing hard

Shore Capital equity analyst Paul McGinnis says DFMs are seeing “a good flow” of referrals of high-net-worth clients from advisers.

McGinnis cites the example of Brewin Dolphin, which has seen more wealthy clients recommended to the firm from advisers as a portion of their assets has been moving down into new lower priced tiers.

In Brewin’s latest results for the year to March, the firm’s adviser channel and model portfolio were key drivers of growth, with most flows coming from higher wealth clients, particularly in the £1m to £5m bracket.

McGinnis notes this growth contributed to an increase of 25 per cent in the total assets under management year-on-year for the firm to £7bn, and accounted for £400m of the £1.1bn in discretionary inflows seen in the first half of the year.

On rival Rathbones, McGinnis says the firm is “pushing hard” in the adviser channel but argues growth is taking longer than other wealth managers.

Rathbones has set out targets for growth for 2017 in its private office business of £200m in assets and has a goal of £200m inflows in 2017 within its adviser-led distribution business.

But analysts at Canaccord Genuity say while these initiatives are “on track” for Rathbones, their contribution to profits is likely to be “negligible”.

Analysts also warn some private wealth managers venturing into automated advice might not have a smooth path ahead of them.

McGinnis argues Vanguard’s launch into the direct space in the UK presents “a real challenge” to many of the robo models still trying to build sufficient assets to become profitable, even at the higher pricing point.

Brewin’s robo-advice assets stand at £100m. McGinnis argues Brewin’s robo advice offering could, for now, fulfil an “incubator” role for other family members of high-net-worth clients.

Separately, Coutts plans to launch a “simplified advice” proposition where clients can run their Sipps or calculate their pensions’ contributions, among other services.

Who are the high-net-worths?

CoreData international research head Craig Phillips identifies three types of high-net-worth clients; the “externaliser”, who outsources to advisers and DFMs, the “controllers” who see advisers in an execution-only role, and the “worriers”, those who constantly ask for advice on the market and investments.

He says the first category is growing faster than the others.

Phillips says: “High-net-worth clients show investment behaviour is at a crossroads. They have a high return expectation. A lot of them know markets don’t stay high forever. They have made good money in the tracker space but now they know there are more risks so advisers have more of a planning role.”

Phillips expects advisers’ private client base to gradually increase from 9 to 11 per cent by 2018, with those clients having between £500,000 and £1m to invest.

Penguin Wealth partner Oliver Pughe has been focusing marketing towards the small business community and estimates the firm has taken on board around 20 high-net-worth clients each year over the last five years.

Informed Choice managing director Martin Bamford says there is not enough financial planning capacity in the UK to serve the mass market, and the rising cost of regulation means it makes commercial sense to only work with clients who pay the highest fees.

Bamford says the firm “regularly” attracts clients who might once have been in the realm of the private banks and sees this number rising.

Portfolio size at Informed Choice is normally £500,000 to £1m, although the firm has recently secured a client portfolio of £8m. Bamford says portfolios of this size are “no longer unusual”.

He argues high-net-worth clients tend to favour the advisory approach to the management of their money, which is why he does not outsource to a DFM.

He says: “This puts clients in greater control of investment decisions and involves them in the process, rather than handing assets over to DFMs, which too often apply generic model portfolios.

“High-net-worth clients also value the financial planning-led approach we offer, which is something DFMs or private banks typically cannot provide.”

Expert view

There are a variety of investment thresholds in Coutts Invest and some of our high-net-worth clients use it to do their basic investments such as Isas, but they are Coutts clients already.

Some clients also invest a lot because many are financially sophisticated City executives. They use Coutts Invest as an option. Other clients who are multi-invested are using Coutts Invest to test the water and see how good we are.

Clients also come to us for advice to provide financial planing and investment advice and we go from Coutts multi-asset funds through to bespoke segregated portfolios.

For us it is all about providing a choice for customers to give them different ways to engage with us on the basis they already fit Coutts’ criteria.

Pensions continue to be complicated for clients, and they are now more cautious in their tax planning.

We are not looking to grow the number of advisers per se, we have the right people to deliver on our ambitions. But we will always continue to invest in digital because it brings clients a real service enhancement across banking, lending and wealth management.

At Coutts Invest there are five strategies ranging from cautious to adventurous. The one-year performance now has reached 30 per cent for the adventurous portfolio.

Our objective is also to keep the cost well managed so we do not drive on performance.

Camilla Stowell is head of Coutts International and Coutts Private Office