When asked by a journalist why he targeted banks, notorious robber Willie Sutton replied: “Because that’s where the money is.” Slick Willie might equally have been describing why investment groups are charging into wealth management.
After losing business to cheap passive funds and coming under intense pressure to slash fees, traditional investment groups are searching for fresh clients and sources of revenue. Wealth managers are attractive acquisition targets, with their large books of rich clients who are more amenable to paying higher fees for a personalised service and less likely to move their business at the first sign of underperformance.
“The future is wealth” is the view of many asset managers, says Jonathan Doolan, head of Emea at Casey Quirk, the Deloitte fund management consultancy. “Traditional clients are like melting ice caps — fund managers are looking for much stickier assets.”
The trend of asset managers moving into wealth is most pronounced in the US and UK, which have well-established advisory markets. Those businesses hard hit by the rise of passive funds have seen wealth as an attractive area.
“There is huge potential in this market,” says Peter Harrison, chief executive at Schroders, the FTSE 100 asset manager that owns the Cazenove Capital wealth brand. “The UK is very, very under advised.”
Keith Skeoch, chief executive of Standard Life Aberdeen, the UK’s largest listed fund manager by assets under management, is also bullish.
“Wealth is a significant part of our business,” he says. “Our wealth and platforms business already makes up 20 per cent of our revenue — I can see this being 50 per cent in the next 10 years.”
SLA’s wealth advisory arm, called “1825” after the year Standard Life was founded, bought two businesses last year: Grant Thornton’s £1.7bn advisory division and BDO’s Northern Ireland wealth unit. The deals, which increased 1825’s assets to £6bn and raised to 11,000 its client base, were part of a global trend of traditional asset managers buying wealth businesses.
There were 148 acquisitions of wealth managers last year, accounting for more than half the total deals involving investment groups worldwide. The number has more than tripled in three years, according to figures compiled by Piper Sandler, the US investment bank. The fragmented state of the wealth market — as well as the stable fee rates and high levels of client retention — have made wealth managers attractive targets.
While many of the deals have been the result of consolidating wealth groups — backed by private equity — buying up smaller rivals, several have involved traditional active managers.
Franklin Templeton’s wealth arm, for example, recently bought Athena Capital Advisors, which came with $6bn of client assets, and Pennsylvania Trust, which brought $4bn with it. That took Franklin’s total wealth assets to $29bn, which the company hopes to grow to $50bn in the next two years.
Mr Doolan says wealth management clients are much less likely than retail clients to switch their business at the first sign of underperformance.
Casey Quirk’s research shows that retail investors tend to move their money after about five years, meaning fund managers need to attract 20 per cent more inflows a year just to keep funds at consistent levels before market moves are taken into account. By comparison, the replacement rate is just 4-5 per cent among wealth clients.
Mr Skeoch says SLA’s heft in the wealth market has not been recognised because of its fragmented business lines, which the company plans to bring together in the coming months.
Combining SLA’s financial planning technology businesses known as Wrap and Elevate, its Parmenion discretionary fund management division, its Aberdeen Standard Capital discretionary wealth management operation, 1825 and its joint venture with Virgin Money, brings the total assets under management and administration to £86bn. That makes the group the fourth-biggest player in the UK wealth market, according to Mr Skeoch.
“We have already got critical mass,” he says. “The aim now is to provide a seamless customer experience across our wealth range.” He adds that SLA will disclose details of the strategy to bring the wealth units together in the coming weeks.
Wealth and platforms was one of the few bright spots in SLA’s results last week, with the division bringing in combined net flows of £7bn, while the investment business had net outflows of £65.9bn, mainly driven by the loss of a £41bn mandate with Lloyds Banking Group and redemptions from the once-popular Gars absolute return funds.
But the wealth market is not without its problems and different ends of the sector have their own challenges. Businesses that target the very richest clients often suffer when they die, even if their beneficiaries stay as clients. Once inheritance tax is taken out and the wealth is distributed among children, the amount of money that stays in the wealth manager’s account can drop as much as 80 per cent, says Mr Doolan.
For advisers focused on the lower end of the market, targeting the mass affluent — those with £100,000 to £250,000 of investable assets — the challenge is more about building up scale by attracting a broader range of clients, who are typically younger.
Christian Edelmann, head of wealth and asset management at Oliver Wyman, a consultancy, says there are three routes for fund managers building up their presence in the wealth market: organically, via acquisition or through joint ventures. “These businesses are not cheap to buy, but customer acquisition can be very expensive, especially if you don’t have a recognised brand in the market,” he adds.
One business that has tried all three routes is Schroders, which has £66.7bn of wealth assets under management, as well as joint ventures with China’s Bank of Communications and Axis Bank in India, through which it sells wealth products.
Mr Harrison draws a parallel between the wealth sector and the cable industry, where the last mile of broadband connection is the most valuable because it is closest to the end customer. “We want to be owners of that last mile in the UK, but overseas, we want to work with banks that own that last mile,” he says of Schroders’ strategy.
The group has bought several wealth businesses in recent years, including Cazenove Capital, C Hoare & Co and Benchmark Capital in the UK, as well as Singapore-based Thirdrock Group.
Its latest initiative is the launch of Schroders Personal Wealth last year, a collaboration with Lloyds Bank that has £13.7bn of assets. The venture is aimed at selling wealth products to the bank’s existing customers and hopes to double its assets in the next five years.
In its annual results this month, Schroders broke out wealth management — along with four other business lines — separately for the first time. It showed wealth contributed the third-highest portion of net operating revenue at £302m and the second-highest volume of new business at £14.7bn of assets.
Mr Harrison says one of the biggest challenges of moving into the wealth market is providing a personalised service that customers have become accustomed to in other parts of their lives.
“Ten years ago, if you asked for a coffee, you would be happy with a cup of Nescafé. Now, you go into Starbucks and ask for a cappuccino with extra foam and cinnamon on top — and it is served with your name written on the side,” he says.
“We are in a world of more personalisation — and in wealth we need to build something that is appropriate to each individual customer.”
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