Despite the doom and gloom over the prospects for
Britain’s wealth managers, most are weathering the financial storms
well. And wealth managers have only 25 percent of the estimated
total of £1.4 trillion of high net worth client money, leaving them
plenty of growth prospects even in these tough
times.
The main listed UK wealth managers have continued to win net new
business from private clients in the opening three months of 2009,
offsetting the continued decline in overall levels of assets under
management (AuM) caused by volatile financial markets.
Go deeper with GlobalData
Katrina Preston, an expert who tracks the main quoted wealth
specialist firms’ sector – consisting of Hargreaves Lansdown,
Rathbone Brothers, Brewin Dolphin, Rensburg Sheppards and Charles
Stanley – also finds that these firms’ commission revenues have
been helped by the strong retail trading volumes in the rallying
stock markets.
Preston, an analyst at Canaccord Adams, the global capital markets
group of Canadian securities firm Canaccord Capital, does concede
that the private client industry took a big hit last year from
plunging markets.
The value of assets currently managed by the industry fell from
£400 billion ($606.5 billion) to £350 billion during 2008, or a
reduction of about 14 percent, she estimates.
Performance losses, the way the falling markets undermined AuM
levels, were about 21 percent but were offset by new asset
gathering from clients.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataThat net 14 percent fall compared favourably with the 40 percent
plunge in global stock markets last year.
Nonetheless, this reversed the average growth of AuM of 14 percent
in each of the proceeding five years up to 2008, one of the
greatest bull runs in private banking history.
On the upside, Preston estimates that the pool of suitable money
for wealth managers in the UK has grown to about £1.4 trillion,
still leaving the wealth industry “plenty to go for” in terms of
finding new pockets of client money.
Stated another way, at £350 billion, the wealth industry has a
penetration of UK high net worth investors and other wealth
segments of only about a quarter.
Plenty of opportunity
Preston, who previously published her annual wealth survey with
Bridgewell Securities, estimates that there are around 500,000 high
net worth individuals (HNWIs) in the UK and roughly two-thirds
employ a wealth manager, compared with less than half three years
ago.
The mass affluent market comprises some 5.5 million individuals,
most of whom are served by IFAs and fund supermarkets, rather than
by wealth managers.
Of the current levels of client penetration, the top 10 players
control around half the £350 billion of AuM (see table below). The
biggest is Barclays with its brokerage affiliate Gerrard, with
£27.3 billion of AuM by the end of 2008, down from £34.1 billion
the previous year.
Despite its problems, UBS hangs on to second position, with £19.5
billion versus £22.2 billion the previous year.
In the quoted UK domestic specialist sector, Brewin Dolphin showed
the strongest performance. It was in third position overall with
£18.7 billion (£21.6 billion in 2007).
Even among these top 10, only eight companies manage more than £10
billion and Preston estimates around 60 companies manage less than
£500 million.
“This fragmentation is likely to force consolidation now that
market conditions have become more challenging,” she says. “We
expect higher levels of corporate activity in 2009 involving both
smaller players and the wealth management divisions of beleaguered
investment banks.”
The survey puts the total number of wealth managers in the UK at
153, of which roughly half operate a traditional stockbroking
model, with the remainder comprising investment managers and
private banks.
Access to collectives and alternative investments is largely
restricted to the latter two business models, with stockbroking
clients predominantly investing in securities directly.
Drilling down into her data, Preston estimates the average client
portfolio size at circa £500,000.
Advisory mandates gained some ground over more profitable
discretionary mandates during 2007 and 2008, reversing the previous
year’s trend, she finds.
However, this masks considerable divergence in business mix trends
at a company level. Many of the large private banks have attracted
more clients on an advisory basis in recent years, notably Goldman
Sachs, Morgan Stanley and Coutts.
Preston said: “A key selling point has been providing access to
in-house ‘institutional’ product with limited capacity, whereas
discretionary arrangements would preclude managers from making
significant allocations to in-house funds.
“Conversely, most traditional wealth managers have continued to
focus on winning stickier and more profitable discretionary
mandates.”
The degree of apparent similarity in the typical portfolio
composition of clients served by private banks and investment
managers is misleading, the survey contends.
Many private banks have been very focused on selling
quasi-institutional, in-house product to their private clients in
recent years.
“The current financial crisis has revealed the flaws of making
insufficient distinctions between institutional and retail clients,
and the recent demise of the market for structured products is
forcing many private banks to re-think their strategy,” Preston
says.
Discretionary investment management typically generates similar
revenues to advisory services but they are skewed in favour of
recurring fee income rather than commissions.
As such, revenues are less sensitive to private client activity
levels, which tend to reduce considerably in bear markets, Preston
notes. Discretionary also incurs significantly lower costs than
managing clients’ portfolios on an advisory basis. Moreover, many
advisory clients are inactive, and they incur administrative costs
without necessarily paying any fees.
In a prolonged downturn in equity markets, the greater earnings
visibility that discretionary clients provide proves all the more
valuable, she notes.
“The strength of wealth managers’ relationships with the
end-investor is proving a significant factor in avoiding the
redemptions suffered by retail and institutional fund managers as a
result of the current financial turmoil,” she says.
Indeed, the fall-out from the stressed banking system and the hedge
fund industry has already seen many existing clients re-allocating
cash and other assets to their wealth manager, suggesting that
market turmoil can provide “a useful opportunity for the industry
to exploit mistrust elsewhere in the financial sector.”
As a result, Preston reiterates her belief that wealth firms have
much more scope to increase “share of wallet”, which has remained
static at about 25 to 26 percent based on a £1.4 trillion pool of
wealth in the UK .
