Wealth management firms face challenges to win back clients

Global investment firms are thinking much more carefully about which markets are core to their businesses and which are not. In today’s terms, that means wealth managers are concentrating efforts on markets where they believe they have a strong enough proposition or brand to generate the additional client volumes they need to support the growing cost of compliance.

The landscape of wealth management has been in a state of flux, preparing response to regulatory shifts. We recently undertook analysis of global M&A activity over the last five years in the wealth management sector. What the results show is that 35 per cent of all international wealth management merger activity between 2008 and 2012 took place in the UK.

Of the 171 wealth management deals that were identified around the world, 48 were between UK firms and a further 12 were international firms buying into the UK wealth management market.

Much of this activity was in response to regulation. In particular, UK firms have been restructuring advice and investment propositions, looking to build scale into their business models and seeking to manage the growing costs of compliance.

Still of interest

The results also suggest international firms have not lost interest in the UK’s wealth market, which remains one of the largest in the world. However, it is probably fair to say that some of the shine has come off the UK market in recent years, if measured by deal valuations.

Internationally, the average price/assets under management for transactions fell from 3.7 per cent in 2008 to 1.98 per cent in 2012. In the UK, the decline was sharper. During the same period, measured across the 18 deals for which comparable data are available, valuations in the UK fell from 4.2 per cent to 1.4 per cent.

The costs associated with operating in an increasingly highly regulated market were no doubt a factor in this changing equation. Inevitably, the weaker economic environment in the UK will also have played a part in falling valuations. 

However, it is important to note the situation in the UK is mirrored in other markets. Wealth management valuations are generally on a downward trend. The combination of difficult economic conditions and rising regulatory pressures are slowly deflating the world’s wealth management bubble.

The question for the UK is: what next? As the Retail Distribution Review (RDR) regime beds in, we would certainly expect to see high levels of M&A activity continue in the UK wealth market. The need for scale will not go away. Indeed, it is likely to become more important through the coming months.

In January, less than two weeks into the new regime, the Financial Services Authority began the process of reviewing the impact of RDR. The regulator announced that during the course of this year it intends to undertake thematic analysis on what has changed with regard to professionalism, charging structures, how firms describe their services and market distortions.

Clearly, the regulator’s focus is on how the business of wealth management is changing in the UK.

Sourcing profits

Once firms become more confident operating in the new environment, attention will start to focus on the advice gap.

More specifically, those wealth managers that retrenched into the high-net-worth market in the face of advisory fees will need to consider how to win business profitably from individuals who may inadvertently have slipped into this uncharted territory. To win back these clients, firms will need to square up to the challenge of developing compliant but scalable solutions to ensure their future growth.

With this in mind, one would hope the UK market may be entering a phase of growth where the focus turns to innovative strategies to deliver high quality advice and solutions to a wider section of the population.

One cannot help thinking that maybe this is what the regulator had in mind all along, but that does not mean to say the challenges have become any easier.   

Catherine Tillotson  is managing partner at wealth management think-tank Scorpio Partnership