Asset managers across the City of London, the UK’s traditional financial hub, have long vied for the attention of investment platform Hargreaves Lansdown and wealth manager St James’s Place with the aim of selling their funds to the groups’ vast armies of affluent investors.
But now investment managers are going head to head with their distributors and increasingly targeting wealthy clients directly. Not content with simply managing funds, the likes of Schroders, Standard Life Aberdeen and M&G are seeking to control the entire value chain by becoming wealth managers themselves.
Traditional stockpicking groups hope that moving into wealth management will help to revive their profits, which have been hammered by fee pressure as investors abandon them for cheaper passive funds.
“Owning everything from manufacturing all the way to delivery to the client means that you can set the pricing and terms. That’s an extremely attractive proposition for asset managers at a time of sustained pressure on fees,” says Jonathan Doolan, head of Emea at Casey Quirk, the Deloitte consultancy.
Wealth managers’ businesses are also more resilient and less likely to lose business in times of market volatility. Their revenue margins are about 30 per cent higher than those of asset managers, owing to the fact that investors tend to stay invested for 12 years on average, compared with just four and a half for asset management clients, according to research by Schroders.
But challenging the established position of Hargreaves and SJP will not be easy, as asset managers grapple with branding, cost and strategy considerations — all at a time when going out to win clients has been complicated by the coronavirus crisis.
For now, however, the pandemic appears to have only strengthened asset managers’ desire to branch out into wealth, as they look to future proof their businesses and tap into growing demand among wealthy investors for financial advice.
Some groups have hit the acquisition trail to accelerate their growth drives. Schroders, whose chief executive Peter Harrison has identified wealth management as one of the group’s primary growth drivers, snapped up family office Sandaire last month. Schroders already oversees £65.7bn in wealth assets, including via its joint venture with Lloyds bank.
M&G’s first deal as a standalone company was the purchase of adviser platform Ascentric, which it recently folded into a newly created wealth management unit overseeing £28bn in assets.
Other asset managers have focused on giving greater prominence to their existing in-house wealth capabilities. One of the first things Standard Life Aberdeen’s Stephen Bird did when he became CEO last month was to promote the heads of company’s wealth and advisory businesses to his leadership team.
This marked a change in direction for SLA, which previously placed less importance on wealth and arguably undersold its clout in the space. With assets of £84bn, SLA’s combined operations makes it the fourth-largest player in the UK wealth market, but its lack of joined-up strategy for the business hindered its development up until now.
However, the current market opportunity has changed the game for SLA and others. An ageing population combined with the gradual closure of defined benefit corporate pension schemes is set to encourage ever greater levels of private savings.
At the same time, UK regulatory changes have made it difficult for so-called mass affluent individuals to access financial advice, particularly if they have a relatively small pot to invest. This is spurring large fund groups to seek to muscle in on this underserved market.
“The democratisation of savings is a trend that is accelerating and will lead to a greater portion of savings being dealt with directly,” says Standard Life Aberdeen chair Douglas Flint. “We’ve got a brand and set of capabilities that fits very well with serving those needs.”
Peter Hall, global head of wealth management at Schroders, says that his company’s historic brand and breadth of investment capabilities make it well placed to compete. “Many clients are planning for their future against the uncertain backdrop they currently face,” he says. “We can leverage our global investment expertise and draw on our experience of looking after families across generations.”
But only a handful of asset managers have a brand that is well-known enough to allow them to push into wealth. Christian Edelmann, head of wealth and asset management at consultancy Oliver Wyman, warns that these groups would nevertheless face challenges in expanding beyond their home market. So far Vanguard is one of the only major investment houses that has attempted to expand its advisory service internationally.
Given the high cost of building a traditional wealth management business, one of the biggest challenges for asset managers that are new to the space is achieving sufficient scale to operate profitably, particularly when it comes to servicing smaller investors.
Some are hopeful that technology will come to fund groups’ aid by bringing down operating costs. The likes of Hargreaves and AJ Bell, people-light, technology-centred businesses whose share prices have soared in recent years, could serve as a blueprint for new entrants.
Schroders, for example, is focused on developing Benchmark Capital, its technology-led support platform for advisers. Meanwhile SLA, under the leadership of former Citi consumer banking head Mr Bird, is expected to boost its digital capabilities to get closer to end investors.
Berenberg analyst Chris Turner expects SLA to pursue “light physical, high digital and high brand” strategy with a layer of basic financial advice on top, potentially taking it in the direction of robo-advisers such as Nutmeg. SLA appears to be preparing a move into automated advice, having invested £17m last year in a UK company registered as Standard Life Digital Solutions.
However, the recent decisions of UBS and Investec to close their robo-advisers point to the difficulties of making these services profitable, particularly if they use active funds, which are more expensive to manage.
Fund fees are a key consideration for asset managers pushing into the wealth market, regardless of whether they go down the automated or human advice route.
“For asset managers moving into wealth management, there is a trade-off between independence and cost,” says Mr Edelmann. “Nobody is going to believe you’re super independent [compared with incumbents such as Hargreaves Lansdown] so to make up for that you need to offer a significant cost advantage.”
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But Mr Doolan says that asset managers should be alive to the risk of only offering their proprietary funds to wealth clients. Managers should carefully consider whether their product range meets their clients’ needs, and offer external products where there are gaps, he suggests. For example, pure active houses might choose to make third-party passive funds available to clients.
If asset managers can resolve these thorny issues, their whole business stands to benefit from their expansion into wealth management.
Jefferies analyst Julian Roberts says the groups that are successful in pivoting to wealth are those that are more likely to stand the test of time. “If you as an asset manager don’t have a clear investment specialism that gives you an edge, having an offering to compete in the wealth space is a way of making sure your business remains viable in future,” he says.