Director Alex Shaw‘s articles examining the reasons driving the recent increase in Mergers & Acquisitions (M&As) in the wealth management industry have been published in Wealth Manager, FT Adviser, Wealth Briefing, Wealth Adviser and Real Business.
The UK wealth management industry occupies a unique position, and one which makes it particularly appealing in terms of Mergers and Acquisitions. The fairly fragmented make-up of the market, and the fact that it contains relatively large numbers of smaller firms, can be taken together as a landscape which is particularly tempting in M&A terms.
This particularly applies to those firms based outside the UK, gazing with somewhat envious eyes upon pension deregulation, still-rising property prices, a stable stock market and a population of “baby boomer” clients no longer able to rely upon interest payments to fund their retirement.
This analysis prompting the increasing trend towards M&A activity should also be balanced by a consideration of the other issues which are driving wealth management firms toward growth and consolidation.
Chief amongst these is the change in adviser fee charging which was introduced by the imposition of the Retail Distribution Review, under which financial advisers have to agree a fee up-front rather than accepting a commission as a reward for recommending or selling particular financial services and products. Add this change to a stricter all-round regulatory framework and a growing focus on technology and digital tools, with their potential to cut out the middleman to a significant degree, and you have a backdrop against which economies of scale and the acquisition of specifically lucrative skill-sets mean that merging to form larger firms becomes the natural choice.
The figures back up this analysis; in 2015, 124 mergers took place in the sector, as opposed to just 83 the year before, although the total assets involved was slightly down on previous years. This would tend to paint a picture of an industry in which smaller firms will find it harder to exist whilst resisting the M&A pressure applied by medium sized firms, who, while still working in the £5bn-£15bn range, will be unable to handle the scale of business needed to achieve maximum efficiency.
The previous reference to acquiring expertise as opposed to developing it from scratch has to be related to the rise of digital provisions, also mentioned briefly above, which has been another unspoken and somewhat unrecognised driver behind the move towards mergers and acquisitions.
The financial imperatives set in place by the regulatory and fee charging frameworks currently operating are fairly clear and push in one direction – towards scaling up as a means of driving revenue. The move towards Direct–to–customer (D2C) provision is slightly more nuanced in that, although much of the technology is already in place, where the willingness of larger, more established firms to embrace the new delivery methods is far from assured.
This leaves not only a gap in the market as far as the advice which is sought is concerned, but also a gap in provision. In recent months, several firms have made moves to fill that gap. Vanguard are thought to be close to signing a deal with technology firm FNZ in order to launch a D2C platform in the UK whilst Aberdeen Asset Management acquired Parmenion Capital Partners in September 2015. Any move by Vanguard will be an extension of the way in which it already operates within the US, where it launched an automated (so called ‘robo-advisor’) Personal Advisor Service in May of last year. The service offers automated investment portfolios and telephone support for those with at least £32,373 ($50,000) to invest, with service charges of 0.30% of assets per year.
Other examples of ‘robo-advisors’ include the Nutmeg platform and Simply EQ, both of which are set up to offer advice to comparatively lower wealth investors in a way which undercuts the costs involved with more traditional financial advice models. The powers that be have recognised this shift to the degree of setting up the Financial Conduct Authority’s Project Innovate and, in particular the regulatory sandbox which, in the words of the FCA:
“… aims to create a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms in a live environment without immediately incurring all the normal regulatory consequences of engaging in the activity in question.”
Many of these moves are clearly right at the leading edge of D2C innovation, but the more astute of the larger wealth management providers will be keeping a very careful eye on them.
UK firms such as Brewin Dolphin and Hargreaves Lansdown have already launched their own online offerings and, although the D2C and more traditional wealth management markets may differ somewhat, there is considerable overlap, and this overlap is bound to grow as the power of the technology and the acceptance from consumers both increase.
In the US, the reaction has been to seek expertise through acquisition – as when BlackRock purchased FutureAdvisor – or partnership, such as Fidelity going into partnership with Betterment. The UK market seems certain to follow a similar pattern, with the established players allowing the smaller more innovative firms to take the initial ‘digital risk’, before stepping in to merge and acquire.
For the individual faced with the likelihood or reality of their wealth management firm being engaged in an M&A, however, whether they are the perceived junior or senior partners, the situation can be one which leads to some disquiet and a slightly less detached scrutiny. It should be remembered, however, that the driving force behind any such M&A is likely to be a desire to produce an entity which is more valuable than the sum of its’ parts and which offers value to the shareholders.
Any haemorrhage of business away from a newly-formed wealth management firm in pursuit of wealth managers who have moved elsewhere runs the risk of marking the arrangement out as a failure from the start. To ensure this doesn’t happen, newly formed firms are almost certain to emphasise and exploit the client-focused advantages which come from such a merger – factors such as reduced charges and more flexibility regarding contracts.
It should also be borne in mind that the newly acquired types of expertise which are often the catalyst for mergers of this kind will now be available to all clients. A key part of building and maintaining this value will rest in continuing to offer a full and effective service to existing clients at the same time as attracting new business.
Taking an overview of the situation is this manner is undoubtedly a fascinating exercise – part analysis, part speculation, and all extremely useful for anyone with a stake in the wealth management industry.