By Sunil Gopalan, Publisher, Wealth Adviser – The array of winners who gathered in London’s Mayfair last month at the Wealth Adviser Awards 2013 demonstrate recent changes in the ranks of wealth managers, with established private banks and advisers rubbing shoulders with some relative newcomers.
The winners of these peer-to-peer awards include fully-fledged global private banks, regional private banks, fast-growing independent wealth managers, advisers and service providers from around the world, united in their determination to deliver market-leading products and services to their clients in an increasingly volatile and rapidly changing marketplace.
The changes can be witnessed most clearly at the top of the market, where consolidation and realignment are gaining pace and scale. Last month Credit Suisse announced the acquisition of Morgan Stanley’s EMEA private client wealth management business, and also announced it was selling its stake in JO Hambro Investment Management to Bermuda National Limited.
In the past few months Schroders acquired Cazenove Capital, Brooks Macdonald acquired fund manager Spearpoint in the Channel Islands, Rathbone Investment Management International acquired AIB Jersey, Standard Life Wealth acquired Newton’s private client business, Handelsbanken purchased Heartwood and Julius Baer acquired Merrill Lynch’s International Wealth Management business outside the USA from Bank of America
These recent deals throw up two clear trends – the requirement to scale-up in terms of client assets under management, and the need to focus closely on regional groups of HNWI clients with similar product and service requirements.
What is driving these trends? In terms of growing assets under management, industry estimates suggest that while total AuM has grown post-2008, the costs associated with managing those assets have risen faster than the growth in income.
According to the Capgemini-RBC Wealth Management World Wealth Report 2012, the cost-to-income ratio of the global wealth management industry stood at 79.8 per cent in 2010, up from 63.7 per cent in 2007, reflecting a consistent rising global trend.
The report states “That trend is clearly exacerbated by the inability of firms to generate significant fees when interest rates are low and investors are favouring capital-preservation products. To improve overall profitability, firms need to seek out new ways to control and reduce their costs while growing AuM.
“And even as profit margins are being eroded, rising levels of adviser remuneration make it expensive to acquire and retain successful advisers who are key to bringing in and managing clients and assets. Other costs are also high, with expensive real estate locations, and high technology and compliance costs all taking their toll on the bottom line.
“Some regulatory measures have affected funding costs, and some are even targeting business models. The UK’s Retail Distribution Review (RDR) is designed to improve transparency and reduce fees, but essentially shifts the industry income structure from a primarily commission-based approach to a more fee-based approach.”
The timing of the RDR and regulations such as FATCA couldn’t be worse for some firms. In its 2012 report ‘UK Wealth Management at the tipping point?’ KMPG noted “The ever increasing volume of regulation and the increased intrusiveness of the regulators will have profound impact on both the structure of supply and on clients: the historic attractiveness of Wealth Management as a low risk, low capital, highly liquid sector will be diminished materially.”
KMPG says the direct commercial impact of vaulting regulatory costs, both of compliance and implementation, will take the form of:
• Erosion of wealth management earnings
• Firms existing the sector
• Firms withdrawing products and services or ceasing to deal with certain client segments
• A lowering of sector attractiveness and lack of new entrants.
The markets have been volatile post-2008 and political conditions have complicated wealth strategies even more.
With heightened volatility even in traditional safe-have investments such as gold, and a high level of correlation between asset classes, it has become challenging for wealth managers to develop effective diversification strategies and provide profitable wealth management products and services to their clients.
Understandably, there has been a lot of caution among investors in recent times because of events in the eurozone. But while the emerging equity market rally is leading to increased risk on sentiment, Cheviot Asset Management’s CIO Alan McIntosh makes the point that if recent issues in Cyprus “have taught us anything, it is that we are not out of the woods yet. As a result, we believe a diversified portfolio is still the right path for the majority of clients.”
Having a flexible approach and an ability to make and implement decisions quickly has helped the firm exploit opportunities and generate strong, consistent returns for its clients. “Each of Cheviot’s clients is assessed on an entirely bespoke basis and has a portfolio built to suit their needs. It is this personal service that sets us apart and it remains our key strength,” notes McIntosh. Cheviot won the Wealth Adviser award for Best Wealth Manager for Balanced Portfolios (UK).
Generating consistent growth in portfolios has also been challenging in recent times given the extent of central bank intervention. In order to help its clients maximise total returns, Vestra Wealth, which won the Wealth Adviser award for Best Wealth Manager for Growth Portfolios (UK), has structured portfolios to generate income from local currency emerging market debt and selective high-yield bonds, explains Jenny Tozer, investment manager and Chair of the Investment Committee. In addition, portfolios have been structured “to generate capital growth via a core selection of global, high quality dividend paying companies, together with investments in global macro and event driven alternative investments.”
Jonathan Giles, who heads the Jersey office of UK’s Rathbone Investment Management, says, “I firmly believe that our institutional size – we now manage close to GBP20billion – married with our ability to truly tailor our service to individual client needs has hit a ‘sweet spot’. We can offer clients a focused and substantial investment management resource, independent advice and a skilled and proven offshore investment team.”
Over the past six to nine months, Giles has observed an increasing desire among the firm’s clients to target shorter-term returns and to be involved through advisory mandates: “Diversification remains central to their thoughts with a focus on blending market risk and lower correlation; what a couple of our clients have called ‘their cake and eat it strategy’. Good or bad humour aside, they are asking for simple and transparent solutions to an increasingly complex world.” Rathbone Investment Management International won the Wealth Adviser award for Best Wealth Manager (Jersey, Guernsey and Isle of Man).
But not all wealth managers can take this flexible and bespoke approach and as result, some may suffer in the months ahead. As KPMG notes: “This is an industry with limited experience in implementing transformational change. Should there be a major market correction, a mere 15 per cent decline in revenues would push around 29 per cent of wealth managers into a loss.”
Another challenge is communicating these products and services to clients without confusing them with too much noise. The efficient use of technology can be a key differentiator here with firms such as St James’s Place Wealth Management, which won the Wealth Adviser award for Best Private Client Asset Manager (UK), distributing iPads to its 1,800 Partners to enhance the depth and quality of their client presentations, backing this with an array of multimedia presentation tools.
The second trend outlined previously is the focus on regional groups of HNWIs. It is increasingly difficult for most wealth management firms to operate on a truly global basis given the cost constraints they face. And, the growth of wealth in some domestic markets makes overseas expansion unattractive for some domestic wealth managers.
Tony Dunk, Marketing & Investor Relations Director at St James’s Place Wealth Management, who delivered the opening address at the Wealth Adviser Awards 2013, said RDR has proved a mixed blessing to the firm, driving IFAs struggling to stay independent to its doors, attracted by its centralised multi-service model and its use of external managers.
Dunk believes there is enormous untapped potential for growth in the UK market, given the low interest rate environment and the significant volume of bank deposits and household wealth.
Indeed, the growth of global household wealth is unstoppable. As Credit Suisse Research reported in its Global Wealth Report 2012: “Despite the financial crisis, global household wealth increased by USD 109 trillion between 2000 and 2012.”
Credit Suisse estimates that global net worth per adult will reach USD 67,000 by 2017, an increase of almost 40 per cent relative to 2012. And total household wealth is projected to rise almost 50 per cent (equivalent to 8 per cent per year), from USD 203 trillion in mid-2012 to USD 330 trillion by mid-2017.
China is expected to surpass Japan as the second wealthiest country in the world by 2017, and the USA expected to maintain its leading position, with France and Germany in fourth and fifth place respectively, according to Credit Suisse.
The political instability and market volatility witnessed around the world in recent times, combined with the growing trend towards multi-location lifestyles, mean that HNWIs in these countries are increasingly investing their money offshore, with some countries such as the UK and Australia being beneficiaries of this move as witnessed by the rising demand – and prices – for prime London and Sydney property, along with alternative and portable investments such as fine wine, art, classic cars, rare stamps and watches.
This means that wealth management firms need to respond with a pooled skills approach – bringing in experts where required – or develop multi-disciplinary skills in-house to service these diverse investment requirements.
KPMG also notes that “firms are responding to costs and revenue pressures by focusing on more profitable clients, in at least one of two ways:
• Identifying profitable clients, segmenting by value, remodelling proposition and service packages to suit client type, rationalising unprofitable clients and focusing on attracting and retaining wealthier clients.
• Seeking greater share of wallet by cross-selling a broader range of services and products.
“The first route will be favoured by mono-line Private Client Investment Managers (PCIMs) as their chief route to scalability, while private and universal banks will attempt both routes to increase their share of wallet of more profitable clients.”
The Wealth Adviser Awards 2013 showcase wealth managers, advisers and service providers who are already focused on realigning their business models to deal with these many challenges, and to profit from consolidation, strong investment models and significant investment in technology.
