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May 20, 2009updated 05 Jun 2017 11:40am

Standing their ground

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.

By PBI Editorial

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.

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.

That 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 .

UK Wealth business model UK Wealth AuM by client type

UK Wealth top 25

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