Home Personal Finance Wealth management consolidation leaves smaller groups on borrowed time

Wealth management consolidation leaves smaller groups on borrowed time

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Smaller UK wealth managers have received the harshest warning yet that they may be living on borrowed time as the industry expands rapidly.

Rathbones acquired Investec Wealth & Investment UK earlier this month, a £839m deal to create a wealth management powerhouse, needed to cut costs in the face of soaring inflation told some people.

But critics warn that it will give consumers less choice and could also lower fees for mid-sized fund groups (such as Abrdn, Jupiter and Liontrust) that sell products to asset managers.

A partnership between two of Britain’s most prominent wealth groups to manage money on behalf of individuals has positioned Rathbones as one of the largest players in the sector, overseeing £100bn of assets .

At the heart of the deal is a plan to save around £60m annually by sharing resources, reducing the property portfolio and reducing headcount.

It represents an industry under pressure, from inflation to increased competition from low-cost investments such as index-tracking funds and cheap DIY investment supermarkets.

UK targeted Wealth/Asset Management M&A deal value column chart - all acquirers (£m) showing Wealth and Asset Managers on the block

However, for those who can afford the short-term acquisition costs, there is also an opportunity as a result of the growing demand for wealth management. Pension changes over the years, including moving to defined contribution plans, have left many people burdened with investment decisions and in need of advice.

Graham Merchant, Partner at Fenchurch Advisory, an investment banking boutique, said: An attractive industry feature is a simple fee-based, light capital business. The need for scale and consolidation “is likely to continue” as wealth managers grapple with technology, regulation and product spending, he added.

More transactions are already on the card. Days after the merger of Rathbones and Investec with UK and Channel Islands wealth businesses was announced, his buyout group Inflexion is reportedly considering small-scale wealth manager Seven Investment Management. but declined to comment. British fund firm Liontrust said earlier this week that its troubled Swiss rival had taken an approach to buy GAM, but said there were no firm negotiations leading to a formal offer.

Accelerating consolidation means pain for smaller asset managers.

“Rathbones’ acquisition of Investec Wealth means increased fee pressure on asset managers,” said one UK equity fund manager. “The number of independent wealth managers is rapidly declining. As super-large wealth managers, they can demand lower fees for their practices. We go to all our suppliers (fund managers like us) and argue that they shouldn’t be paying existing interest.”

A shrinking group of large wealth managers can hit certain types of investment products. Analysts at Jefferies said the impact of the Rathbones merger on mutual funds “could be huge.” “As companies grew, they needed fewer investment solutions, but larger investment solutions,” they warned.

Mergers in wealth management aren’t a new trend, but analysts say the pace is likely to pick up as costs rise and margins are squeezed.

Panmure Gordon analyst Rae Maile said profitability was “under relentless pressure” from the fixed costs of competition and regulation.

Recent deals in the wealth management industry include the £1.6bn acquisition of Brewin Dolphin by Royal Bank of Canada, completed last year. According to data firm Dealogic, he will have 29 merger and acquisition deals in the UK in 2022, valued at £2.25 billion. So far this year there have been six of his deals valued at £979m.

The market is fragmented, with only a handful of large players such as St James’s Place, which manages £150bn. His PAM Insight, a research firm, estimates that he has £1.2 trillion under management in the UK on behalf of clients. Of the 300 wealth managers, more than two-thirds of them have less than his £1 billion in assets under management.

Headwinds aren’t the only things forcing consolidation in the industry. Private equity groups are interested in their business model, which has lower capital requirements than other financial services firms and longtime customers often pay attractive rates, bankers said. .

Evelyn Partners is one of the leading wealth managers that may soon be blocked or listed, according to some investment bankers. The group, which declined to comment, was formed after Tilney, owned by private equity group His Permira, bought Smith & Williamson for her £625m in 2020. In the last decade, Tilney has also acquired his Bestinvest and Towry, forming a group that now manages £53 billion.

Like the wealth management sector, the wealth management industry is ripe for consolidation.

UK targeted Wealth/Asset Management M&A deal value column chart - £m acquired by Wealth/Asset Managers shows sector consolidation

Numis analyst David McCann said: “There is additional pressure, especially when it comes to asset management, with passive and private markets taking share of flows and putting pressure on fees.

McCann added that increasing size through mergers is one way to deal with “an ever-shrinking company.” [fee] rate”.

“It’s the part of the industry that’s most under pressure, so it will inevitably be in the mid-sized part of the market where we’ll see the most consolidation activity,” he said.

Many deals have been made in recent years, from a partnership between Standard Life and Aberdeen to Jupiter’s acquisition of Merian.

Still, analysts warn that the combined business risks losing fund manager talent and bleeding assets.

In the case of Rathbones and Investec, the two companies will spend around £100m on the integration.

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