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Could outsourcing reverse the tide of boutique consolidation?

Could outsourcing reverse the tide of boutique consolidation?

Private banking and discretionary management has come full circle since 2007, as a following tide tipped the industry structure from favouring monoliths to multitudes and back again.

An initial wave of bank-downsizing-induced business launches has given way to a wave of consolidation; 94% of practitioners expect this to continue or accelerate over the next two years, according to research by PricewaterhouseCoopers (PwC).

The direction of these tides varies but the current strongest is regulation, which has fundamentally shifted the profit/cost ratio of the front of office.

‘New compliance requirements will likely be a game-changer for asset managers,’ noted Ernst & Young last year.

At least some in the industry predict that seemingly straightforward direction is meeting a little-noted but powerful cross-current however: the rise of the outsourcing industry.

The ability of businesses to pick and choose which services they offer and which they farm out at low cost to one of an increasingly sophisticated field of providers fundamentally changed how businesses make money, they suggest

‘Barriers to entry are not as high as people think,’ says Matthew Butcher, who recently left Brewin Dolphin to join relative upstart Dart Capital.

‘We will see more boutiques launched but they will be larger than they previously have been as you need to extract economies of scale, keep pricing as keenly as you can for clients, and keep investing in research and compliance as well.’

Front-of-house needs

After years of increasing automation and standardisation in the middle and back offices, change in the sector is currently being driven by front-of-house needs.

New requirements to invest in systems and processes related to suitability and other regulated client functions have put a big additional financial burden on businesses without the scale to develop their own IT systems.

But for the same reason they offer the greatest potential for maturing technology providers to become a critical component of wealth management competitiveness.

‘You have a series of factors here’ said Ian Woodhouse, a director in the wealth management team at PwC.

‘You have a much more mature [outsourcing] industry able to offer more options than ever before.

‘Historically, most investment in [wealth management] technology was on-site but you now have software-as-service, remote-hosted systems and a range of other platforms. 

‘You also have a bottom-line that is under pressure in terms of margins and regulation, so IT is becoming much more important as a component of the cost-base.

‘Really, for the first time, these compliance and regulation pressures that have been on the back office for years are now beginning to be applied to client-facing services, which until now have been much more diverse. So you really have a confluence of things all coming together.’

Given the broad range of issues in play, Woodhouse said it is hard to predict simple, binary cause-and-effect consequences. But he believes historical factors such as scale were likely to be a much weaker predictor of success, and intelligent use of technology to maximise much stronger margins will be key.

Regardless of size ‘you have 30% of businesses reporting double-digit growth, 30% on low single-digit, and 30% really struggling. This is an industry going through a lot of change’.

According to PwC research among more than 200 wealth management businesses across more than 50% countries, IT spending growth has more than doubled since 2012, from 5% a year to 10%. This is in turn being driven by increasingly tailored services, with more than 60% of managers saying they were reducing their usage of off-the-peg services.

These still have attractions, however. Raymond James charges a flat 15% of fee income for a suite of wealth management and compliance services.

Reducing regulatory burdens

That did not just make economic sense for market entrants, said Mark Sturdy of recently launched, Raymond James-authorised Marlborough & City, but also offered flexibility, and the stability provided by a multi-national business.

‘Obviously the regulatory burden has been hugely lessened, but secondly the Raymond James name is helpful because it signals that we are regularly audited and so forth,’ he added.

‘As a friend put it, if I was employing a group of people to do this rather than a service provider, I would be paying out far more to them in the good years in the form of bonuses and so on – not just in compliance but in administration and back office.’

He added that speaking to other start-ups, he appreciated that there could be longer-term downsides, however.

A capital-rich individual intending to build the value of a business for eventual sale might find the initial systems investment worth the long-term pay-off, he suggested  

‘Some [users] will have left other companies with a fair amount of money and if they are hoping to build a brand for eventual sale then you would probably want to break away as soon as possible.’

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