If the credit crisis has taught us anything, it is how quickly the world of financial services can change.
Canaccord Genuity Wealth Management (CGWM), formerly known as Collin Stewart Wealth Management, is one business that has sought to benefit from change in the sector, having undergone something of a metamorphosis over the past five years.
Hot on the heels of its rebrand last week, CGWM chief executive Neil Darke is positive about the path ahead for the business.
The rebrand tops five years of significant change at the wealth manager. During this time it has completed a string of acquisitions, with Eden Financial the most recent, and has moved into financial planning through its purchase of Anderson Charnley back in 2010.
One of the most striking changes under Darke’s six-year tenure at the helm of the business has been a shift in focus from the Channel Islands to the UK mainland. In fact, the UK market now accounts for 40% of CGWM’s £9.5 billion in assets versus historic ratios which Darke says were closer to 80:20 or 70:30.
‘The inorganic growth opportunities in the UK are manifestly more material than in the Channel Islands. It is a smaller market and we have a bigger share of a smaller market, so naturally there is less we can do,’ says Darke.
‘One of the reasons Canaccord bought Collins Stewart Plc was for the wealth business, and Canaccord sees the UK market as ripe for consolidation. It could see us, Collins Stewart Wealth Management/CGWM, as a key aggregator in that consolidation. Very recently we have seen an increasing number of transactions in the sector and one would expect that to continue’.
While Darke currently has no interest in moving into private banking, he said the management team would consider ‘four Cs’ when looking at potential acquisitions in the future: namely, culture, clients, capability and finally costs, lastly but still one of the larger elephants in the room.
With three acquisitions under its belt over the space of the past four years, which has helped the firm to double the size of its business, Darke says it has learnt a lot from the process.
Although he acknowledges that parts of the infrastructure have come under pressure in the past, he says significant investment in a robust platform now leaves the business well placed to consolidate smaller players.
He is also positive about Canaccord’s global presence, resources and the potential growth opportunities that can come from being a part of the group.
‘Collins Stewart Wealth Management, courtesy of its offshore heritage of the wealth management group, has always had an international view of the world.
‘We have always tried to use that to differentiate ourselves from some of the very UK-centric stockbrokers and managers out there, in terms of our global view of the investment world. The acquisition by Canaccord just allows us to enhance that because we have a more international name,’ he says, highlighting the firm’s presence in Asia, mainland China and Australia alongside its native Canada
He adds that the integration of Eden Financial, a UK-based wealth manager acquired in September of last year, is progressing well. Although takeover talks were stalled by the Canaccord deal, the extended courtship, as Darke describes it, allowed both management teams to have a thorough plan for the integration of the two businesses.
‘It meant we were very open about what we planned to do post the acquisition, so nothing we have done since we owned it has been a surprise to anyone… and I am very keen that with any business acquisition the physical integration happens as quickly as possible,’ he says.
The integration process has been helped by mixing up the two teams through a new seating plan, organising social events to help the two teams get to know each other, and ensuring Eden’s investment managers are well represented on investment committees.
More generally, having representation in the formulation of the investment process is the key to getting individual investment managers to buy into the firm’s centralised investment process, Darke notes.
‘Our view was an important part of the integration process was to have a centralised investment process populated by practising portfolio managers and we insist that every bit of the business is represented,’ he says.
‘There are lots of academic studies that show that group decisions are better than individual decisions.’
CGWM runs a series of risk-rated models called Remap (risk enhanced multi-asset portfolios), which are underpinned by a risk management system designed in the wake of the credit crisis to take into account movements in volatility, liquidity and correlation risk.
The investment proposition is underpinned by a recommended stock and buy list, which the chief executive says is not overly prescriptive. Overall, he describes the firm’s investment process as ‘disciplined but tolerant’.
‘We make sure we have got discipline but also the flexibility to recognise the characteristics of individual client types,’ Darke adds.
Equities remain CGWM’s preferred long-term asset – although given the potential for volatility, the investment team is currently modestly underweight across its models, which they acknowledge has led to some underperformance over the past six months. Despite this, they feel it is appropriate for its client base, given their cautious outlook.
The firm’s balanced model for UK clients currently has a 69% allocation to equities, with 24% in bonds, 6% in alternatives and the balance in cash. Over the past 12 months, the model is up 11.4%, while the Apcims Balanced Benchmark rose 13.4%.
The same model has fared slightly better over a three-year period, posting a 26.9% rise and outpacing a 26.1% rise by Apcims Balanced, with annualised three-year volatility of 9.8% against the benchmark’s 10.7%.
Darke highlights infrastructure and healthcare as key themes in future, although the team remains cautious and underweight risk assets as a result.
‘While sentiment has improved this year, a myriad of economic issues remain with Europe in particular stuck in the doldrums of recession. Japan’s recovery from deflation is at best in its early stages. While the US economy appears the strongest of the major developed economies, it is only the best of a bad bunch.
‘Against this backdrop, we believe equity markets are overvalued. Turning to fixed income – with government bond yields so low, investors are chasing income. However, we question whether investors in corporate bonds and high yield are being fully compensated for the inherent risks.’
Darke recognises the value of regulation, saying the RDR and its focus on transparency are likely to lead to lower total expense ratios and benefit clients, while the suitability review has caused discretionary managers to carry out as extensive fact-finds as their adviser counterparts, allowing for a much better understanding of the client’s financial circumstances and needs.
Nonetheless, he notes there will be unintended consequences of regulation. One of the most notable has been a narrowing differential between wealth management businesses, particularly as many traditional investment management firms have moved into financial planning over the past few years in order to attract new clients and enhance the proposition for existing clients.
‘It has narrowed the differential between businesses...so client acquisition is a hugely important issue,’ he remarks.
He views CGWM’s financial planning specialist 360° Service as offering a substantial potential growth opportunity for the business, not least due to the potential demand from its own discretionary client base who, it has transpired from a recent survey, are not currently receiving advice.
‘The interesting thing that came out of the survey was that some clients were not aware of what services we have on offer.
‘Most of our clients have financial planning needs. When we bought Anderson Charnley and turned it into 360, it was not to flog financial planning to our existing clients, but what we are hearing is that our existing clients do have financial planning needs,’ he says.
‘I guess we will look to do a bit more on that and this will be part of this year’s more organic approach.’
He compares the convergence in wealth management business models to UK supermarket industry where there is massive competition and businesses work hard to differentiate their propositions.
In the process they spend a lot of time understanding their client base and bringing about product innovation, based on their findings.
‘Supermarkets are fantastic businesses for focus groups, trialling things, and new product innovation because they are looking for that little edge because they understand that fundamentally they are doing the same thing,’ he explained.
To help achieve differentiation from competitors, Darke expects technology and its use in improving the end-service to clients will prove even more important.
He hopes it can differentiate the firm from ‘the stuffiness of some of its competitors’. For example, its recent client survey showed that 30% of its client base who are over 65 use tablets, while 50% bank online.
‘We as an industry can be a bit old fashioned and stuffy and view our clients as conservative, but their technological habits are far more advanced than we think they are. We recognise that as a growing business we need to understand our clients better,’ he said.
Nonetheless competition is driving consolidation in Darke’s view, and this is where he hopes that Canaccord with its scale, global backing through its new parent and brand, investment proposition and solid infrastructure can benefit.
‘Canaccord would like to be a key aggregator in the UK. We see an opportunity in the UK wealth market and over the next business cycle would like to double assets under management again.’