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Will fee competition kill wealth earnings this year?

Will fee competition kill wealth earnings this year?

Wealth managers have warned that earnings in their own sector could be subjected to downwards pressure this year as fee competition bites.

A survey, carried out by Wealth Manager, found that 42% of an 80-strong sample of our readers expect earnings in the industry to move downwards in 2014. A little over 38% expected earnings to stay static, with the minority tipping upwards movement.

It is a finding that reflects concerns about oncoming market weakness as global monetary policy unwinds, particularly as fees are inherently linked to the direction of markets and trading volumes, alongside the rising costs of doing business.

‘We had a jolly good year in 2013 as markets rallied, and although we’re hoping that will continue, it won’t be enough to offset regulatory and fee overhaul cost,’ consultant Michael Maslinski explained.

Tim May, chief executive of the Wealth Management Association, added that concerns about profitability were understandable, given the costs of doing business.

‘Compliance costs have been a significant drag on profitability – in the worst cases they have cut wealth management firms’ profits in half. Those compliance costs include funding for the FSCS, which has been at record levels for four years now.’

James Brearley director David Hannis, on the other hand, expects fee competition will weigh on earnings in 2014.

‘It’s a two-pronged attack, as regulatory costs continue on the upward trend that we have seen over the last years. Like the fund management industry, wealth managers are under pressure from both clients and competitors to look at their overall costs and fee structure.

‘I would suspect that, on balance, it’s the fee structure that will bring a little more pressure rather than regulatory costs,’ he explained.

Andrew Fisher, chief executive of Towry, anticipates earnings in 2014 will not differ hugely from 2013. He anticipates Towry’s earnings and broader business will continue to grow but highlights volatility and instability in markets as the biggest threat facing the company. He believes the firms that will feel the pinch are those that ‘still operate a very hefty upfront charge’.

‘If people are heavily dependent on transactional income as opposed to ongoing and regular income then I think they will feel the pressure,’ he said.

‘I think a lot of peers are the same as us now, having moved to a more recurring income type-model. For those who haven’t moved to giving value for money, they are going to get bitten.’

Gavin Haynes, managing director at Whitechurch Securities, anticipates larger businesses are more likely to see earnings coming under pressure.

‘Like all businesses, the larger you are the harder it is to grow the assets and market share when you are mature, particularly if you are seeing a reduction in margins. Some of the traditional DFMs are also relatively expensive compared to some of the newer solutions.’

He said the findings contrast with the positive earnings projections he has for his business.

‘But obviously, if you’re looking at fees only, then yes, I agree that in the medium-to-long term there will be continued downward pressure on fees,’ he acknowledged.

‘Fee competition is going to continue to erode margins, over the medium term, but if you have a competitive solution and a good level of service, then things should look more positive,’

While investors may still be attracted to large household brands, Hannis claims ‘the bigger players may still feel that they can maintain a premium charge, but I think on balance they are more vulnerable to any sort of squeeze.’ 

He also notes changes to pension rules announced in the Budget, which were announced after the survey was completed, could provide a welcome boost for the firm, and compensate for some of the headwinds.

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