As the latest wave of consolidation in UK wealth management gathers pace, senior figures in the industry are questioning whether the economies of scale will be passed on to clients.
Many argue the latest round of mergers and acquisitions (M&A) has much further to go and is being driven by the perfect storm of rising regulatory requirements and costs, pressure on margins and revenues as new business stalls, and a growing acceptance of lower valuations by sellers.
Quilter’s purchase of Cheviot comes hot on the heels of Rathbones’ purchase of Taylor Young Investment Management. Rathbones plans to raise a further £24.2 million to take advantage of acquisition opportunities (see page 6 for more details).
Meanwhile, Collins Stewart parent company Canaccord took over Eden Financial earlier this year, indicating a growing trend towards consolidation in a fragmented market.
Driven by regulation
‘There is no doubt that regulation to a degree is driving some of it because the whole retail distribution review (RDR) process has caused people to look at their business model and decide if it is sustainable in its current form or whether it would be better set alongside another firm or part of a firm,' Andy Steel, chief executive of boutique James Hambro & Partners, explained.
In August, James Hambro & Partners decided to merge with high net worth financial planner Calkin Pattinson, to expand its proposition and increase scale ahead of the RDR. Steel anticipates that consolidation will continue, with two types of deal dominating.
‘We think what we are seeing is a bit of polarisation between bigger houses increasing market share by acquisition or two small businesses coming together to make sure they have sufficient scale to survive the RDR. Two different types of deal are happening and this will continue,’ he said.
Impact on pricing
With incoming regulator the Financial Conduct Authority seeking to promote competition in the interests of consumers while the RDR aims to improve competition through increased transparency and the removal of trail, the fact regulation is driving consolidation – and thereby removing competition and choice for consumers – could be seen as ironic.
Paul Killik, founder of Killik & Co, is concerned that regulators are driving business models and stifling innovation and competition.
‘This has all the obvious contrary effects on pricing and choice. The problem is that we are not getting new businesses coming through,’ he said. ‘The green shoots are not there because it is a heck of a job starting a business up.’
He estimates that if he were to go through the same process he went through 23 years ago when he set up Killik, it would now take twice the amount of time.
‘I think it is a huge sadness that firms are merging. I can understand why, but the poor consumer is a loser again,’ he said.
The potential impact of consolidation on fees could go either way. Some argue that larger firms with economies of scale that are run efficiently and have access to super-institutional pricing should be able to pass on the benefits to clients through lower charges.
On the other hand, less competition theoretically means less downward pressure – although pricing in wealth management has historically been driven by a number of factors, not just competition.
Steel anticipates fees will move upwards, pointing to larger firms in the industry taking a ‘robust’ approach to pricing ahead of the RDR in order to maintain margins and react to rising business costs. ‘This is more about needing to maintain margin. In an expensive environment, some are passing this on to the client,' he said.
'It is an unfortunate consequence of what is regulation-driven – that you remove competition and increase the cost for the client.'
Steel added that as a relatively new entrant to the sector, his firm has no plans to adjust its pricing.
Killik also takes issue with the argument that larger firms have more efficiencies than smaller businesses, saying: ‘I am not sure if there is ever much cost that you can take out of the equation – particularly for advisory businesses.’
He also questions whether firms put too much faith in growth by acquisition rather than organic growth.
Consultant Michael Maslinski expects pricing to change little following the latest round of M&A and is concerned the industry is polarised with a lack of medium-sized firms.
‘I expect pricing will continue to be opaque and I don’t believe the regulators have got a handle on how to make sure that both clients and salesmen really understand what it is they are selling,’ he said.