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Wealth Manager: Thomas Miller - 'the profitability shift is generational and it's not coming back'

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by Danielle Levy on Jun 13, 2013 at 00:01

Meeting someone who is brutally honest about how the changing dynamics of their industry will force down profits is rare in financial services.

So spending an afternoon with Thomas Miller Investment’s (TMI) Harry Morgan proves refreshing, given his frank views on the wealth management sector.

One gets a sense he has attained a new perspective from the part-time MBA course he is currently two thirds of the way through at Heriot-Watt university, along with the experience he has gained after a year spent building a UK division for his company.

While firms may have been able to boast of 50% profit margins back in 2008, he says those days are long gone. ‘I think people can only dream of these kinds of margins,’ he says, adding if clients were to sense a company were making a 50% margin in the current environment, they would be pretty perturbed.

He believes this underlying trend towards lower profit margins should not be underestimated by the private client investment management community. ‘I think there has been a profitability shift which is transformational and it is generational and whether it ever comes back, I am not sure,’ he says.

‘The big issue for the industry is that the demand curve has shifted down and the cost curve has shifted up, so profits are being squeezed. We can’t shift the demand curve out, people are not going to pay more, so you have to either manage the costs or take a smaller margin.’

With this in mind, he says it is important to adapt expectations. ‘The Thomas Miller Investment view is that it is a low return, low inflation world. Let’s make a sustainable profit but let’s not aspire to making 2007 era pre-tax profit multiples. It is not going to work. It is very tough for the industry at the moment,’ he explains.

He highlights the snapshot of the industry that is thrown up by adopting Michael Porter’s ‘Five Forces’ investment theory. This provides a framework for analysing an industry or business strategy and looks at the threat of new entrants, substitute products, bargaining power of customers and suppliers and the intensity of rivalry.

Anyone viewing wealth management through this lens would conclude that the sector ‘looks like a terrible place to invest in’, he admits.

‘There are plenty of good people doing it and the substitute product is passive,’ he says. ‘The barriers to entry are still relatively low. Customer power is strong as people can negotiate on fees and there is intense rivalry.’

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