London-listed wealth managers are cottoning on to the benefits of managing money on a discretionary basis. During recent years, groups including Brooks Macdonald (BRK) and Brewin Dolphin (BRW) have been shifting towards discretionary wealth management and away from advisory work. In line with this, many wealth managers have been tidying up their corporate structures, selling off non-core businesses and consolidating offices. However, with investors casting an increasingly sharp eye over fees and more 'robo-advice' products launching, the challenge is to maintain this momentum in attracting new business.
Some wealth managers have been launching lower-cost services in order to attract a broader range of retail clients. Meanwhile, Rathbone Brothers (RAT) is planning to target even higher value customers, launching a private office to offer access to private banking products. Others are trying to offer a more holistic service. The question is: will wealth managers be able to continue growing client funds while maintaining a personalised service and keep costs down?
Transitioning to discretionary management and away from advisory services has helped stabilise flows for the majority of UK-listed managers, even when equity markets have been volatile. Under a discretionary model, clients outsource management of their portfolio rather than signing off day-to-day investment decisions. Inflows into wealth managers have grown steadily during the past three years as a result. Part of the recent upswing can be attributed to the implementation of pensions freedom legislation last year - and the additional complexity that came with it.
But moving towards discretionary management means greater reliance on fee income and less on commission. The latter is dependant on the volume of transactions executed and is therefore more volatile. Under a discretionary model, a greater proportion of wealth management income is recurring. For example, Aim-traded Mattioli Woods (MTW) has managed to increase its proportion of recurring income to almost 83 per cent from 71 per cent three years ago.
How low can costs go?
Targeting individuals with an investible portfolio of between £50,000 and £500,000 could provide good inflows for wealth managers. UBS has recently launched its SmartWealth platform, an online wealth manager that gives clients real-time advice and access to five investment strategies based on their risk profile. In April last year Brewin Dolphin launched the Brewin Portfolio Service (BPS) on its 'Brewinsdirect' platform. The non-advised service is aimed at those with a minimum of £10,000 to invest and places investors into one of six investment portfolios according to their risk profile. Funds under management initially consisted of transfers from advisory and execution-only clients, although the service has now been rolled out fully.
Shore Capital analyst Paul McGinnis is not convinced Brewin should be targeting the 'robo market'. "What no one has been able to demonstrate is that you can make money from these," he says. BPS levies an annual charge of 0.7 per cent on the value of a portfolio per customer account, plus product charges, for a total cost of less than 1 per cent. Mr McGinnis reckons 'robo-advice' pricing can't be sustained at this level, which is only marginally below the price of a full discretionary service. It needs to ultimately settle at an annual fee of around 0.45 per cent - equal to Hargreaves Lansdown's (HL.) annual fee for assets up to £250,000 via its Vantage platform. However, an important difference is that Vantage doesn't offer the same risk-profiling service as BPS.
Charles Stanley (CAY) is also exploring options to launch low-cost alternatives for clients where a discretionary tariff is not suitable. However, chief executive Paul Abberley doesn't believe 'robo advice' services pose a threat to the group's business model. "Whenever we talk with our clients one of the key things they prioritise is trust," Mr Abberley says. He reckons this will dissuade investors taking their business to start-up fintech advice firms over established wealth managers.
The difficulty for wealth managers such as Brewin in launching lower-fee services is that while they can typically negotiate a better rate for collective products with fund managers than a retail investor could, they don't have the same firepower as larger rivals such as St James's Place (STJ) and Hargreaves. While St James's Place only recently made its first foray into the discretionary market, it has around £71.4bn in total funds under management. This is almost three times that of Brewin and more than twice that of the larger and more established Rathbone Brothers.
Growing income from existing clients
Where smaller wealth managers can make progress is by gaining more funds from existing clients. This is an important part of Charles Stanley's recovery strategy. The core investment management business still houses its discretionary and advisory management services. However, its multiple asset management brands have now been organised into one division, accompanied by a financial planning division and online platform business, Charles Stanley Direct.
The aim is to create a one-stop shop for clients and generate more cross-selling opportunities. Vertical integration is a growing trend within the wealth management industry. For Charles Stanley this strategy is aiding progress, helping stem pre-tax losses to £0.6m at the end of March 2016 from almost £5m in the previous year. Crucially, discretionary funds under management also grew by £100m last year despite rocky equity markets. Management expects the group to tip into the black by March 2017.
Wealth managers are also recognising intermediaries as an important part of growing funds under management. More stringent application of client suitability reporting requirements have meant a growing number of independent financial advisers (IFAs) are outsourcing the investment management of clients' portfolios by referring them to discretionary wealth managers. However, wealth managers are not able to pay a referral fee to IFAs. Brooks Macdonald has benefited particularly from growing its distribution network of intermediaries. Around 90 per cent of funds under management are gained via referrals from intermediaries.
IC VIEW:
Unsurprisingly the majority of wealth managers have suffered significant share price declines since the EU referendum. However, most are now regaining ground. With such large exposure to retail investors, London-listed wealth managers are particularly vulnerable to any market shocks or negative sentiment. However, on the whole, we're positive on the sector. The shift to discretionary management is softening the effects of recent market volatility. What's more, increased defined-contribution pension provision and pension freedom changes work in these companies' favour.
Favourites
Rathbone Brothers is arguably the highest-quality player in the sector. Admittedly its net trading commission is in decline, down a quarter to just under £20m during the first half of the year. However this is a relatively small part of the business. More reliable net fee income is growing solidly and the drag from commission on profits should lessen as the business mix changes. Management is also pushing hard to grow its intermediary network, setting up a combined sales and business development team. What's more, the shares are trading at just 16 times forward earnings, compared with 18 times when the group announced its full-year results in February. Buy.
Outsiders
Charles Stanley has made progress in strengthening its balance sheet, growing discretionary funds and reducing operating costs. However, it still has some way to go until it looks as attractive as some of its peers. The dividend was cut by more than half in 2015 and maintained at 5p a share for the year ending March 2016. The dividend may rise once adjusted earnings per share hit 10p, management says. This was 6.9p on an adjusted basis as at March 2016. Hold.
