An environment of low interest rates, dwindling investment banking revenue and exposure to the oil and gas sector via bad loans has left the banking groups in search of fresh income streams. For HSBC (HSBA) the latest initiative to drum up new business will be offering investment advice to people with smaller sums to invest. The bank's 700 premier wealth advisers will now offer standalone investment advice to people with between £15,000 and £100,000 to invest. Initially customers must have either £50,000 of investible assets or at least £100,000 in annual income to qualify for the service. However, if there is sufficient take-up of the advice service, the bank will scrap these conditions, a spokesperson for HSBC said.
Standalone investment advice will be charged at a 30 per cent discount to the premier financial advice service currently on offer to customers. This is equivalent to a report-only fee of £294 and a report plus implementation fee of £672 or 1.93 per cent. The bank said it is catering to those in the advice gap - people with smaller amounts of money to invest. Two-thirds of UK adults have already made an investment in 2016 without seeking financial advice, while almost a quarter believe it is too expensive, according to research carried out by YouGov.
The introduction of the Retail Distribution Review, which required financial advisers to charge their clients rather than getting fees through product commissions, made it uneconomical for banks to offer mass market investment advice. This caused many banks to pare back or scrap their investment advice services for all but their wealthiest customers.
However, HSBC is not the only large bank targeting a wider customer base for its financial advice services. Royal Bank of Scotland (RBS) is cutting 220 investment advice jobs and 200 protection advice jobs in favour of a 'robo-advice' service, which management said will enable the bank to offer advice to people with as little as £500 to invest. Customers can go online and answer a number of questions about their financial circumstances. The bank would suggest how much money to invest in certain funds and transact on a customer's behalf for a fee. Management is also more than doubling the current £100,000 threshold for face-to-face investment advice to £250,000.
Banks are keeping a tight rein on their costs, after the majority of the mainstream lenders were forced to book hefty provisions for mis-sold payment protection insurance (PPI), as well as restructuring charges, during the last financial year. This is in tandem with weak retail banking revenue and scaled-back investment banking operations. As a result, large banks have struggled to bring down their cost-to-income ratios. The relatively low start-up costs associated with the provision of mass market advice fits with this strategy.
Does the re-entry of large banks to the investment advice market pose a threat to specialist wealth managers, though? In short, it is unlikely. Wealth managers such as Rathbone Brothers (RAT), St James's Place (STJ) and Brewin Dolphin (BRW) cater to individuals investing much larger sums than the minimum thresholds set by the large banks for these more generalised advice services. The typical minimum account size with Rathbones Investment Management is £100,000, while for Brewin Dolphin the average managed account size is just shy of £500,000.
Peel Hunt analyst Stuart Duncan does not reckon the banks pose too much threat to existing wealth managers. "The advantage wealth managers have is the strength of their brand and the quality of service they offer," he said. Specialist wealth managers also build client relationships that tend to be very "sticky", he added.
