Wealth management consolidation leaves smaller groups on borrowed time

Smaller wealth managers in the UK have been given their starkest warning yet that they may be living on borrowed time as their industry rapidly scales up.

Rathbones’ £839mn deal to buy Investec Wealth & Investment UK earlier this month and create a wealth management powerhouse was heralded by some as necessary to cut costs in the face of surging inflation.

But critics warn it could also mean fewer choices for consumers and lower fees for midsized fund groups — the likes of Abrdn, Jupiter and Liontrust — which sell their products to the wealth managers.

The tie-up between two of the UK’s most well-known wealth groups, which manage money on behalf of individuals, has positioned the enlarged Rathbones as one of the largest players in the sector, overseeing £100bn of assets.

At the heart of the deal is a plan to strip out nearly £60mn of annual costs by sharing resources, shrinking the real estate portfolio and reducing headcount.

It is emblematic of an industry under pressure, from inflation to mounting competition from low-cost investments, such as index-tracking funds, and cheap DIY investment supermarkets.

But for those who can wear short-term acquisition costs, there are also opportunities as a result of growing demand for wealth management. Pension changes over the years, including the shift towards defined contribution schemes, have left many people burdened with investment decisions and in need of advice.

Graham Marchant, partner at investment banking boutique Fenchurch Advisory, said: “The UK wealth management industry is benefiting from long-term structural growth. An attractive industry characteristic is the simple fee-based and capital-light business.” He added that the need for scale and consolidation was “likely to continue” as wealth managers grappled with spending on technology, regulation and products.

More deals are already on the cards. Just days after the Rathbones merger with Investec’s UK and Channel Islands wealth business was announced, buyout group Inflexion was reportedly considering smaller wealth manager Seven Investment Management, which declined to comment. UK fund company Liontrust earlier this week made an approach to buy troubled Swiss rival GAM, although it said there was no certainty talks would lead to a formal offer.

An accelerating consolidation spells pain for smaller asset managers.

“Rathbones buying Investec Wealth means more fee pressure on asset managers,” said one UK equity fund manager. “The number of independent wealth managers is shrinking fast. As a supersized wealth manager, they can demand lower fees for their custom. When these mergers happen, they go out to all their suppliers — the fund managers like us — and argue that they shouldn’t be paying the existing rates.”

The shrinking group of large wealth managers could hit certain types of investment products. Analysts at Jefferies said the implications of the Rathbones merger for investment trusts were “potentially enormous” because the enlarged group’s size makes it harder to invest in smaller, more specialist, or less liquid products. “As the firms get bigger, they have required fewer but bigger investment solutions,” they warned.

Although mergers in wealth management are not a new trend, analysts say it will probably gather pace as costs rise and profit margins are squeezed.

Rae Maile, analyst at Panmure Gordon, said revenue margins were “under inexorable pressure” from competition and fixed costs of regulation.

Recent deals in the wealth management industry include Royal Bank of Canada’s £1.6bn acquisition of Brewin Dolphin which completed last year. According to data company Dealogic, there were 29 merger and acquisition deals in the UK in 2022 with a deal value of £2.25bn. So far this year there have been six deals with a value of £979mn.

The market is fragmented, with just a handful of larger players such as St James’s Place, which manages £150bn. Research company PAM Insight estimates that £1.2tn is managed in the UK on behalf of customers. Of the 300 wealth managers, more than two-thirds have less than £1bn in assets under management.

It is not just headwinds forcing mergers in the industry. Bankers say private equity groups are interested in their business models, which have less onerous capital requirements than other financial services companies and have longstanding customers often paying attractive fees.

Evelyn Partners is one of the larger wealth managers that could soon be put on the block or floated, some investment bankers said. The group, which declined to comment, was formed after Tilney, owned by private equity group Permira, acquired Smith & Williamson in 2020 for £625mn. Over the past decade, Tilney has also acquired Bestinvest and Towry, to create a group that now manages £53bn.

Much like the wealth management sector, the asset management industry is also ripe for consolidation.

“For asset management specifically, there is the added pressure of passives and private markets taking share of flow and putting pressure on fees,” said David McCann, analyst at Numis.

McCann added that boosting scale through mergers is one way to deal with the “ever-reducing [fee] rates”.

“Inevitably it will be the midsized part of the market where we will probably see most consolidation activity, as that is the part of the industry most under pressure,” he said.

A number of deals have taken place in recent years, from Standard Life joining forces with Aberdeen to Jupiter’s acquisition of Merian.

Still, analysts warn that combined businesses risk losing fund manager talent and haemorrhaging assets.

In the case of Rathbones and Investec, the businesses will also spend about £100mn to integrate — a reminder that despite the promise of riches, such mergers are not without costs.