UK wealth managers must embrace consolidation challenge

Saturday 9 March 2013

A private client fund manager encapsulated the challenge everyone in the financial sector is facing at the moment when she said: "The problem is, no wealth is being created right now."

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ROBERT DAVIES Fundamentals

And the gross domestic product figures for the UK certainly bear that out.

Banks are not lending, house prices are not rising and there is little demand for the associated goods and services that go with a housing boom. Incomes are flat and few people like saving when petrol prices are rising, graduates are paying off debt and pensioners face falling income from rising bond prices and low interest rates.

No wonder no wealth is being generated and wealth managers are being squeezed as never before. And the ramifications are being felt far and wide, as 10,000 UBS traders can vouch for.After years of expansion the cake has stopped growing. In such a time of stress could there be a better moment to introduce two radical ideas into the industry: retail distribution review and auto-enrolment? Probably, but they did it anyway.Finally, this is just the occasion for the UK industry to face one further challenge.The arrival of low-cost passive funds in force from the US is changing wealth management in the UK, in the same way cheap reliable Japanese motor bikes and cars eviscerated the UK motor industry in the seventies.So wealth management is an industry that has no, or little growth, too many competitors, a high cost base and an erratic range of products some of which are complex.Car manufacturing and many other UK businesses reacted by shrinking from the mass market and retreating into specialised, niche and high-margin areas. Even that was not enough to prevent brand names such as Rolls-Royce and Lotus succumbing to foreign buyers.We have already seen a great deal of consolidation in wealth management and there is undoubtedly a lot more to come. The lesson from other industries is that consolidation is inevitable and will be driven by the low-cost manufacturers. While many people aspire to owning an Aston Martin more people drive a car made by Ford. Top speed is simply not a factor for most buyers when choosing a car. The same applies to funds. The UK's best-performing fund only has £59 million. That tells us investors and intermediaries are not buying alpha, as the term for outperformance is known.Low cost and reliability are more important factors and those features will be the ones that predominate in an industry that is consolidating.It is of course possible economic growth may return but it would not be prudent to rely on that. So the challenge for intermediaries is how to slice the cake so they and the clients can adapt to the new world. Cutting costs by switching to funds with lower fees is an obvious first step. It is true there are costs in the transaction like capital gains tax, stamp duty, commission, spreads and platform fees, as well as the risk of being out of the market. Even so, the inexorable arithmetic of compound interest means quite simply the sooner you switch from a fund charging 1.5% to 0.5% the better off the client will be.Robert Davies is founder of Fundamental Tracker Investment Management in Glasgow, which runs the Munro UK Dividend Fund

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UK wealth managers must embrace consolidation challenge

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