Wealth management sector demonstrates continued resilience
The UK wealth management sector continues to demonstrate its resilience in the face of considerable market turbulence. The robustness of recurring revenues, the continuing desire of UK clients to use professional investment advice and ongoing consolidation have merged to sustain the sector despite the triple impacts of the 2019 General Election, Brexit and the massive economic dislocation due to COVID-19.
As the stock markets oscillated in the early part of 2020, underlying revenues were negatively impacted but surprisingly less so than might have been expected. Prudent and sophisticated investment strategies to some extent cushioned clients from the full market effect. Moreover, UK clients have held their nerve and continue to use investment advice and invest. It is undeniable that new business flows did fall in the latter part of Q1 and into Q2 2020 but they have rebounded. The social impact of COVID-19 has in many cases reinforced consumer demand for advice on achieving longer-term financial security.
AI and data are transforming how investment advice is generated, driving significant cost savings
Against this backdrop, technology continues to disrupt this market. Newer consumers are drawn to the technology-driven, lower-cost advice providers be it for savings help towards the purchase of a home, starting a pension or just investing in higher growth asset classes. On the other hand, more seasoned investors are looking for yield opportunities in the market and as such are looking at accessing alternative asset classes, increasingly through technology-driven distribution platforms. From the advisor’s point of view, AI and data are transforming how investment advice is generated, driving significant cost savings as well as managing risk in a very new way. This onslaught of technology is only going to increase, and the larger, more traditional players will need to adapt to this new world if they are going to survive.
M&A activity
Private equity continues to see real value in the sector, with the roster of investors growing
As such the sector continues to be an attractive area for investors. The polarised makeup of the industry lends itself to consolidation and a number of well-funded platforms are continuing to grasp these opportunities. Significant numbers of bolt-on transactions continue unabated, with private equity-backed firms like Fairstone, Succession and Wren Sterling all active. Private equity continues to see real value in the sector, with the roster of investors growing despite market uncertainty. This has been underlined by Carlyle’s investment in Harwood Wealth Management Group and Warburg Pincus backing the proposed Tilney and Smith & Williamson merger.
Whilst the sector has proven its resilience and attractiveness, there are challenges ahead. Whilst some argue that the current cohort of bolt-on transactions are completing at more modest pricing there is a dwindling pool of them to go for. The number of competing consolidators will further diminish this pool. Overhangs from poor historic advice or compliance challenges are problems for vendors of businesses as they are much less attractive to consolidators. Moreover, as we approach the end of lockdown there remains economic uncertainty, and in such times, clients may seek to hoard cash and / or withdraw from investment plans to bolster their incomes. This will have an impact on wealth managers who derive significant revenue from assets under management. The implication may well be uncertain earnings later this year and impacted profitability. Whatever the case this is likely to be a short-term impact on what remains a very active and desirable sector.
