Myopia tends to be a common characteristic of analysts and commentators, especially when attention is focused on the UK wealth management sector.
The prospect of a merger or acquisition invariably generates speculation about the onset of a tidal wave of consolidation within the sector, as was the case recently when Rathbones announced it had opened negotiations with Smith & Williamson about a possible takeover.
This speculation invariably ignores the wider picture, however. Instead of looking at the wider market dynamics, especially the prospects for additional growth within the sector, it tends to remain focused on a relatively small subset of active growth-challenged firms. But these are not necessarily representative of the sector as a whole.
The reality is that the UK wealth management sector is far from saturated. A considerable volume of personal assets remains outside the ambit of UK wealth managers. And this should provide growth conscious wealth management firms with plenty of potential.
Just how much was illustrated by recent data releases from Her Majesty's Revenue and Customs (HMRC) relating to the volume of personal financial assets held in tax-privileged individual savings accounts (ISAs).
For the first time ever, the amount of money held in Stocks & Shares ISAs (£315 billion) now exceeds that held in Cash ISAs (£270 billion).
Furthermore, after a decade of very low interest rates, UK savers appear to be getting the message: that cash might not be able to generate a suitable return. The volume of money placed in Cash ISAs fell from £58.7 billion in 2015-2016 to £39.2 billion in 2016-2017.
Nonetheless, notwithstanding this apparent change of behaviour, more than £1,585 billion is still held in retail savings accounts, according to Bank of England data. This is nearly double the volume of assets managed, or administered, by the UK's wealth managers and execution only (XO) stockbrokers, according to Compeer, a London-based research and consultancy firm that focuses on the sector.
Of course, not all of this cash will end-up in the hands of UK wealth managers, even if they make a concerted effort to attract it. Even affluent and rich investors like to hold a portion of their assets in cash for precautionary reasons. And some of these cash balances will be too small to interest most wealth managers.
The likelihood is, however, that there is a considerable volume of low yielding assets that could interest wealth managers. What was so interesting about the run on Northern Rock 10 years ago was the size of the deposits being withdrawn: in many instances these amounted to six, if not seven, figure sums.
And all this ignores the impact of the UK government’s pension reforms. According to Compeer’s data, self-invested personal pensions (SIPPs) have already provided UK wealth managers with a lucrative source of new business since 2006 with the prospect of much more to follow.
But are UK wealth management firms interested in tapping into this potential flow of assets?
Until relatively recently the answer would have been “not really”, especially as far as what one might call “core” wealth management firms are concerned.
These firms often appeared to have a culture and mindset that made it virtually impossible to acquire new business through organic growth. Acquisitions, by either purchasing new firms, or attracting new investment teams from rivals, seemed to be the preferred way of proceeding.
But the situation appears to be changing. Firms do appear to be making genuine efforts to attract new business via organic growth.
According to Compeer, for example, £65 billion of the £83 billion of new money attracted by UK wealth management firms during 2016 was not acquisition-related (although a portion would almost certainly be “switched” from one manager to another, perhaps as a result of the capture of investment teams from rivals).
Reducing minimum investment thresholds and working more assiduously with intermediaries and other business introducers has started to generate increased business volumes for a growing number of firms.
One of the more interesting developments in recent years is the emergence of vertically integrated firms encapsulating dedicated distribution, or new business acquisition arms, as well as “traditional” wealth management functions.
Old Mutual Wealth and St James Place have probably made the biggest progress in this respect, but there are a number of other firms pursuing similar models.
Some firms have even begun to dip their toes into the retail sector. Schroders' 2016 purchase of a majority stake in Benchmark Capital, an advisory and advisory support firm, is particularly interesting in this respect.
Then there is the new wave of firms targeting the market with digital initiatives.
Of course the big banks and insurance companies should be best-placed to tap new flows of business from the affluent, or mass affluent, sub-sectors.
Unfortunately, however, most initiatives from these sources have a habit of backfiring.
Take Barclays Smart Investor, its latest stockbroking and investment management initiative.
This seems to be a genuine attempt to help its retail and “premier” banking customers to dip their toes into the investment management universe. Unfortunately, however, through a combination of poor planning and worse execution, it looks as if they have alienated their existing stockbroking clientele in the process.
Despite these and other hiccups, however, the reality is that there is still considerable potential for existing and new wealth management firms to make good returns from pursuing new sources of business.
And contrary to analysts and commentators’ opinions, it is not as if margins and returns in the sector are negligible anyway.