In the first quarter of 2013, North Korea was playing around with nuclear bombs, meteors were exploding over Russia and the EU bailed out Cyprus with €10 billion, which did nothing to suppress another banking crisis. UK wealth managers could therefore be excused if they started the year trembling and sweating their way through a few sleepless nights, but were their fears realised?
The industry exhibited uncharacteristic consolidation in 2013, shrinking from 147 to 140 as firms tried to cut the costs associated with regulation – specifically RDR – and agglomerate expertise. Investment assets increased 13.4% for the sector as a whole to a record £638 billion. Execution only stockbrokers provide custody for just under a fifth of industry assets and turned in a stellar performance, increasing them by 23.7% to £113.4 billion. Further proof of an advice gap was indicated by non managed-assets increasing by 23.2% and advisory assets trailing market growth of 10.8%, increasing only 6.2% . SIPPs performed well, increasing by 13.1%, but fell below overall asset growth for the first time in 5 years. As a proportion of total assets measured by asset type, collectives grew by 1.2%, no mean feat when you consider that this equates to an increase of £28 billion, to £182 billion.
Despite the continuing low-interest environment putting pressure on net interest revenue streams, total revenue hit a new high, increasing by 4.2% to £5.4 billion, with full service wealth managers being the standout performers, increasing revenues by 14%.
Execution only stockbrokers saw a 21% increase in trade volumes on the back of some high profile IPOs and the expansion of collective trading, where volumes reached 3.5 million, an increase of 50% and not just a blip. In the first three months of 2014 collectives breached 1 million for the first time in any one quarter. CFDs and spreadbets continued their retreat, falling for the fourth consecutive year, by 21% in 2013.
Costs rose by a negligible 0.03% to £4.02 billion, suggesting that the industry has a grip on costs. Property and facilities grew by 1.25%, but many firms had new branches to show off as a result (and the opportunity for geographical expansion). Front office staff costs grew marginally, but these guys are the revenue generators and provide an engine for growth. Staff expenses fell, as did non-staff marketing costs and surprisingly – perhaps astoundingly – non-staff compliance costs.
The mathematicians among you will have noticed that rising revenues and steady costs produce happy and healthy profit margins. In fact, ‘record-breaking’ can again be applied with absolute pre-tax profit levels at £1.38 billion and profit margins averaging at 26%. From a UK perspective, these are the kind of margins that would invite a nod of admiration from highly profitable North Sea oil companies. The data clearly shows that the UK wealth management sector is, generally, in good health.
Well, the advice gap indicated by the growth in non-managed and discretionary assets is going to determine what happens to the ‘sub £500k investor’. As things stand, our data shows that this wealth is either invested by individuals via execution only stockbrokers or put in the hands of discretionary advisors. A third possibility is that money is invested in property, decreasing cash available for wealth managers to compete for and fuelling an already inflated housing market. Any future housing crash could cause wealth management assets to decrease as investors draw down assets to pay for what had previously been paid for by increased equity in their homes and the willingness to take on higher levels of credit card debt.
SIPPs: 2013’s reducing growth rate could indicate more assets are instead being invested in defined contribution pension schemes managed by the nation’s pension fund managers. These fund managers have not been delivering satisfactory returns and the managed pensions industry may not be the best place to invest retirement assets. In addition, assets not invested in SIPPs could be assets that are exiting the wealth management sector, decreasing the opportunity for firms to increase revenues.
What of interest rates? Mark Carney at the Bank of England has indicated that rates could rise ‘sooner than markets presently expect’, though he is no longer tying his decision to an unemployment rate below 7% (which stands at 6.6% as at April 2014). I’m willing to bet that rates won’t be moving until late 2015/early 2016. If this is true, wealth managers’ net interest income which forms approximately a fifth of their revenue will likely remain static (if not fall) for the foreseeable future. Revenue growth will therefore have to be driven by fee income and commissions: fine if the regulator remains happy with current fee structures and trading volumes remain buoyant. The hope must be that the current popularity of collectives spread to other instruments too. It will also be interesting to see how the debate on clean share classes develops in the coming months.
Costs too, may be under pressure in 2014 with a heightened regulatory burden, upward pressure on front office salaries and a continuing need to invest in technology.
The UK wealth management industry has had a fantastic year in 2013, but as always, it must be diligent if the news is to remain positive in 2014.
Visit the following link and click on the ‘slides’ section. As always, please get in contact to discuss any (or all) of the theme’s discussed.
ComPeer Wealth Management Business Performance