THE ART OF THE DEAL

 

By Nabil Elhihi and Caroline Burkart in London

Since the beginning of the year, the cycle of mergers and acquisitions among investment managers in the UK has shown no sign of subsiding in 2018. This in itself is a known trend since consolidation has long been a systemic factor in the UK wealth industry. What’s interesting, however, is how the trends driving consolidation are evolving.

Hungry for growth
As firms seek to build scale, the rise in costs borne out of the need to meet regulatory requirements and investment in technology have sustained downward pressure on both fees and margins. This in turn typically spurs investment managers to focus on assets under management (AUM) and to consider new acquisitions to meet headline growth targets.

Rathbones, for example, recently completed its acquisition of Scottish investment manager Speirs & Jeffrey, following a failed merger with rival Smith & Williamson last year. This forms part of the group’s ‘purchased growth’ strategy, intended to boost AUM funds to £40 billion in 2018 – a time when competition for new client assets continues to intensify in the UK. In doing so, assets under management are estimated to increase by 18%, illustrating the compelling power of inorganic growth strategies to meet financial targets.

Another factor to consider, and one which is less well cited, is the changing service requirements of different client segments. Such changes increase pressure on wealth managers to continually develop their proposition. According to one M&A consultant involved in several confidential deals: “The most challenging thing is getting comfortable with the acquirer and whether it’s a long-term home for their clients. This can hold small firms back from selling to consolidators, where it can be more of a one-size -fits-all approach which they don’t want to be involved in.”

Our proprietary data indicates that UK ultra-high net worth (UHNW) clients, with investable assets in excess of GBP10m, demand more complex product solutions from their primary wealth manager, relative to HNW clients (see Figure 1). UHNWs require a more expansive product proposition that goes beyond discretionary management or execution-only accounts. Instead, they expect to receive a range of banking and trustee services, a strong advisory component alongside their investment plan, as well as increased exposure to exotic investment products (alternatives, private equity etc.).

Figure 1: UK HNWIS’ product and service usage (2015-2017)

Source: Scorpio Partnership Client Insight Database

Build, borrow, buy

The difficulty for wealth managers wanting to maintain or grow their client base lies with meeting their evolving demands in an effective (and cost efficient) way. It’s often said that businesses which need to develop their service proposition can adopt one of the three B’s of content acquisition – they can either build the proposition out through long-term investment, borrow it from another provider, or they can buy the content and integrate it into their own operations.

A good example of the later approach is Stonehage Fleming’s acquisition of FF&P Wealth Planning in 2016. The intention was to improve the multi-family office’s advisory and financial planning capabilities to better serve UHNW clients with multigenerational wealth management needs. In building a more vertically integrated wealth management firm, Stonehage Fleming is able to innovate and offer new propositions to clients, ultimately improving the firm’s competitive appeal with its target audience.

Most firms however choose a hybrid strategy, combining different elements to enhance their proposition and appeal. For instance, Rathbones Investment Management is continuing to build its UHNW Private Office by teaming up for product solutions, such as banking and lending services through a partnership with Credit Suisse.

Mergers and acquisitions within the wealth management industry will remain a trend as the industry continues to restructure. To be most effective at securing future growth – firms will need to think about complementarities from both a cost efficiencies and client needs perspective.

“Acquisitions and sales are like icebergs,” says one industry expert. “The surface is the acquisition, but the integration is often a larger part, which constitutes the success or failure of the deal.”

 

Thought of the week:

“The purpose of business is to create and keep a customer.” – Peter Drucker

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