The surge in wealth mergers

This particularly applies to those firms based outside the UK, gazing with somewhat envious eyes upon pension deregulation, still-rising property prices, a stable stock market and a population of baby-boomer clients no longer able to rely upon interest payments to fund their retirement.

This analysis looking at the increasing trend towards M&A activity should also be balanced by a consideration of the other issues that are driving wealth management firms towards growth and consolidation.

Chief among these is the change in adviser fee charging, which was introduced by the imposition of the Retail Distribution Review, under which financial advisers have to agree a fee up-front rather than accepting a commission as a reward for recommending or selling particular financial services and products. Add this change to a stricter all-round regulatory framework and a growing focus on technology and digital tools, with their potential to cut out the middleman to a significant degree, and you have a backdrop against which economies of scale and the acquisition of specifically lucrative skill-sets mean that merging to form larger firms becomes the natural choice.

The figures back up this analysis. In 2015, 124 mergers took place in the sector, as opposed to just 83 the year before, although the total assets involved were slightly down on previous years. This would tend to paint a picture of an industry in which smaller firms will find it harder to exist while resisting the M&A pressure applied by medium-sized firms, which, while still working in the £5bn-£15bn range, will be unable to handle the scale of business needed to achieve maximum efficiency.

The previous reference to acquiring expertise as opposed to developing it from scratch, has to be related to the rise of digital provisions, also mentioned briefly above, which has been another unspoken and somewhat unrecognised driver behind the move towards M&A.

The financial imperatives set in place by the regulatory and fee-charging frameworks currently operating are fairly clear, and push in one direction – towards scaling up as a means of driving revenue. The move towards direct-to-customer (D2C) provision is slightly more nuanced, in that, although much of the technology is already in place, the willingness of larger, more established firms to embrace the new delivery methods is far from assured.

The financial imperatives set in place by the regulatory and fee-charging frameworks currently operating are fairly clear

This leaves not only a gap in the market as far as the advice which is sought is concerned, but also a gap in provision. In recent months, several firms have made moves to fill that gap. Vanguard is thought to be close to signing a deal with technology firm FNZ in order to launch a D2C platform in the UK, and Aberdeen Asset Management acquired Parmenion Capital Partners in September 2015. Any move by Vanguard will be an extension of the way in which it already operates within the US, where it launched an automated (so called ‘robo-advisor’) Personal Advisor Service in May last year. The service offers automated investment portfolios and telephone support for those with at least £32,373 ($50,000) to invest, with service charges of 0.30% of assets per year.

Other examples of robo-advisors include the Nutmeg platform and Simply EQ, both of which are set up to offer advice to comparatively lower wealth investors in a way that undercuts the costs involved with more traditional financial advice models. The powers-that-be have recognised this shift to the degree of setting up the Financial Conduct Authority’s (FCA) Project Innovate and, in particular, the regulatory sandbox, which, in the words of the FCA, “aims to create a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms in a live environment without immediately incurring all the normal regulatory consequences of engaging in the activity in question.”

Many of these moves are clearly at the leading edge of D2C innovation, but the more astute of the larger wealth management providers will be keeping a very careful eye on them.

UK firms such as Brewin Dolphin and Hargreaves Lansdown have already launched their own online offerings, and, although the D2C and more traditional wealth management markets may differ somewhat, there is considerable overlap, and this overlap is bound to grow as the power of the technology and the acceptance from consumers both increase.

In the US, the reaction has been to seek expertise through acquisition – as when BlackRock purchased FutureAdvisor – or partnership, such as Fidelity going into partnership with Betterment. The UK market seems certain to follow a similar pattern, with the established players allowing the smaller more innovative firms to take the initial ‘digital risk’, before stepping in to merge and acquire.

For the individual faced with the likelihood or reality of their wealth management firm being engaged in an M&A, however, whether they are the perceived junior or senior partner, the situation can be one which leads to some disquiet and a slightly less detached scrutiny. It should be remembered, however, that the driving force behind any such M&A is likely to be a desire to produce an entity which is more valuable than the sum of its parts and which offers value to the shareholders.

Any haemorrhage of business away from a newly formed wealth management firm in pursuit of wealth managers who have moved elsewhere, runs the risk of marking the arrangement out as a failure from the start. To ensure this does not happen, newly formed firms are almost certain to emphasise and exploit the client-focused advantages which come from such a merger – factors such as reduced charges and more flexibility regarding contracts.

It should also be borne in mind that the newly acquired types of expertise which are often the catalyst for mergers of this kind will now be available to all clients. A key part of building and maintaining this value will rest in continuing to offer a full and effective service to existing clients at the same time as attracting new business.

Taking an overview of the situation in this manner is undoubtedly a fascinating exercise – part analysis, part speculation, and all extremely useful for anyone with a stake in the wealth management industry.

Alex Shaw is director of Progeny Wealth