The joint venture participants hope it will becomes a ‘top three’ UK financial planning firm within the next five years. It aims to go live by end of the first half of 2019, subject to regulatory approval. But how is it expected to work?
Distribution
Ian Woodhouse, head of strategy and change at consultancy Orbium, says the joint venture will enable Schroders to sell directly to clients and use Lloyds as its main, but not its sole distribution partner.
Mr Woodhouse explains: “Lloyds will provide the retail clients, distribution and brands (both Lloyds and Scottish Widows) to address changing client needs, such as self-provision of retirement advice, next generation transfer, while Schroders will provide the industrialised asset management product and solution capability and performance across multiple asset classes and international markets.”
Bartosz Golba, head of wealth management research at GlobalData says: “Previously Schroders would sell the products to intermediaries; now they will be able to do it directly.”
For Lloyds, the partnership will “combine Schroders’ investment, wealth management and technology expertise with Lloyds’ significant client base, multi-channel distribution and digital capabilities”, both firms say.
Affluent v high net worth
The joint venture partnership will establish two models, as under the terms of the deal Lloyds will transfer £13bn of assets to the joint venture and receive up to 19.9 per cent of financial investment in the holding company of Cazenove Capital, Schroders’ UK wealth management business. Cazenove focuses on high net worth clients.
In addition, Lloyds will also transfer approximately £400m of existing private client assets under management to Schroders’ UK wealth management business.
But even though the joint venture says it is adopting a model for affluent customers and one for high net worth clients, experts are unclear what the target market will be.
Martin Bamford, chartered financial planner and managing director of Informed Choice, says: “The joint venture appears to focus its advice delivery on high net worth banking customers, while customers who don’t meet this criteria will no doubt be offered a lesser service that will seek to funnel them into a restricted range of investment products,” he explains.
Key Points
- Lloyds and Schroders have formed a joint venture for a joint financial planning business
- The move raises questions over who will be the target market
- It also raises questions over whether banks should re-enter the advice market
Neil Moles, managing director of Progeny Group, says: “It isn’t clear what sort of clientele this venture is looking to attract. ‘Affluent’ and ‘high net worth’ are subjective terms, but it will likely involve a mass market approach with low minimum investment amounts. Financial planning has become a catch-all term and it will be interesting to see what the JV’s proposition and charging structure looks likein practice.”
According to Mr Golba, the joint venture is more tailored to an affluent client because via Cazenove Capital, Schroders already has a strong institutional asset management capability, and holds stakes in Nutmeg and WeInvest, standalone robo-advice challengers.
“Now, by tapping into mass affluent space directly, they can open another revenue stream,” he adds.
Client interest
The experts note the advantages the merged entity will bring to both Schroders and Lloyds, but questions persist about how helpful the deal will be to clients.
“The real question to ask is whether clients will benefit from the move. It’s impossible to tell at this stage for this venture. If you look at the history of similar restructurings or partnerships though, you’ll find that customers rarely continue to come first as the need to rationalise the decision at a business level takes precedence,” says Mr Moles.
He also warns that restructurings, even on a small scale, increase short-term business costs, meaning “few companies, especially public ones, are prepared to do that”.
A spokesman for EQ Investors says: “They state their aim is to become a top three UK financial planning business within five years, but as we’ve seen in the past, the mix of banking and advice has proven to be difficult. It will be interesting to see if they can get it right.”
What is the future for banks in financial advice?
The deal has also given rise to the debate on whether banks should re-enter the advice market or not.
The spokesman for EQ Investors says: “The majority of UK banks cut back on financial advice services after the retail distribution review in 2012, but they have begun pushing back into the sector in recent months as they look for new revenue streams.”
Lloyds stopped offering financial advice to clients with less than £100,000 to investin 2012.
Santander was one of the first groups to re-enter the financial advice market in 2016 and RBS launched an automated investment advice platform late 2017.
RDR removed commission bias from the system so that recommendations made by advisers are not influenced by product providers, resulting in greater transparency for retail investors.
Andy Thompson, chief executive of Quilter’s Intrinsic network, says: “Given we have a vast advice gap in the UK, banks re-entering the market should not be seen as a threat. Research has shown that those who take advice are likely to continue to take advice in the future, so I believe a rising tide can lift all ships.”
Mr Woodhouse believes banks in the industry are moving towards partnership models as industry players give up ownership of all areas of the business operations, described as the value chain.
But Mr Bamford says: “I can’t see banks re-entering the advice space of their own volition. Training a sales force with level four qualifications and then being transparent about advice charges, even within a business model using vertical integration of advice and products, is too much of a culture change for the banks to handle.
“Banks do however have access to a large customer base, which appeals to the distribution needs of fund providers,” he adds.
Mr Bamford also notes that financial planning can co-exist in tandem with wealth management to yield better outcomes. He argues the financial planning process results in clear goals being defined, making it easier for wealth managers to deliver those goals.
He says: “Wealth managers tend to have weaker relationships with their clients than financial planners do, by virtue of the service they offer. Banks have even weaker customer relationships, driven by inertia rather than loyalty.”
“Financial planning will help to strengthen customer loyalty for wealth managers and banks, at a time challengers with technology-led propositions seek market share. I suspect we will see more joint ventures designed to integrate financial planning with wealth management, along with the acquisition of financial planning firms by wealth management firms,” adds Mr Bamford.
Saloni Sardana is features writer at FTAdviser and Financial Adviser
