InvestmentsApr 30 2019

The blurred lines between wealth managers and advisers

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The blurred lines between wealth managers and advisers

I mention this not to make any political points, but rather to say that it’s reached the stage where I’d rather write my Money Management column than follow the progress of Brexit any more.

To take my mind off all this perfidious nonsense, I’ve been taking a look at the relative state of the wealth management sector versus the financial advisory sector. I’ve had an ulterior motive for doing this – I’ve got to give a talk on what is probably going to end up being called the ‘dynamics’ of them both.

I don’t really know what that means, but I think if I use the word dynamics a lot, and substitute delta for difference, then I’ll probably be in good shape.

Here’s my hypothesis: the difference, sorry, delta, between the two markets is the smallest it’s ever been, or at least since Methuselah was a boy.

Split the difference

Let’s look at what goes into each of the propositions offered by each, and think about where those differences are. This is, somewhere way underneath, still a technology column, so we’ll also think about how technology has closed and can continue to close the gaps.

Table 1 has the details. I’m sure I’ve missed some, but that’ll do for now.

Table 1: Wealth manager vs adviser attributes

Service

Wealth manager

IFA

Financial planning

Sometimes

Yes

Cash-flow modelling

Sometimes

Yes

Tax management

Yes

Yes

Dealing with client’s other advisers (accountants, etc)

Yes

Yes

Investment management

Yes – including equity-based portfolios, private equity, etc

Yes – normally collectives only

Cash management

Sometimes

No

Intergenerational planning

Yes

Sometimes

Family office (segregated custody, etc)

Yes

No

Multi-jurisdictional planning

Yes

Rarely

Source: Lang Cat. Copyright: Money Management

‘Favours’, of course, is a tricky term, as many IFAs may feel that fancy-dan active equity management, or investment in private equity, is a fool’s game, and some wealth managers may feel that cash-flow planning for wealthy clients who will clearly never run out of money is really just a load of colours on a poorly drawn bar chart. But go with it for now.

Let’s go through it. First up, a common criticism of wealth managers by IFAs is that they don’t do ‘real’ financial planning – whatever that is. If the critics mean that they don’t do kinder-style coaching, then I think that’s probably right. When dealing with wealthy clients, coaching on how to optimise things so you can afford to retire five years earlier probably isn’t all that interesting.

But while the extreme-sports end of financial planning may not be as relevant, there’s plenty of room for good plans, expressed simply, even for those with quite complex affairs. In fact, many businesses spend an awful lot of money in trying to get difficult stuff made easier; it’s no stretch to think that the people leading those businesses might want to extend the same logic to their finances. 

Many wealth managers, who are centred in investment management, either leave this bit out, or treat it as a thing on the side. I can’t be the only one to have talked to financial planners in wealth management firms – sometimes quite big ones (the firms, not the planners; the planners are of a normal size distribution) – who feel like second-class citizens next to the investment guys.

So that’s one area where I think IFAs have the edge, and it’s a big one. But there’s a lot of other categories in that table, so let’s have a quick look there.

A wealth of positives

I’ll start with the ‘pure wealth’ side of things: true family office work, and inter-generational management. These often go together; you’re managing money for not only the generations of the Bufton-Tufton clan who are alive today, but for future generations yet to be spawned. 

For those unfamiliar, the family office concept in its purest form is that Mr and Mrs Bufton-Tufton have so much money that they end up setting up a company and staffing it to look after the cash. This company will often also look after philanthropy, charitable trusts in the family’s name, and so on. Think Rothschild and you get the idea.

Most wealth managers don’t end up doing this for obvious reasons, but they’ll offer a ‘multi-family-office’ approach – you get the same sort of service, with custody of your assets segregated away from other clients, but without the overheads of running a company. I’m not aware of many IFAs offering this kind of service – it tends to be for clients who have assets in the tens of millions rather than the hundreds of thousands, and it’s probably best left to those who have their own custody arrangements in place.

Incidentally, there’s a reason so many wealth managers work hard at getting listed on the stock market, and invest in nice property in central London, and it’s not just for bragging rights (maybe a bit). 

If you’re trying to convince a wealthy client that you will be around to look after her assets well after she’s joined the choir invisible, you’ll need to show that your business has a long future ahead. That’s something many IFA firms simply haven’t got to grips with yet – easy to say, but very hard to do.

So that’s best left – a segment of target clients that are simply unsuitable.

Everything else – equity-based portfolios, private equity, multi-currency, cash management – is completely doable. There are solutions out there IFAs can use that will happily go up against the kit that wealth managers use: in fact many of them are the same under the hood. 

We’ve seen an example recently with Foster Denovo using Sequel. Firms such as Third Financial and Multrees are starting to get traction with larger advisers rather than the traditional space of private banks and wealth managers. It’s early days, but these sorts of companies eat private equity, multi-custodian and multi-jurisdictional business for breakfast in a way that Nucleus, Standard Life or Aegon simply don’t.

Similarly, on the cash side, advisers tend to steer clear of active cash management because: a) it’s a pain; b) platforms are really bad at it; and c) they can’t make adviser fees off it. But solutions are turning up that can help with at least two of those – have a look at Flagstone’s cash management platform as an interesting example. 

IFAs, including some big names you know, are starting to get into this, and it’s a big gap-close to the wealth management sector.

The adviser opportunity

That’s sort of the core of this. The wealth management market is worth in the region of £1tn in assets under administration, insofar as it can be measured. The True and Fair Campaign puts the typical total charge load at or around 3.5 per cent a year. 

I don’t have a figure for the total AUA in the adviser market; I suspect it’s a bit smaller than the wealth space, but I might be wrong about that. But what I do know is that typical total costs range from 1.5 per cent up to about 2.5 per cent, and if you’re over that in the IFA space then you need to have a word with yourself.

I think the top end of the wealth space isn’t going anywhere; it’s not addressable for advisers. If you could address it you’d turn into a wealth manager or family office. But further down the scale, wealth managers deal with lots of clients with assets in the low millions. I am going to guess that there is probably £200bn to £300bn available in that space. 

That is absolutely fair game if advisers want to go at it – but they will need to close some of those gaps and look at some of the solutions the wealth managers use in order to accommodate specific needs. A partnership with a stockbroker will be essential; a knowledge of private equity or lines into someone who has that, equally so. A solution for offshore custody – such as Switzerland, Luxembourg, the Channel Islands, Malta, the British Virgin Islands and Dublin – and the ability to think and work across borders is also important.

None of these are zero-effort options, but IFAs do financial planning better than anyone else. That’s a valuable commodity, and wealth managers have shown that it’s hard for them to really crack financial planning within their existing propositions. Some have made a decent fist of it, but it will never be the core of their business. I suspect it might be easier for IFAs to eat some wealth manager lunch than it will be for wealth managers to eat IFA lunch.

The rewards are there for those who can bridge the divide. You know what they say – £100bn here, £100bn there, soon adds up to real money.

The answer to the first bit, by the way, is October 31. I’m off to stock up on Halloween puns. See you next month.