Firing lineJul 3 2019

‘Lower earnings and more costs have led to consolidation’

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‘Lower earnings and more costs have led to consolidation’

Matthew Wright, director of sales and marketing at Fulcrum Asset Management, first started out in the asset management industry as a headhunter.

This gave him the experience and contacts he needed to reposition his career in the world of asset management.

And according to Mr Wright, if one compares what it was like back in the late 1990s with now, there has been a big change in the industry.

He says: “The industry has changed a huge deal since then, when returns on assets were huge.”

But one thing has remained the same.

He says: “Asset management is about building long-term relationships; friendships in and outside the industry.

“It is a nice enough industry that we all cross-pollinate and discuss ideas, even with our competitors.”

The defined contribution price cap on assets has fundamentally changed how much asset managers get paid.Matthew Wright

Nevertheless, he says the industry has become a lot more competitive, with less money and assets going to fewer managers. 

“It has become a bit more dog eat dog,” he says.

One of the challenges facing the industry is the consolidation of asset management companies.

He explains: “The impact of consolidation and margins and all of the pressures on the industry means there is a little bit more fighting [for assets], whereas historically there was enough to go around for everybody. 

“Now it is feast or famine in many respects.”

He adds: “But it does not stop the long-term relationship with the client.

“Yes, there is the financial and sales element, but many of the relationships are built to endure, and trust in the industry is very important.”

On why the industry has changed so dramatically, he explains it is due to a combination of factors, though largely because of regulation.

He says: “The defined contribution price cap on assets has fundamentally changed how much asset managers get paid. 

“The cost and stress to businesses are huge: now, we have teams of people involved in operations and management of the business and we subcontract legal, accountancy, advisory, third-party administration to many external providers.”

Mr Wright continues: “This sets a lower bar and [results in] lower earnings for businesses. Lower earnings and more costs have then led to consolidation.”

He quotes some recent examples of mergers, such as Brewin Dolphin’s acquisition of Epoch Wealth Management and Sanlam UK’s purchase of Thesis Asset Management.

He explains that in an attempt to return assets under management and asset growth to shareholders, consolidation allows companies to acquire assets to “constantly look as though you are growing, even if your margins are lower”.

“Consolidation is a problem because it means there is less competition in the market. 

“[And] if acquisitions are not so good it can lead to growing pains [and] cultural squashes. That can then affect clients in terms of poor performance, low morale [and] people leaving.”

He adds: “Ultimately, I do not think it has been brilliant for our industry: it creates fewer jobs, so there is job destruction, leading to a lot more competition for fewer positions.”

But he expects consolidation will slow slightly, “as a lot of the easy ones have been completed”. 

Another key feature of future investments will be a move away from passive investing towards active management, according to Mr Wright.

He says: “The last 10 years have been about passives – leading this have been companies like Vanguard and BlackRock – but the next 10 years will be about active.

“At the end of the day, passives go up and down with the market; people are buying them to get the beta of the market, but if the beta of the market is low, people will sell them or their assets will go down.”

However, he says the next 10 or so years will give greater opportunity to houses like Fulcrum, allowing “many of the active managers out there a chance to breathe again”. 

He adds: “Some will fail, but some will perform better than the index.”

He says funds that do outperform the index will have a chance to grow and take back some assets from passive providers.

There is and will continue to be a huge demand for responsible investment, says Mr Wright.

He says: “It is niche currently, but with more[of a] voice it will be mainstream in the future.

“For some people, it is a crucial part of their investment selection.”

Similarly, he says diversity and inclusion within the industry continue to improve.

He adds: “But some people are trying to make light green dark green, manipulating things a bit to satisfy a tick-box in a questionnaire rather than actually do the best for the funds. 

“Progress has to be natural, otherwise you will have inexperienced, inappropriate people in the job and it becomes a tick-box exercise.”

But the biggest challenge will be navigating future expected returns. 

He continues: “It is going to be lower, while the costs of running a client portfolio will undoubtedly be higher. 

“The fees are going to be eating a large part of the future expected returns: that is the new paradigm and it is going to put even more pressure on the distributors.”

Victoria Ticha is a features writer at Financial Adviser and FTAdviser.com