Long ReadMay 22 2023

Is consolidation really considering clients?

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Is consolidation really considering clients?
(rfaizal707/Envato Elements)

Take a stroll down memory lane and consider the headlines in the financial services industry press over the past 15 years. Once you get past the horror stories of rogue operators and wave after wave of enhanced regulation, what would jump out at you next?

Well, I think mergers and acquisitions would be right near the top of the list.

It’s hard to think of another sector that has been such a hotbed of M&A activity.

There were more than 350 deals in the European asset and wealth management sector in 2021, with M&A consolidation activity being "hotter than it has ever been in the past 15 years", demonstrating high levels of activity that show no signs of slowing down, according to White & Case's "Financial institutions M&A: Sector trends" July 2022 report.

Recent deals in the UK space have included Aviva's acquisition of Succession Wealth (March 2022); Raymond Jame's acquisition of Charles Stanley (December 2021); Mattioli Woods' purchase of Maven Capital Partners (July 2021); Tatton Asset Management's acquisition of 50 per cent of 8AM Global (April 2022); and of course the deal that has brought this issue into sharp focus most recently, Rathbones and Investec’s private client arms merging to creating a £100bn UK-based discretionary wealth manager.

Where, in all these victorious articles of M&A triumph and shareholder approval, is the client?

The examples are genuinely too numerous to mention, so much so that we have created the widely accepted term 'consolidators'. I am not sure there is a better word for more accurately describing what we are witnessing and the motivations behind it.

Time and time again we are told about the ever-rising costs of managing regulation, controlling risk, investing in technology, and attracting the best talent. And how, against that backdrop, biggest is always best.

And, as the numbers show, (often with some private equity gunpowder in your back pocket) you have been able to make hay under the relentless sun in recent years.

I cannot deny that the factors mentioned above have had a genuine part to play. In the UK this has been particularly pronounced in the retail space over the past decade from the introduction of the Retail Distribution Review in December 2012, through to the impending implementation of consumer duty and everything in between.

Technology and staying ahead equally carries significant costs if you would like something bespoke, with Brewin Dolphin spending an estimated £55mn integrating the popular back-office platform Avaloq in recent years. And although the scale and the ambition may vary across the sector, they are certainly not alone.

The reality is size brings highly attractive scales of economy.

Then throw into the mix the well-documented race to the bottom on fees, facilitated by model portfolio services.

Their rise in popularity is borne out of the aftermath of the global financial crisis. At a time when consumer sentiment was understandably crushed, investment businesses sought to repair that trust and distance themselves from the 'greedy bankers' that most considered guilty of causing the event.

Equally, the regulator had to be seen to respond, creating an environment where discretionary investment managers were discouraged from taking risk at a corporate and individual level, and security selection for retail clients was further restricted.

And finally, central banks conspired to create financial conditions where all assets moved higher as quantitative easing and stimulus policies took hold and backstopped the market. This combination provided the perfect backdrop for what we know as MPS to be born.

But here is the issue. Where, in all these victorious articles of M&A triumph and shareholder approval, is the client?

And how, after successive waves of regulation specifically targeted at improving the experience and outcomes for the end retail investor, have they been allowed to be so under-represented as this bandwagon has rolled on? 

Don’t think it’s a problem? Well Iain Hooley, Investec Wealth & Investment’s interim chief executive, was sufficiently concerned to be quoted recently that the firm has denied implementing a more centralised process.

Since the start of 2020,106 investment professionals have left front-office roles in the firm, according to data from the Financial Conduct Authority registry, with 17 leaving front-office roles so far in 2023 alone.

With a new economic era now in play, we need investors to recognise what the experience of employing an investment manager can and should be like.

The reality is, whether you are manufacturing carpets or delivering financial services, size brings highly attractive scales of economy. Which, by its very nature, brings a pressure to standardise.

The more that can be achieved, overtly or covertly, the greater the operational and therefore economic benefit that is achieved.

So much has changed in the investment management space over the past decade, with regulation, central bank policy and risk appetite having a hand.

However, with a new economic era now in play, we need investors to recognise what has been lost over those years, and what the experience of employing an investment manager can and should be like.

If we are entering a period of low returns, characterised with heightened volatility, retail investors are going to need skilled investment managers, unlike any other period within the recent past.

Those investment managers are going to need to be working in a business that respects their experience, provides them with the autonomy to realise the benefit that can bring and the scope to find and use the best investment opportunities they can, given the current climate.

They are going to need to work in a business which is structured around them, supporting them with research and risk controls that are at the forefront of what is required and expected.

They are going to need to work in a business that regards its clients as individuals and is dedicated to the task of achieving the best outcomes for those clients that it can.

A business that puts client satisfaction ahead of profit, quality ahead of cost and investment returns net of fees.

Richard Bacon is head of business development at Shard Capital