The story of UK Wealth Management has been one of huge consolidation over the past thirty years. An industry, once fragmented into regional and local specialists, has reduced to a handful of national behemoths. Brewin Dolphin, listed on the London Stock Exchange in 1994, has consolidated under its roof once familiar regional names such as Bell Lawrie, Wise Speke, Hill Osborne, Popes, and more recently Duncan Lawrie.  According to latest figures, Brewin Dolphin now controls close to £50bn, about the same as Rathbone Brothers, and half that of St James’s Place.

Such developments have, of course, been lauded by these companies’ shareholders; wealth managers have a relatively fixed cost structure, meaning that incremental increases in revenue from additional assets under management (AUM) flow pretty much straight to the bottom line. Management, incentivised by increasing their employer’s share price, have done extremely well (along with their shareholders).

There are two noticeable developments which have accompanied this consolidation.

  1. Regulation and compliance have multiplied exponentially.   As various market setbacks have hit the pockets of investors, regulators have in turn heaped more and more obligations on wealth managers.  These of course come at a considerable cost and to counteract this, managers have sought to streamline their businesses.
  2. Instead of managing client portfolios on an individual basis, managers have been forced to build portfolios from an approved list of funds.  Once again, this makes sense to both management and shareholders; following stock markets and engaging in proper research is a time consuming affair and if centralised, managers have more time (theoretically) to service their clients but more importantly to gather new assets.

It is the gathering of assets that has been incentivised, not the performance of client portfolios.  

A centralised buy list works well from a regulatory and compliance point of view. If every client has a similar portfolio, and one that does not deviate too much from the sector indices, then clients are unlikely to have a reason to be unhappy, switch manager or sue. One particularly unfortunate piece of compliance insists that all clients are treated fairly (Treating Customers Fairly – TCF), a laudable objective but one with unforeseen consequences.

For example, with £50bn under management, a new money allocation to a fund holding of 5% for each client means in theory that the fund selectors are forced into investing in a fund that can absorb £2.5bn without adverse consequences. While this may well tick the compliance box for the regulator, it’s not a policy which necessarily benefits clients, especially as it is likely to exclude the chance to invest in smaller companies, a sector which over the long term, has often outperformed the larger ones.

The unintended consequence of TCF is to find the lowest common denominator, frequently leading to the dumbing down of client performance thus denying the one huge advantage that private clients have of being small enough to invest in smaller and more nimble funds. (Just ask Warren Buffet how difficult it is to maintain his performance now that Berkshire Hathaway has grown to $707 billion). And just to prove the point, a recent report from Yodelar showed that over 50% of St James’s Place funds rank in the worst 25% of their sector over the last 5 years, and that over 72% of their funds perform worse than their own benchmarks.

UK managed funds divide up between Unit Trusts (numbering about 3,500) and Investment Trusts (numbering 390).  Most Investment Trusts – long known as the City’s best kept secret – have been ignored by the large Wealth Managers, and this is particularly true of the smaller Investment Trusts. An Investment Trust launching today needs to be at least £250m in size and have the ability to grow well beyond this amount – through subsequent fund raises – to begin to accommodate the size of allocation that the large Wealth Managers need to make. Investment Trusts can also be awkward for large wealth managers to buy; investment trusts are quoted on the UK stock market and often prove too illiquid to satisfy demand. It is usually much easier for large Wealth Managers to invest in large unit trusts where millions of pounds can flow in and out every day without liquidity problems. We believe that there is now a huge advantage for clients of the smaller Wealth Managers who can still buy some of the most interesting and best performing investment trusts with assets under management under £250m.

To conclude, the shares of the publicly quoted Wealth Managers have been terrific investments; indeed, many of the investment trusts we rate highly, typically invest in the shares of these quoted Wealth Managers. However, whilst shareholders in these large Wealth Management companies have been very well served, the same cannot necessarily be said for the clients. Taking all this into account, we think that there has never been a better case for finding smaller privately owned Wealth Managers to manage your investments. These companies can construct portfolios for their clients which focus primarily on performance rather than size.

Simon Milne

Investment Director

Hamilton Financial

Financial Advice | Investment Management


The information contained in this document is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The value of investments can fall as well as rise. You may not get back what you invest.

Hamilton Financial is an independent firm of private client investment managers & financial advisors.

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