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.
- 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.
- 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.
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.
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.
Investment Director
Hamilton Financial
Financial Advice | Investment Management
DISCLAIMER:
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.
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