UK-based wealth management institutions that strongly differentiate themselves from rivals will be best placed to win new business in a tough market environment, while most operations have chosen to expand organically instead of through takeovers, a new report by wealth management specialist consultantsScorpio Partnership said.

Although the UK wealth management sector is still heavily fractured, a number of firms are gravitating towards to the “mass wealth” market for people with investable wealth of between £500,000 and £5 million to ensure they stay profitable, the report, carried out in conjunction with US financial and technology firm SEI, said.

"There will be a group of businesses: family offices, boutique firms, private banks and independent wealth advisors that are most likely to benefit from the market conditions and taking steps to differentiate themselves from their competitors," said Graham Harvey, senior associate at Scorpio.

"This has been coming for some time [before the credit crunch]. Clients with nine-figure sums of wealth are exercising rights to choose where they sit in the wealth industry though the growth in the MFO [multi-family office] model. It is not just saying you are different, but how you prove that to clients out there," he added.

Merger and acquisition activity has been relatively low in recent years and focused primarily on small firms, such as the purchase of Tilney Investment Management by Deutsche Bank, Quilter by Citi, or Baker Tilly by Towry Law. By contrast, some firms have been happy to grow organicially with a strong in-house sales force, such as St James’s Place.

“The examination of 25 major entities in the UK market show clearly that the competitive battle is now shifting almost entirely to differentiate on the service model but crucially, this does not mean that the product platform is less important – they are conjoined,” the report said.

It continued: “Many firms are now reviewing the means by which they can win market share through marketing, communications and branding. For instance, the efforts of Barclays Wealth in its above-the-line campaign have made a huge dent in the broader client psyche of what wealth is.”

Investment platforms are increasingly being developed to make it easier to handle more differentiated client service and products, the report said. In other findings from a survey of 25 institutions, the report found that clients with higher wealth values, are willing to use packaged investment products.

The report said there has been a “notable” shift to advice-based wealth management but such a shift will require some expenditure to make such a business model work; firms are spending more on brands and client knowledge, while there are signs that companies which encourage managers' professional development are seeing the benefits to their bottom lines.

The report said the UK onshore wealth management sector for individuals with more than £100,000 in wealth, has grown rapidly since 2005, rising by between 7 and 10 per cent a year to reach £1.64 trillion. Scorpio said the 25 institutions it tracked between October 2007 and this September accounted for 9 per cent of the total market potential. Average growth in the assets under management of these 25 firms was 56 per cent, while client growth was 15 per cent in the three years to September 2008.