Regardless of broader economic trends, the variety of tailwinds that are positive for wealth management will continue for the forseeable future, helping to accelerate developments such as M&A among smaller wealth managers, the author of this article says.

The following brief article is from Hugh Elwes, managing director at US private bank Stephens. Elwes, who is based in London, examines the merger and acquisition landscape in the UK private banking sector. The editors are pleased to share these views; the usual editorial disclaimers apply to views of outside contributors. To respond and enter the conversation, email tom.burroughes@wealthbriefing.com

The UK wealth management sector continues to display remarkable resilience, despite ongoing economic challenges. 

While inflation has cooled, pricing pressures remain higher in the UK than in many developed market peers. Despite this, monetary easing could be on the horizon as we move through 2024.

As savings rates have moved higher over the past year or so, mass affluent and high net worth investors have recently been relatively content with allocations to traditional safe instruments – such as deposit accounts, cash ISAs, and short-term government bonds. However, the imminent end of the rate hike cycle could be a catalyst for increased exposure to higher-risk investment solutions – which bodes well for the wealth management sector.

Structural drivers and ongoing innovation
Additionally, the UK wealth space also remains structurally well-positioned. As the majority of the UK’s investable wealth is concentrated among those approaching or already in retirement, the flexibility offered by pension freedoms has underscored the need for sound investment advice. This continues to accelerate demand for intelligent tech-enabled wealth solutions.

While personal liquid assets total a massive £2 trillion in the UK, just 30 per cent is under the control of independent financial advisors (IFAs) and tied advisors – with a substantial portion remaining trapped in low-yield savings accounts or outdated life and pension products. The opportunity to reallocate these funds to higher-performing wealth management solutions is immense.
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Innovative, cost-effective wealth services have also expanded in recent years. However, while robo-advisor platforms such as Nutmeg and Wealthify have gained traction, many individuals still seek a certain level of human advice and reassurance throughout the wealth journey. Given the intricacies of pensions and tax regulations, many experts still require guidance for navigating the complexities.

This has spurred the growth of hybrid advice models, which blend technology-enabled guided advice with human interaction. Additionally, people are increasingly using multiple touchpoints in the management of wealth – combining self-service platforms such as Interactive Investor and AJ Bell with the expertise of IFAs, financial planners, and discretionary managers.

Small entities ripe for further consolidation
Despite ongoing advancements, the sector remains fragmented – with five or fewer advisors. The pressure to consolidate stems from various sources, including an ageing advisor base, retirement planning considerations, heightened regulatory requirements, and general cost inflation. 

Private equity investment is driving this consolidation wave, with more than 30 active consolidators in the market. This trend aligns with renewed interest from both domestic and international entities – such as RBC’s acquisition of Brewin Dolphin, the purchase of 7IM by Ontario Teachers' Pension Plan and Aviva’s deal for Succession. While consolidation is broadly on the rise, the straightforward acquisitions have already occurred, which has driven up pricing and necessitated increasingly nuanced strategies for successful integration. This includes tapping into cost synergies, consolidating platforms, and vertically integrating functions such as in-house investment management.

Looking ahead, we anticipate an acceleration of M&A among smaller firms, along with the eventual sale of consolidation entities by sponsor owners once attractive returns are achieved. These entities could merge with other consolidators, be acquired by larger sponsors to sustain the momentum, or become targets for banks and insurance companies. However, not all wealth businesses have the same value creation model – careful presentation of the business and the investment case is increasingly important for unlocking premium valuations.

While the UK has faced a number of significant challenges in recent years, a lowering of rates could provide renewed optimism for the economy as we advance further into 2024. But irrespective of broader macro prospects, we expect the multiple tailwinds powering the dynamic wealth management sector to continue apace for the foreseeable future.