The mid-tier space of wealth managers doesn't grab as many headlines as the top-10 firms dominating the UK market. But there is plenty of room for growth, with closeness to clients being an important draw factor, the CEO of one middle-ranked player has told this publication.

By some estimates, about 90 per cent of the UK investment advisory market is controlled by around 10 businesses. It is within the remaining 10 per cent that some firms believe they can carve out a different type of service.

One of those is the Bowmore Wealth Group, a mid-size family-run UK firm that wants to develop a one-stop wealth planning and asset management business that can deliver the sweet spot between highly personal services and economies of scale.

While a new round of industry consolidation is at the mercy of a pandemic that is shifting more than disappearing, it hasn’t stopped issues of low interest rates, crunched fees, and varying degrees of digital adoption success from forming potential new alliances behind the scenes.

“I do think there will be advisory businesses and small discretionary fund managers that are going to struggle as a result of COVID,” and who will need other options, Bowmore’s CEO Mark Incledon, said. The firm counts its asset management side as the second fastest-growing discretionary fund management business in the UK.

Speaking to WealthBriefing recently about what adds up for advisors in today’s mid-tier market, Incledon said that a first step for him was reaching a decision five years ago that the firm might be better off developing its own discretionary fund manager, and taking a leap from there.

“What we were finding with outsourcing is that we were getting inconsistencies between our assessment of portfolio risk and how that mapped to what third-party discretionary fund managers were coming up with,” Incledon said. “Clients that were taking more risk were getting inferior returns and vice versa.”

This left the business hamstrung. “We realised we were doing all the hard work in distribution, finding and developing clients, and then handing over quite a large proportion of the value chain to a third party.”

The penny also dropped when he saw the firm giving a hundred million to Brooks MacDonald or a hundred million to Quilter to manage assets.

“Seeing [Brooks MacDonald co-founder] Chris MacDonald walk away with £30 million ($39.4 million) and Martin Baines [former chief executive of Quilter Cheviot] with £50 million, “I thought, hang on a minute, I am making a small contribution to making these guys rich. Why don’t we just do it for ourselves?”

Bringing it all back home
The firm's rebrand in the summer to Bowmore Wealth Group included formally taking investment management in-house. The group also says that it is close to securing private equity to spur the next phase of growth.

This may yield opportunities attracting pure advisory businesses that have a good client base but struggling to maintain profits as regulators continue to scrutinise fee structures and advisors' recurring revenues.

Incledon uses the history of Manchester-based Frenkel Topping as an example of where businesses make critical choices. After the firm considered selling the business and outsourcing fund management to Brooks MacDonald, it opted instead to secure its own in-house permissions, a decision that has been validated in valuations since, Incledon suggests.

A number of mid-sized wealth management firms have bulked up over the past decade. The Retail Distribution Review reforms, taking force from 2013, encouraged a run of deals for firms seeking economies of scale to cope with rising regulatory costs and to pay for the kind of technology clients expect. For example, Tilney Bestinvest bought rival Towry in 2016, one of the larger deals of recent years. In early 2020, UK-based Mattioli Woods bought private client and asset management business Hurley Partners. Seven Investment Management bought Partners Wealth Management a few weeks ago. Hertfordshire-based Independent Wealth Planners acquired financial planning firm Richmond House Wealth Management a few months ago.

Getting ready
For a larger slice of the mid-tier market, Bowmore began acquiring and restructuring the business. Its purchase of Bristol-based Trigon Financial Services last year took the firm’s advised assets to around £350 million. Since then, Incledon has been looking for businesses that can bring between £50 million to £100 million of managed assets to the table as a “perfect” fit: “Not so large that they can’t realign with what we are trying to do and having values that are likely to match ours.”

The group wants to boost AuM to £1 billion over the next five years as an optimal growth target. “Beyond that and you begin to lose your personal touch.”

Incledon, who has been in financial planning for 30 years, engineering the management buyout of Bowmore Financial Planning to create Citimark, now under the Bowmore Group, believes the best insurance for business longevity “is having very secure funds under management, under your total control.”

With offices in Bristol and London’s Mayfair, most of its clients reside along the M4 corridor, with a large proportion of them being entrepreneurs looking for business guidance and financial planning. Other HNW segments include senior managment at large corporates and retirees who have shut up shop or recently sold out of a business and are now making their rest of life provisions.

Those on the books typically span several generations of a family. “At the lower end, the children might just have a couple of junior ISAs that need looking after. At the top end, there is a pension, ISA portfolios, an offshore bond, various trust accounts for inheritance planning; it’s the full spectrum,” said Charles Incledon, son of the CEO and client director in the asset management team, who also spoke to this service about the business.

With fees upmost in clients’ minds, and a premium put on personal service, the firm says it is not the cheapest but is competitive on its combined financial planning and asset management offering. “We can do both of those for what you would pay a large investment manager with no financial planning provided at all,” Charles Incledon said.

Clients can choose to pay separately for financial planning or fund management. “If they want the combined service, which is what we generally advocate, they effectively get a discount,” he said.

Fees are typically 1.2 per cent for active investment management, with funds costs pushing that up to 2 per cent for portfolio management. The firm says it charges below that for investment management and advice.

Balance
Striking the right balance of maintaining a personal culture and growing the business is under constant review at the firm. Charles Incledon compares the current culture to how a Brooks MacDonald, a Quilter Cheviot or a Rathbones operated 15 years ago. “They were small and boutique themselves and reasonably aligned with how we wanted to deal with our clients,” he said. But those same entities today, either listed or third-party owned have become “massive organisations where the values have changed,” he argues.

Industry consolidation has also changed relationships. Once external asset managers decide to offer their own wealth-planning services, they switch from being partners to competitors. “Clients you are handing over from an investment management point of view suddenly have contact with financial planners at those organisations and that is a potential threat,” Charles Incledon explained.

It is another reason why the firm wanted to bring business in-house and provide an end-to-end service for clients. In efforts to scale up but remain tailored and boutique, the firm also believes that its client/manager ratio more than stacks up against larger competitors.

“You’ve only got to look at the likes of HSBC and Coutts. Coutts are saying that unless you have over £1 million invested with us you are going to get a desk-based service, a telephone service only,” Mark Incledon counters. “But we are not cutting it at a million. We think we can offer good face-to-face service [below that]".

Bowmore’s CEO concedes that in the process of growing clients, there are segmentations that won’t be able to have the same level of service they have been used to. “That’s just the reality of the market. The advice gap is real.” In this respect, Bowmore is no different to any other business looking at margins of profitability, Incledon said.

"But we still feel we can come up with an elegant solution for clients at whatever level they are at."