Choosing a wealth manager in the post-Covid world

At the start of the pandemic, Britain’s wealth managers assumed they would be in for a torrid time, as financial markets crashed and worried clients swamped the phone lines.

Instead, despite the human and economic damage wrought by the crisis, they are emerging from the depths of Covid-19 with their businesses secure and their prospects much brighter than expected.

“When things got really sticky in the market, clients just wanted somebody to talk to,” says Rob Burgeman, investment manager at Brewin Dolphin, an old, established London-based company. “And that plays to the strengths that a lot of firms in our industry have.”

The rapid recovery in stock markets from their March 2020 lows has transformed investors’ fortunes and with them, the value of the assets under management (AUM) entrusted to wealth managers. While many do-it-yourself investors panicked and sold up, those with professional advisers generally stayed invested through the storm.

Although millions of poorer people lost their jobs and ate into their savings, the well-off largely retained their income, whether from work, pensions or investments, and saw deposits soar as lockdown hit spending on leisure and travel.

Also, many investors responded to the collective encounter with mortality by reorganising retirement and legacy plans — generating another fee bonus for the wealth industry as well as creating opportunities to sign up a new generation of clients.

“With the pandemic there is more focus on financial planning than ever before,” says Charlotte Ransom, chief executive and founder of Netwealth, a tech-based wealth manager. “Portfolios are at record levels. And people are taking action, especially over pensions. The outlook for the business is very positive.”

But, while the industry appears to have dodged the worst of Covid, the outlook is far from easy. Clients consistently complain about fees, putting pressure on revenues just as competition is increasing from tech-based newcomers and from retail banks refocusing their attention on wealth management. For established firms and new entrants alike, the adoption of digital technology, accelerated by the pandemic, is adding to the day-to-day challenges.

For investors, the plethora of information — and advertising — on the web means it’s never been easier to look for a wealth manager. But making a choice remains hard: despite recent improvements in transparency, many investors still struggle to compare fees, investment performance and quality of service.

“Wealth managers have talked about being client-led for years. Now they have the chance — and the imperative — to deliver on it,” says Anna Zakrzewski, global head of wealth management at BCG, the consultancy, in an annual report on the sector.

To help readers navigate these waters, FT Money looks at UK wealth companies, focusing on firms offering discretionary management via personal advisers. Together with Savanta, a research company, we are publishing a list of top wealth managers, with detailed company information.

The core market is for savers with £250,000 to £5m to invest, though many firms have clients with substantially larger portfolios. Above £5m, private banks, including Swiss lenders with UK hubs, become increasingly competitive.

Below £250,000 it becomes progressively harder to provide personal advice cost effectively. But tech is helping cut costs at this end of the market through the launch of semi-automated services, which compete with tech-based robo-advisers, such as Nutmeg, with very limited human support.

The overall number of firms providing retail investment services — a broad category including discretionary wealth management — has risen slightly in recent years from 4,864 in 2015 to 5,111 in 2019, according to the Financial Conduct Authority, the regulator. Small firms — those with five advisers or fewer — account for about 90 per cent of the total.

However, within this seemingly stable market, bigger companies are consolidating their grip, with the number of companies with more than 50 advisers almost doubling to 42 in 2015-19 and increasing their adviser count from 8,440 to 12,135, says the FCA.

Leigh Himsworth, a fund manager at Fidelity International, who invests in wealth management companies and previously worked for 25 years in the sector, says the costs of technology — including investment platforms and processing systems — combined with growing regulatory burdens is driving consolidation. Also, the expansion of new financial products, such as funds based on private equity, requires recruiting better-trained — and higher-paid — staff.

In principle, these trends favour universal banks, with their big financial resources, including Barclays, Deutsche and HSBC. Nuno Matos, chief executive of wealth and personal banking at HSBC, says global banks offer not only international diversification of assets — as do most wealth firms — but also international diversification of location, so they are able to tap local knowledge all over the world. He says: “Banks have a much bigger role to play in wealth management than in the past 10 years.”

Also, many banks are seeking to expand their wealth management services, as they complete their recovery from the 2008-09 global financial crisis and try to supplement the poor returns earned from retail banking customers in the low-interest era.

A notable recent example is Lloyds Bank’s joint venture with Schroders, the fund management group. Meanwhile, Goldman Sachs, the US investment bank that has long given wealth advice to the ultra-wealthy, is pushing into lower market segments by adding a robo-advisory service to Marcus, its digital consumer bank. And JPMorgan Chase of the US this month bought Nutmeg, the British wealth management platform company.

Still, non-banks are not doomed to be outgunned by the big lenders. British banks have in the past been inconsistent with their commitment to wealth management, often struggling to fit this business into the wider sweep of retail services. Meanwhile, global private banks tend to focus more on their wealthiest clients than those with smaller portfolios.

Is big necessarily better?

Mark Le Lievre, a former banker at UBS, the Swiss bank, who has co-founded Vestrata, a company offering support services to wealth managers, says: “The dirty little secret is that most wealth managers spend 80 per cent of the time on 20 per cent of their clients, and the other 80 per cent of clients are underserved. Most wealth managers are poor at engaging with clients.”

In other words, big might not be best for all investors, especially those with smaller pots than the global rich. Himsworth says that specialist managers are “perhaps better-placed” to really get to know their customers than big banks.

That’s music to the ears of the likes of Paul Stockton, chief executive of Rathbones, a firm dating back to 1742. “We bring a level of engagement and reassurance,” he says. “It’s easy to present a cheap solution but it’s hard to do what we do and take responsibility for managing our clients’ money.”

However, if tradition was ever decisive for investors choosing an adviser, it certainly isn’t today. The pressure to deliver good financial returns on portfolios is relentless, as are demands to reduce fees. Digital technology has made it easier for clients to check results against benchmarks.

The rising markets of the past decade — fuelled by tech stocks — have been favourable for wealth managers, providing cover for even mediocre performers.

It may be harder in coming years if the markets are less obliging. Interest rates remain low, but have crept up and are not expected to return to rock-bottom pre-pandemic levels. Meanwhile, inflation has re-emerged as a concern, as has the colossal Covid-linked increase in public debt. In a survey by Savanta, nine of 23 UK wealth managers who gave a view predicted that the FTSE 100 index (currently just over 7,000) would not hit 10,000 in the next five years. A further nine said it would do so only in 2025.

The fees saga rumbles on

If returns falter, clients are likely to revive longstanding complaints about fees. While transparency about charges has improved markedly after regulators ordered changes, customers are divided about whether the reforms have gone far enough.

At Netwealth, Ransom says clients are “growing less and less tolerant of expensive, out-of-date services”. Her company charges an all-in fee of 0.65 per cent a year of AUM, compared to what she says is a typical industry levy of 1.6 per cent.

But traditional managers say this is not comparing like with like, since Netwealth is not based around human wealth managers, but an automated system offering limited portfolio choice. Also, Netwealth charges extra for some services — such as pensions advice — which some established firms wrap into their annual charges.

Holly Mackay, chief executive of the Boring Money personal finance website, says 49 per cent of investors polled in a recent survey said they were content with paying charges as a percentage of AUM.

That might not sound too bad. But a full 31 per cent want to switch to service-based fees, according to the Boring Money survey. “These users want fixed fees for a fixed amount of advice,” says Mackay.

Andy McGlone, chief executive of Quilter Cheviot, the wealth management arm of investment group Quilter, says: “The discretionary management industry has not been fast to adapt to client pressures over costs in comparison with other financial services.”

As well as keen prices, investors want new services, especially advice on companies and funds meeting environmental social and governance (ESG) criteria.

McGlone says it is easy to provide ESG-labelled products but the key is to standardise the information and embed it in the investing process. The firm plans to have a system for grading funds on ESG criteria “by year end”.

Boring Money’s Mackay warns wealth managers that they have to be rigorous about ESG rules. “There is a good deal of scepticism,” she says. “People want evidence and the wealth management industry isn’t very good at providing evidence. There is still a lot of bluster.”

Another tricky new field is private equity and other non-public markets. With private equity investments delivering big returns in recent years, they have become key to many institutional portfolios and important to very wealthy private investors.

But private equity is not necessarily suitable for those with less than £1m in their portfolios, as these investments are illiquid, the minimum investment is often £100,000 or more and the fees are high in comparison with public market investments. Ed Smith, head of asset allocation at Rathbone, says: “While it’s appropriate for some of our most risk-tolerant clients to be in these markets, that’s not true for most clients.”

Looking to the future, wealth managers see the further advance of digital technology as central. With similar technology and the same range of investment products available to most wealth managers, companies have limited ways of differentiating themselves with their products. BCG’s Zakrzewski says “differentiation by delivery” matters even more than before. That means providing good service, in person and online.

This is particularly true in the face of competition from robo-advisers and the widespread use of digital platforms, such as Hargreaves Lansdown, where investors buy and sell on their own without advice.

The rapid spread of do-it-yourself investing under lockdown has created new cohorts of investors, often young people, who are keen to make money and to learn more about markets. Some of those who have made speculative bets in cryptocurrencies or meme stocks are now looking to do more on their own. But others could turn into a new generation of clients for wealth managers. McGlone says: “I think there will always be a market of people who don’t want to do it themselves and will want an investment manager.”