The latest report I have seen comes from Momentum Global Investment Management and discusses margin compression as the dominant trend in the wealth management industry.
It states "profit margins have declined considerably in the wealth management industry over the past two years" and that this is felt throughout the whole supply chain from IFAs all the way through to fund managers.
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Feeling the squeeze
Momentum cites industry research which shows that during 2009 and 2010 the average profit margin in the IFA industry fell significantly, with over a third of IFAs making losses.
It continues that only advisers who can attract higher asset flows to absorb increasing costs seem to be succeeding in the current environment.
So what are the causes of this margin compression?
Part of it stems from the stage of lifecycle the wealth management industry has now reached, according to Momentum.
Between 1980 and 1990 wealth management was in its growth phase, as highly qualified professionals poorly compensated by banks broke away to form independent asset management firms, the report contends.
Then from 1990 to 2006 (the mature growth phase) assets grew rapidly as excessive global liquidity and credit extension pressurised asset prices upwards. During this period, which Newton’s Iain Stewart has dubbed the ‘great moderation‘ M&A activity was rife as autonomous firms sold businesses back to banks and other financial institutions.
Since 2006 stock markets have tumbled (and partially recovered) and liquidity has been restrained. Increased competition during this stabilisation and deceleration phase, alongside rising costs, means the prospect of slow long-term growth has become entrenched, says Momentum.
The land of opportunity
Portfolio Adviser has reported extensively on the opportunity wealth managers have to tap into increased outsourcing from IFAs post-RDR.
Now it seems barely a week passes between announcements of more firms waking up to this opportunity and opening their discretionary fund management services to third-party advisers.
But innovation alone will not be enough to ensure wealth management firms survive, as fund houses too are on the ball and touting for the business.
Regulatory developments since the financial crisis have led to an increase in the cost of compliance, both from an initial implementation perspective and on an ongoing basis. This additional cost, along with the continual pressure on fees, is likely to further stress the profit margins experienced by wealth managers.
Finally, specific requirements under RDR will inevitably escalate costs as advisers have to ensure they properly review an investor’s savings and cash flows, while retaining independent status and ensuring minimum qualification are achieved.
"This is expected to result in large segments of advisers closing down, merging or moving offshore," Momentum concludes.
As with all RDR-impact reports, much of Momentum’s has to be seen as conjecture because in the absence of a crystal ball nobody truly knows what the wealth management sector will look like in 2013 and beyond.
There is still value to be gained from such reports, however, particularly as they are developed through surveying wealth managers and IFAs and so can give a feel for the general industry mood.
Hopefully the British tendency towards the conservative (read pessimistic…) end of the spectrum means we will see some surprise to the upside, what do you think?
