In a recent note, Numis’ David McCann, says: “For investors with larger portfolios and by extension more complicated financial affairs, ever growing tax and other regulation is likely to increase the need for an adviser for this group of high-value investors.”
This is backed up by comments made by Brewin Dolphin in its results for the half year to the end of March. Released yesterday, the discretionary advice-focused wealth manager said the primary reason for its long-term strategy is a belief that: “The demand for high quality, trusted, face-to-face advice is rising”.
But, McCann says: “Overall the adviser share of the market is likely to decline over the next few years, reflecting a shift towards self-investment among smaller investors in particular”.
As he points out, in the year to the end of June 2013, around 80% of UK retail funds were bought through an adviser, which compares to 53% in the US where direct-to-retail offerings have been more widely available for longer.”
Longer-term shifts
This is evident also in the race to the bottom by passive investment funds in terms of costs in a bid to corner what is a continually growing market. As Fidelity Worldwide Investment’s head of UK retail sales, Ben Waterhouse, explained to Portfolio Adviser earlier this week: “There has been a real focus, post RDR on cost, and especially on accessing equity investments at as low a cost as possible.”
For McCann, the rise of the small investor is part of a broader structural shift within the pensions industry that the sector should be taking cognisance of – the long-term shift away from defined benefit (DB) pension schemes – where the onus is on the employer to provide a set pension to employees until death – towards defined contribution (DC) schemes which place the burden at retirement on the employee’s pot of savings.
This shift has been taking place over the past decade and will likely have a continued influence on the sector, he says, because: “Retirement assets are by far the largest pool of money managed by the asset management industry… Net net, we believe it would be reasonable to assume that around two-thirds of the total industry AUM is retirement asset related (38% held explicitly by pension funds plus 50% of the remainder)”.
One of the major implications of this shift, according to McCann, is that established, retail-focused asset managers are likely to see improved fund flows at the expense of institutionally biased managers.
This is because, he adds: “DB schemes are largely an institutional product: a relatively small number of corporates award a relatively large pool of assets to several institutional asset managers. We believe DC schemes on the other hand are fundamentally a retail product: each employee is given a pot of money each month/year with which he/she will either themselves (in a SIPP) or through an adviser (in a personal pension for example) choose where to invest the money.”
According to McCann, Jupiter, Liontrust, Hargreaves Lansdown, St. James's Place and Brooks MacDonald are most exposed to this trend and are likely to receive the biggest benefit of this shift toward retail asset managers.
But, he says, he excludes Brewin Dolphin and Rathbone Investment Management from the list because Numis believes “pensions are not one of the core focuses of their businesses despite the retail bias”.
Thus, while the institutional side of the business is likely to remain very large for a number of years, he says, it will be much smaller in the long term as a result of the decline of DB pensions.
Looking forwards
The phrase ´post-RDR world' has been thrown around a great deal and for good reason. The changes it wrought will take a long time to fully work through the system. But, it is also useful to remember the broader context of such things.
The structural changes under way within the pension funds industry, while not new, are going to have an important role to play longer-term. As consumers are forced, both willing and unwilling to take increasing control of their financial destiny, so the sector will need to continue to reckon with them; the clamour for more transparency will grow louder, as will the demand for lower costs.
The need for advice, if anything, is only going to grow, and those that can figure out how to do so at a cost-effective level are likely to do rather well.
