Britain’s biggest banks are returning to the wealth management space as the sector attempts to tap into new areas of growth and replicate the success of firms like St James’s Place on the one hand and robo-advisers like Nutmeg on the other.
A large part of the high street banks’ plan of attack has involved disrupting the digital wealth management market.
RBS was the first to dip its toes in the water by offering an automated online service to its 5 million Natwest customers last year. Santander has followed suit this September and HSBC is also reportedly close to debuting its digital advice offering in the UK with pilot testing of its Wealth Track already underway in the US.
Barclays has also expressed plans to roll out a robo advice service but has not yet updated the market after encountering problems with its self-directed investment platform, Smart Investor, last year.
Ben Yearsley, director of Shore Financial Planning, says banks recognise that ‘self-provision’ advice is one of the fastest growing and potentially most lucrative segments of the UK financial services industry.
“Everybody knows the state pension isn’t going to be good enough in the long run, therefore you have to provide for yourself for your future.”
First proper challenger to SJP
Lloyds has taken a slightly different tack. The UK’s second largest bank announced last month it would be partnering with Schroders to create a financial advice firm which it hopes will be in the top three in the UK in five years.
Yearsley views the joint venture as a response to the overwhelming success enjoyed by the UK’s largest wealth manager SJP and says it is “the first time someone has properly tried to challenge” the incumbent.
After the Retail Distribution Review came into effect in 2012 most UK banks ceased offering financial advice to all but their most affluent clients because of the higher risks and costs associated with doing business. This vacancy created a massive boon for players like SJP and Hargreaves Lansdown.
Since January 2013 SJP has seen its share price swell by 140%, while Hargreaves Lansdown’s has gone up by 162%. The banks’ share prices meanwhile continue to languish at historically depressed levels particularly Lloyds which is currently trading at 58p.
Lloyds and Schroders versus SJP
Yearsley says the success of the firm “depends on how much Lloyds get in the way of Schroders”.
“The banks haven’t got a clue what they’re doing in that kind of space,” says Yearsley. “None of them do, simple as that. Why would the banks be any better today than they were five years ago or 10 years ago?”
That said, he thinks the combination of Lloyds’ 27 million strong customer base with Schroders’ investment offering and experience in wealth management via its Cazenove Capital subsidiary means the JV could become a serious competitor for SJP and “quite possibly” poach clients away from the group. He adds that having Schroders co-head of UK intermediary James Rainbow at the helm as chief executive of the group also bodes well.
“They’re seeding it with a lot of money in terms of advisers and assets, so it will have critical mass on day one,” says Yearsley.
“SJP won’t be worried in the short-term; they’re the incumbent. But if it [JV] works, then they are a challenge.”
7IM senior portfolio manager Peter Sleep doesn’t believe that SJP is in any real danger of being dethroned by the Lloyds/Schroder JV, however.
He notes the £13bn of total assets overseen by Lloyds’ wealth management business, which are being transferred to the JV, is still relatively small when compared with SJP’s £100bn of funds under management.
Sleep also thinks the Lloyds’ JV will struggle to keep pace with SJP’s net inflows, which were around £10bn for 2017.
A spokesperson for SJP told Portfolio Adviser the firm remains well-placed to address the growing advice gap due to the strength and depth of its technical resources.
“Any new entrant into the market supports our belief that there is a significant advice gap in the UK. A growing market combined with fewer advisers, low interest rates, tax complexity and pensions freedoms means that there has never been more demand for advice than today.”
Banks poised to address growing advice gap
While the Lloyds/Schroders and SJP showdown might strike some as a David and Goliath-type scenario, the battle of the banks and traditional robo-advisers looks less fraught.
Mike Barrett, consultant at the Lang Cat, notes says the banks are ideally positioned to address the increasingly large gap between the current advised market, occupied by players like SJP, and the D2C market, dominated by Hargreaves Lansdown.
He adds that the high street banks have an “enormous advantage” over digital wealth managers, particularly start-up firms, because of their large existing customer bases.
“It’s there for them to lose really,” says Barrett. “If they are able to start cross-selling into their current accounts and savings customer banks then that gives them enormous advantage over the start-up robos.”
Even more established robo players like Nutmeg and Moneyfarm have been struggling to turn a profit as they spend an increasing amount of money on marketing to raise their profiles.
Last year Nutmeg’s losses rose by nearly a third to £12.4m though the firm blamed this chiefly on regulatory costs.
Nutmeg also recently announced it would be offering an over-the-phone advice service to customers which some interpreted as a sign that specialist robo advisers are beginning to lose their appeal.
A ‘game changer’
Fundscape chief executive Bella Caridade-Ferreira agrees if the banks are able to successfully pull off their robo propositions this could be “a game changer” for the industry.
Caridade-Ferreira says robo is a logical entry point for the banks to “step back into the mainstream” and get in on the mass-affluent advice arena because it is a tightly controlled proposition that eliminates the risk of human error and keeps costs down.
“Unfortunately, our market is primed to target wealthy investors and dismiss the modest customer base as not worthwhile,” she says. “However, this woefully underserviced mainstream segment is crying out for advice and simple, targeted solutions.”
