Charles Stanley stood out as the most cautious, saying on Wednesday that although total revenues remain stable, “due to the cost of continuing investment in our future together with falling commission revenues, we approach the coming months with considerable caution.”
Commissions
For the three months to end June, the group saw total revenue increase marginally, while total client funds grew 0.2% to £20.14bn. But, it said, it was “disappointed” by the drop in commission income, which fell 16.4% to £12.7m.
But, while it may have been disappointed, it was quick to point out that the drop in commission income was “more than offset” by the 13.4% rise in fee income to £24.6m.
“Investment management fee income in particular increased by 21.0%, from £10.0 million to £12.1 million, reflecting the changes to our charging structure introduced last year,” it added.
Brewin Dolphin, also highlighted this decline in commission income, saying: “Core income growth, in common with industry trends, was slower than achieved in the first half due to a marked decline in commission income in the quarter to £20.9 million (12% down on 2013).”
It explained: “While lower transactional volumes partially reflect seasonal effects, they are also a result of lower market volatility in the quarter.”
But, while commission income fell during the period, Brewin Dolphin said that year-to-date, “core income is up 10% from £182.3 million in 2013 as a result of increased funds under management and, the move onto new standard national pricing structures.”
There is of course also the longer term impact of RDR evident as companies continue to seek out hire levels of fee-based income and thus decrease their commission line.
Investment in systems and M&A
The spectre of RDR also floats above much of the commentary within the various trading updates around investment and Charles Stanley is not the only one looking into it. Brooks Macdonald CEO, Chris Macdonald, commented in the group’s full year trading update that the group continues to invest heavily for future growth, particularly in systems development, as did Rathbone Brothers CEO, Philip Howell.
Both Rathbones and Brooks Macdonald are also in the process of digesting acquisitions that are expected to boost not only funds funder management but also skills.
Rathbones funds under management rose from £19.9bn to £23.9bn during the six months to end June.
While organic growth was good, Rathbones said it had begun to see the benefit from the Deutsche Bank transaction, which it said, “helped total acquired growth to rise to £819 million in the period (2013: £453 million).
The bedding down of the group’s anther acquisition, the private client and charity investment management business of Jupiter Asset Management, is expected by the end of September.
“Total Jupiter discretionary and other managed funds under management available for transfer equate to £1.6 billion, with a further £0.5 billion in execution only accounts,” it said.
Brooks MacDonald also reported a rise in funds under management, helped along by its acquisition in April of DPZ. “Over the year discretionary funds grew by £1.44 billion (or 28.2%). As a comparison, the WMA Balanced index increased by 6.2% over the year,” it said, adding: “Over the last quarter, discretionary funds under management rose by £629 million. This included £363 million as a result of the DPZ acquisition. This was a rise of 10.6% or 4.5% net of DPZ,” it said.
Asked his view of the sector, David McCann, analyst at Numis Securities, said that across the names mentioned, organic growth seems solid at around 5%, but that as a subsector of the wider financial services industry, they are on pretty high ratings.
“To put it in context, these companies are trading roughly around the around 16 to 18 times earnings, as opposed to the asset managers who are sitting roughly between 14 to 16 times,” he said.
There is no doubt that the sector faces further headwinds as commission incomes continue to decline and the regulatory burden continues to grow, but there are reasons to be optimistic.
For some, like Brewin Dolphin, there are wins to be made from a cost point of view in terms of margins, while others, like Charles Stanley are looking to technology. Brooks Macdonald and Rathbones have now to focus on bedding down acquisitions made. But, looking at the results even more broadly, even in a flat market, funds under management grew and, the expectation is that that is likely to continue, especially at the lower end of the wealth spectrum as the need for advice and investment management increases.
These firms should also benefit from a rising rate cycle and an improving market. But, as always, while there is cause to be optimistic, success will lie in the implementation.
