The VC deals in the wealth management industry of UK is increasing at 27% y-o-y and the rise in deals have been contributed by the companies looking to scale up their operations, expand product ranges through vertical integration and also companies that are mostly interested in incorporating digital technologies across service-end are acquiring tech start-ups.

• Definition / Scope
• Market Overview
• Market Risks
• Market Trends
• Industry Challenges
• Technology Trends
• Pricing Trends
• Other Key Market Trends
• Market Size and Forecast
• Market Outlook
• Distribution Chain Analysis
• Competitive Landscape
• Competitive Factors
• Key Market Players
• Strategic Conclusion
• References

Definition / Scope

The wealth management companies serve the HNWI segment or the High-net-worth individuals and is generally handled by the sister concern firms of large private banks or by separate wealth management firms.

Since 2016, the UK wealth management sector has been sincere on various aspects including, regulations, technology, increasing client base as well as their AUM (Asset under Management), multiple M&A etc.

For 2020 and beyond UK wealth management sector is set to become the most ideal wealth management endpoint.

The Wealth management services can broadly be divided into three categories such as, discretionary investment management, Advisory services and non-managed services.

• Discretionary investment management: In this model, the buying/selling decision is made completely by the wealth manager.
• Advisory services: The buying/selling decision is made by the wealth owner based on the investment suggestions given by the wealth manger. In addition, the advisory segment market has declined in growth since past 5 years.
• Non-managed services: It is more like a self-service where the wealth managers advise only when the clients need it. There has been rise in this segment since past five years and holds huge opportunity in robo-advisory.

The UK wealth management sector has been facing active digital initiatives and investment activities. Some of the major solutions such as robo-advisory, white label solutions and analytics are supporting the progress in wealth management solutions.

Market Overview

The wealth of the HNWI is rising at 1.1% annually in the UK and stands at $2.53 trillion in 2019. By 2025, the UK is also expected to account 10.5% of the HNWI worldwide making it the fourth largest market in the world after China, US and India.

As of 2019, the UK wealth management industry is expected to manage $7.5 trillion in assets. Overall, of the $2.2 trillion assets of the international clients managed by the UK companies, 1.2 trillion belongs to the European region i.e. 37% of the total European assets.

Within the European region, UK wealth management industry value is worth equal to French, German and Italian combined.

As of 2019, UK is also the world’s second largest wealth management market in terms of size and it has significantly closed gap with global leader Switzerland. Assets overseen by UK wealth managers have risen consistently in recent years-and grew by 13% between 2018-2019.

Around 2.2 million people in the UK that seek wealth managers for investment, retirement and tax planning advice. The UK’s wealth management industry also directly employs 27,000 people.

At present wealth managers in the UK look after $143 billion in UK charity assets. In 2018, charities generated $4.2 billion in income from their investments which is also one third of the value of charitable giving in the same year.

Market Risks

Some of the relevant risks involved in the industry are as follows:

Anti-money laundering and high profile clients: In the UK wealth industry, PEP (Politically Exposed People) and anti-money laundering are the two biggest risks at present.

There is lack of proper client relationship management and also lack of screening on individuals; whether they are currently on the list of customers that sanctions are to be applied to.

It is essential for wealth managers to ensure that PEPs’ are not transacting business through their institutions.

Sustainability: Another major risk that wealth managers are facing is high costs associated with running a wealth business and the negative implications it could have for clients.

The biggest concern for firms involve high cost to income ratios. Although, firms have been impacted because of credit crunch and unfavorable regulations but as the business environment change these firms also need to have relevant business models in place to meet the new standards and also ensure quality service at the same time.

Many firms are not active at leveraging technology to make service swift and cut costs at same time. Firms are not preparing for the evolving world and changing consumer needs.

Thus, lack of innovative and long term sustainable business models may lead to market failure if these wealth management firms don’t take a stand on adopting new ways of working.

Market Trends

Innovation: On a global scale where only 14.8% of the wealth management firms are undergoing a major proposition development and revamping business models, 62% of the UK investment firm providers consider it as their major priority.

Additionally, 61% of the firms are already working on building trust and brand reputation. The UK wealth management industry is shifting towards a more client-centric business model that will help them distinguish themselves in the eyes of younger demographics.

Aging population: Continuous pressure on finances is being created by an ageing population along with successive governments using policy levers to shift responsibility for providing retirement income from the state to the individual.

As increasing savings and investment is top priority across workforce in UK, the wealth management industry will continue to have plenty of opportunities to serve a diverse customer needs and AUM is likely to grow furthermore in near future.

Favourable regulations: For instance, Pension reform that was enacted in 2014 provides individuals with new freedom to access and manage their pension assets. Individuals are allowed to transfer their DB pensions into other pension wrappers that are serviceable by wealth managers.

In 2018, DB transfers of $27.9 billion entered the wealth management industry. In addition, in April 2019, employees and employers are required to contribute 8% of their salary into pension asset fund and this is creating new vehicle for pension asset pool that is most likely to increase AUM of the industry.

At present, 46% of the wealth firms in the UK are least confident in the matter of engaging the younger investors. Young generation clients are also regarded as HENRY or (High earning, Not rich yet) which might require the firms to take their asset gathering journey backwards and focus on taking the size of portfolio to the level that is actually accepted at inception and this process would not be cost-effective one.

The size of the portfolio will likely to be low as the younger generations do not have much capacity to accumulate. In addition, another problem while catering young generation is technology which currently, the firms lack. 40% millennials in the UK cited that they would leave their financial services provider if the tech offering is limited.

Thus, in the digital era, it is no longer the analogue services/business models that appeal to clients but utilization of technology to engage clients cost-effectively which is proving as an obstacle for the firms.

The regulatory change is bringing change within the broader financial services sector in the UK. As the most recently introduced regulations was MiFID II which is regarded as the number one cause of pressure in the wealth management industry.

The firms are struggling to gain transparency and reporting requirements that the regulation mentions. In addition to MiFID II, others in the lists such as FIDLEG, CRS, FATCA, AML monitoring, for data protection and IFRS 9, email and voice mail monitoring are also bringing changes to the industry which the wealth management companies are finding difficult to cope with. 

The full-fledged regtech solutions are also not available in the market which can help the companies meet the regulatory compliance in cost-effective and efficient ways.

Industry Challenges

The traditional wealth mangers in the UK attract traditional wealth clients due to which firms are in competition with each other for the same conventional money.

Most of the wealth management private firms in the country target the X generation as their main client i.e. 50+ year old client who are either fully or semi- retired. Despite of having number of HNWI clients, the firms are dealing with mass affluent tilting towards the lower boundaries of high net worth.

The competition has further intensified because clients that are at a lower end of the spectrum are splitting their portfolio among different managers. This is making the market stressed and requires the wealth companies to have differentiated propositions to retain a HNWI within their firm.

The challenge with 50+ year’s clients is estate planning and death of clients. In the UK, the average client base of wealth management companies is 67 and they lose 7 to 8% client annually due to deaths. As a result, the younger generation will be the ones to inherit their property, the wealth management firms need to engage these customers with technology and solutions that appeal them.

Currently, this lacks in the market and younger generations particularly, in UK are calling such traditional wealth management firms as “Bank of Mum and Dad” which emphasizes the need to revamp brand positioning by these firms which is going to become a major challenge in days to come.

Even the clients personally are going under number of changes ranging from pension reforms to inheritance tax rules and higher taxes on dividends. Thus, these changes are affecting their way of managing their wealth and other financial affairs.

In addition, as the life expectancy of the clients become high (in UK 82 years) they require more money to go through retirement and also for care purposes. As the average costs of residential care and other costs are increasing every year it puts even more pressure upon the wealth management firms to nurture their clients assets especially in low-yield environment.

According to a study by Roubini, 69% of the clients in the UK expect their firms to be responsive to uncertain changes whereas only 58% of the firms feel prepared for such changes.

Technology Trends

The robo-advisor firms are the next-gen technology that is supporting the core function of wealth management services around the world with $3 billion of AUM being handled by leveraging such robo-advisor technology.

In the UK, companies are using Nutmeg which is already handling 55,000 accounts. Other robo-advisors in the market are: Swanest, MoneyFarm and Money on Toast. The technology has huge opportunity to scale up in the wealth management sector.

Another technology called, the white label solution, the providers’ offer automated advice and investment management solutions. In the UK, startups such as WealthKernel and Mubaloo provide white label solutions for wealth management companies.

Many UK companies have also started to leverage data analytics to devise investment tactics for their HNWI clientele. The wealth management companies have started to use big data analytics to gain insights into their customers and discover investment opportunities.

At present, around 50% of tier I wealth management firms use big data registered tools and 25% of tier II firms use big data. Thus, in future the technology is likely to proliferate more in the industry.

Pricing Trends

In the wealth management industry, the prices charged to the clients depends upon to what extent are they receiving the service. Is it discretionary management of funds that they seek or non-discretionary. For example, a company named Brewin Dolphin offers 14 pages of charging information in their website.

So if the client has around $600,000, the client will need to pay around 3.1 cent a year. Whereas some companies such as Rathbone’s charge only 1% management fees which is quite less compared to that of Brewin.

Other companies such as St. James Place would cost their clients 3-4% of their assents annually which includes set-up costs and upwards 2% on annual basis.

Schroders Personal Wealth, a joint venture by Lloyds and Schroders charge for a wider market is around 1.7- 1.9% .Their  cost of the service part of the offering, will be about 0.65 percentage points of that.

The new wealth management company Netwealth has mostly the passive clients. For instance, someone with $600,000, the annual all-in charge is around 0.85 %( no-advice). Clients having around $300,000 it’s 1.2% (0.8% without advice). They also have a third option where their robo-advisor Nutmeg can assist their clients.

The robot-advisor will get straight managed portfolio without the need to make any investment decisions. The charge will be around 1% of $150,000. At $300,000 same service will be available at 0.7% annual charge. Thus, this new innovation is allowing wealth mangers to cut costs and also reduce price to customers.

However, this model is new to the industry as quite few players are only leveraging such technology across their operations.

Other Key Market Trends

As the demographics is shifting to younger generation from older client base, the firms need to become aware about catering effectively to younger generations.

Already 42% of the investment providers are targeting clients across broader wealth levels and 47% are building current client relationships to extend the business further down the family line and among relatives.

This trend is becoming more evident as the older generation pass on their wealth to younger ones in the family. Thus, there is significant rise of millennial investors in the market.

To mitigate the obstacles present in the market, more recently the firms are moving towards the idea of economies of scale. To achieve the scale, some of the firms are observing M&A as their opportunity while some others have organic growth plans to retain customers.

M&A is not only being viewed as an opportunity but a door to bolster the outlook of the entire sector and bring it into modern terms rather than limiting to traditional models of operation. It’s not only about acquisitions but also divestments.

Thus, the increasing number of M&A is going to be witnessed by the sector in areas ranging from culture to technology and solve the integration issues being faced by the firms currently.

Market Size and Forecast

As of 2019, the global asset under management is valued at $59.5 trillion and is growing at 4.1% annually. The top 4 markets include, US, UK, China and Russia. At present UK stands at the 2^nd rank.

As of 2019, the UK wealth management industry market size or total asset under management is around $7.5 trillion which is also 11.8% of the total market size of the global industry. UK lies in the western European region which is also growing at 4.5% annually.

• Within the UK, most of the assets is managed by the discretionary fund managers which include Fas too. As of 2019, FA’s have $500-600 billion funds under management
• Second, the other discretionary fund managers have $400-500 billion funds under management. Total of $1 trillion funds are under management of discretionary fund managers.
• Third, private banks manage around $300 billion funds and finally, $400 billion funds are managed by B2B advisors.
• Other parties include, stock brokers, master trusts and retail banks that have minor stakes in the market.

Market Outlook

The global wealth management industry is growing at 4.1% annually which suggests that by 2024, the market size or total asset under management is likely to reach a value of around $72 trillion

The UK wealth management industry is growing at 2.7% annually so, by 2024, the market size is expected to reach $8.6 trillion.

• The biggest growth area is discretionary fund management firms which are growing at 7% annually and is expected to reach market value of around $826 billion in 5 years’ time period.
• Financial Advisors’ fund under management is also likely to increase and reach $ 1 trillion in same period of time.

Distribution Chain Analysis

In the UK, the wealth management industry operated across three principal functional layers that include:

Client management: It is the most important layer for number of crucial value-adding activities including client relationship management, proposition development, risk assessment and portfolio design.

Some of the major types of firms providing services of this layer kind are financial advisers, discretionary fund managers and private banks. This layer alone manages $1 trillion worth of client assets which mostly belong to HNWI category.

Investment platforms: Clients assets are also invested through the investment platforms layer which is the backbone of the industry. Most of the firms involved are third party B2B adviser investment platforms.

These firms leverage technology capabilities from their backend support such as FNZ, SEI and Pershing. Other supporting businesses operating in this layer include self-invested personal pension administration providers.

Investment Vehicles: This is the actual realm of asset management industry at the receiving ends of trends in the value chain. These include different types of instruments in which the fund managers invest their clients’ savings to create more returns in future.

Competitive Landscape

There are around 200 institutions operating in the wealth management industry in UK, however, foreign players are continuing to add up to the domestic firms regularly popping up due to high growth potential and profitability prospect of the market.

In the UK wealth management, the firms have embraced the scalability and cost-efficiencies and shifted away from the traditional model of providing advisory only services. Around 95% of the firms offer model portfolios compared to 25% providing advisory services.

The discretionary model also seems to be favoured by the clients in UK, due to which the discretionary portfolio management services are given to investment levels $1.1 million or lower while most of the companies have set the threshold at $1.1 million and above.

Some of the larger wealth management companies in the market are also known to provide discretionary service on investments above $11.1 million.

The high proliferation of model portfolios in the UK wealth management also suggest that the market has significant dependence on the typical range to offer.

The funds that the institutions offer include, funds (both active and passive), bonds, direct equities, FX, core alternatives, real-estate and  tangible investments.

100% of the firms in UK Wealth Management are providing funds followed by 90% direct equities and Bonds and above 80% firms are providing real estate, FX and core alternative options respectively.

Competitive Factors

In 2019, the UK has dominated European market in terms of VC funding and investments in the UK after Brexit vote doesn’t seem to have suffered much. In 2019, approximately $8.6 billion has been invested in UK based startups across 1423 deals.

Total assets managed in UK increased by almost 11% in 2019 with a record of $7.5 trillion. This number represents 85% of an ever-extending asset management industry which is expected to be valued at $12 trillion.

UK remains as the largest center of asset management outside of the US and it accounts 35% of the global asset under management. The international funds managed by the UK companies is also increasing at 30% y-o-y and is bolstered by strong flows of money to EU region.

Most of the deals in the industry has been contributed by firms looking to build competitive scale, expand product ranges through both vertical integration and by acquiring specialist capabilities.

These include digital technologies as firms are looking to remain ahead in the market and access new routes to serve clients.

Key Market Players

The top players in the industry are as follows:

Legal & General Investment Management: The Company is universally known as Legal & General. It is a British multinational financial services company headquartered in London, United Kingdom. Some of its core products and services include investment management, lifetime mortgages, pensions, annuities, life assurance, and general insurance.

It was established in 1970 in London, UK. As of 2019, the company has highest AUM in the country at $1.2 trillion.

Insight Investment: The Company is the youngest of all top companies in the industry as it was established in 2002. However, the company has succeeded quite well in short period of time.

The company strives towards solving problems of clients from pension funds to insurers to sovereign wealth funds.The company mostly works around liability driven investment and risk management solutions. It is located in 5 international destinations and as of 2019, total AUM was around $771 billion.

Schroders: Schroders is a British multinational asset management company, founded in 1804. The company employs over 5,000 people worldwide in 32 locations around Europe, America, Asia, Africa and the Middle East. 

As of 2019, Schroders was responsible for assets worth $549 billion on behalf of clients including corporations, insurance companies, local and public authorities, charities, pension funds, high-net-worth individuals and retail investors.

HSBC Global Asset Management: The Company is also global asset manager with a strong heritage of successfully connecting their clients to global investment opportunities.

They have presence in over 26 countries and have 600 full time dedicated professionals to assist clients. as of 2019, the company has over $443.9 billion dollars under management

Billie Gillford: Baillie Gifford is an investment management firm which is wholly owned by 44 partners, all of whom work within the firm. It was founded in Edinburgh in 1908 and still has its headquarters in the city.

Assets under management and advice of under $215 billion is being currently managed by the company.

Other noteworthy players in the industry are as follows:

• Man Group
• Aviva Investments
• Northhill Capital
• Ashfmore Group
• Marathon asset Management
• BlueBay Asset Management
• WalterScott Partners
• Newton Investment Management
• Jupiter Asset Management
• Mondrian Investment Partners

Company Name	Asset Under Management (worldwide, in million dollars)
Legal & General Investment Management	1,261,141
Insight Investment	771,049
Schroders	549,615
HSBC Global Asset Management	443,921
Baillie Gillford	215,238

Strategic Conclusion

UK’s wealth management market is also one of the worlds’ most multi-faceted. It is a home to providers ranging from full-service wealth management arms of international banking groups to private banks, financial advisors and fund managers of all stripes.

All of these firms are different from each other and they are possibly targeting different types of clients and operating in their respective niche markets. However, to thrive in future, these firms will require to achieve sustainable, smart growth as the industry itself and the clients’ needs evolve.

References

• https://gomedici.com/uk-wealth-management-industry-the-private-clients-aum-market-in-the-uk-is-expected-to-reach-1-1-trillion-by-2019
• https://www.wealthbriefing.com/cms/images/app/FINAL%20-%20Smart%20Strategies%20for%20Growth%20-%20A%20Study%20of%20the%20UK%20Wealth%20Management%20Industry.pdf
• https://seic.com/sites/default/files/inline-files/SEI_PB_UK_WMCrossroads_Whitepaper.pdf
• https://www.lek.com/insights/ei/uk-wealth-management
• https://www.mordorintelligence.com/industry-reports/uk-asset-management-industry
• https://citywire.co.uk/wealth-manager/news/the-10-top-trends-for-wealth-management-in-2019/a1188297#i=8
• https://www.ft.com/content/83726034-daeb-11e9-8f9b-77216ebe1f17
• https://www.theglobalcity.uk/PositiveWebsite/media/Research-reports/wealth-management-uk-factsheet.pdf
• https://citywire.co.uk/wealth-manager/news/fca-the-three-risks-facing-wealth-management-industry/a786547
• https://citywire.co.uk/wealth-manager/news/uk-wealth-industry-nears-1trn-on-record-104bn-inflow/a1133284
• https://hub.ipe.com/top-400/uk-asset-manager-tables-2018/10007231.article
• https://www.ey.com/Publication/vwLUAssets/ey-wealth-management-outlook-2018/$file/ey-wealth-management-outlook-2018.pdf

Appendix

• HNWI- High Net Worth Individuals
• AML- Anti-Money Laundering
• IFRS-International Financial Reporting Standards
• MiFID-Markets in Financial Instruments Directive
• FA- Financial Advisors
• DB- Defined Benefit
• EU- European Union
• VC- Venture Capital
• FX-Foreign Exchange
• HENRY- High Earning Not Rich Yet
• AUM- Asset Under Management
• PEP- Politically Exposed People
• FIDLEG- Federal Council adopted the dispatch on the Financial Services Act
• CRS-Common Reporting Standard
• FATCA- United States Foreign Account Tax Compliance Act
• FNZ- Financial Technology Company specialising in providing investment platforms to major financial institutions in the financial services and wealth management sectors.