With the raft of new regulations and pressure on fees, what does it take to launch a successful boutique in today’s market?
One of the first things that those planning to start their own company should consider is the cost of their time, according to CEO at Patronus Partners and former Citywire Wealth Manager cover star, Paul Kavanagh.
The cost of launching can sometimes be exacerbated by the time you spend not generating revenue, he argued.
The former Killik & Co chief investment officer launched his boutique wealth management firm Patronus Partners in June 2015, a year and a half after he left his previous role.
‘From our point of view, the biggest cost was our time. Time that you put into the business that isn’t generating revenue. For example, it took us around eight months to get regulatory approval for our firm, which is just about as fast as these applications can go,’ he said.
‘During that time, you are in suspense and there is a very high opportunity cost, especially if you left a good job like we did. There is a lot of opportunity cost to starting your own boutique compared to joining an established brand.’
This cost is elevated if you go it alone rather than sitting under the regulatory umbrella of a larger company that takes care of back office and regulatory functions for a fee, added Kavanagh (pictured above).
Some of the companies that provide these services include St James’s Place and Raymond James, which allow entrepreneurs to start companies under their brand for a franchise fee.
Ed Froggatt and Andy Butcher, who recently started a Raymond James partner practice, are an example of this model.
‘It takes a lot of planning to launch a boutique, we were looking at this for a long time and we went through several business plans before settling on the Raymond James model,’ said Butcher.
‘There is pressure on fees across the whole industry for wealth managers, fund managers and advisers, and you have to make sure you are confident that you can provide a level of service that your fee warrants.
‘The fact that our overheads were reduced and back office stuff was taken care of meant we could focus on service.’
There is no ‘one size fits all method’ for creating a boutique, according to Alec Stewart (pictured), who helped create the wealth arm of law firm Anderson Strathern and recently established his own business, Stewart Asset Management in June 2017.
‘Anderson Strathern was attached to a law firm, which is quite good in that it came with a steady stream of clients, but it had its own legacy issues, such as IT,’ he said.
‘On the other hand, Stewart Asset Management was a clean sheet, which had its own challenges, but the benefit was that you could cherry pick what your offering looks like. That translates to everything from what IT systems to the way in which you manage money.’
Stewart added: ‘As long as you’re willing to bring the expertise as and when it’s needed, then biggest isn’t always the best. A larger client base generally requires more people to handle them, which makes it harder to provide the cohesive service you might want.
‘By being smaller you can also be in the privileged position of controlling your margin. Some of the larger groups, such as Brewin Dolphin, when you look at their margins and compare it to some boutiques, you see that the boutiques are more profitable in that sense.’
Stewart also argues that regulatory hurdles are not as insurmountable as they first appear.
‘Bringing in outsourced expertise on an ad hoc basis can be a cost effective way to deal with more complicated regulatory issues, rather than training or hiring an in-house expert.’
‘Large firms I dare say do this too, I would expect for example that oil giant BP would bring in an expert to consult on complicated issues for which it didn’t have in-house expertise.’
You can also outsource parts of your back and middle office to providers, such as Schroders-backed Best Practice and Pershing, said Kavanagh.
Stewart added that when it comes to assets under management there is also no ideal size or breakeven for boutiques, as they can have different business models.
‘When you are a small business, at first it’s all income driven. But inevitably, in order to grow, you have to take on costs that don’t add to the top line. These include IT support and human resources, which are crucial if you want to grow,’ he said.
‘I’m not sure there is an ideal size, if you’re looking at it from an AUM figure then the bigger the better. But if you’re talking about it from a service to client point of view, then you may have a cap in mind.’
While having an established client book is not a prerequisite for launching a successful boutique, it can be very helpful according to Raymond James’ Froggatt.
‘If you haven’t got a client set that you know very well, then you are up against it. So if you don’t have a relationship with clients at a level where you are sure if they will come with you, as you can’t ask them before you go, then you better have deep pockets,’ he said.
‘You have to be pretty sure that what you have planned is also for the clients’ benefit, because if they take a risk and follow you, they will see through you pretty quick if you haven’t been honest with them.’