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Does the Lloyds and Schroders tie-up make sense?

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Does the Lloyds and Schroders tie-up make sense?

Six years after it abandoned mass-market financial advice following a series of mis-selling scandals, Lloyds’ decision to come back to the market with Schroders has divided opinion.

Going into a joint venture (JV), 50.1% owned by Lloyds with Schroders holding the balance, the two firms have stated their aim to become a ‘top three financial planner in five years’.

As far as the numbers go, the new financial planning business already has a decent headstart, with Lloyds transferring approximately £13 billion of assets under management (AUM) and associated advisers from its wealth management business to the unit.

But it still has a long way to go if it is to get to its ambitious AUM target, which the analysts at Berenberg estimate at between £50 billion and £60 billion in the next five years.

Some in the industry are sceptical it will work out for the two firms, but others think it’s a ‘great idea’.

Warning signs

Alan Steel, chairman of Alan Steel Asset Management, believes past evidence when it comes to banks and financial advice means it ‘doesn’t augur well’ for the JV.

In December 2013, Lloyds received a £28 million fine from the Financial Conduct Authority (FCA) for ‘serious failings’ in the way it incentivised investment and protection advisers. The fine was at the time the largest ever imposed by the FCA or its predecessor for retail conduct failings.

A sceptical Steel said: ‘They’re a classic bank. Look at the trouble banks have gotten us into – they haven’t learned anything.’

Despite having a wealth unit in Cazenove Capital, Steel is also sceptical as to whether Schroders has the skills in this area.

He said: ‘Schroders are a decent name, but when you look at it, what are the skills in Schroders at giving financial advice? People who have £1 million to invest want a personal service, not just someone ticking boxes.

‘I just don’t think Schroders have that experience in terms of long-term financial planning, tax planning, pension planning, etc.’

However, M&A expert Kevin Pakenham thinks the new business is a ‘great idea’. He added: ‘Merge the Cazenove/Schroders approach to client handling and investment processes with the mass demand channelled by a retail bank. If the IT is up to it, it should be able to deliver value for money to clients.’

Either way, it’s clear to see what both firms get out of the partnership, especially when the hard numbers are looked at.

According to a note from Bank of America Merrill Lynch, Schroders’ JV with Lloyds is expected to deliver a pre-tax profit of £35 million in 2018, of which Schroders takes 49.9%, or around £17.5 million.

While from Lloyds’ point of view, it will receive a 19.9% stake in Cazenove Capital as part of the deal. Broker Shore Capital estimates that given the wealth business reported a pre-tax profit of £52 million in 2017, Lloyds is effectively receiving a pre-tax profit stream of £10.4 million from Schroders.

Gaps in the market

Niral Parekh, head of retail asset and wealth management at Capco, believes the main opportunity for both firms comes from the growing retirement market, which is fragmented and therefore has plenty of gaps for firms to offer financial advice.

He said: ‘There is an opportunity in the retirement market, with the pension freedoms and people moving from annuities to drawdowns. The UK also has some of the most complex tax laws in the world. A lot of people are coming back into the market, and there’s a need for having a financial planner.’

Parekh thinks the partnership is symptomatic of the vertical integration happening in wealth management, but admits that the JV format is a ‘new structure’ in the industry.

He added that the driving force behind the whole partnership is the £80 billion mandate Lloyds has given to Schroders, after it withdrew the original contract from Standard Life Aberdeen over concerns about potential conflicts of interest with the expanded group when Aberdeen merged with Standard Life.

In return, Lloyds has access to Schroders’ growing Benchmark Capital platform, its private banking business and Cazenove Capital, he noted.

Parekh said: ‘Schroders gets the mandate plus access to Lloyds’ distribution network. And what Lloyds will get out of this is getting that conflict of interest and that reputational risk out of the way by giving the mandate to Schroders.’

But one area still to be ironed out is the brand name of the new business, an important point given Lloyds’ past in financial advice and the fact it is consistently in the top three when it comes to the Financial Ombudsman Service’s complaints data. For some this raises questions over whether Schroders wants its brand associated with Lloyds.

Parekh said this is an area Schroders will have to figure out going forward.

He said: ‘A traditional asset manager like Schroders has never had to deal with all that retail mess and various complaints.

‘The reputational risk will be a focus and that’s for asset managers generally. It is something they will have to address. We’ve seen evidence in the US when firms partner like this that they come up with a new brand name, but therein lies the problem. How do people know it is those firms involved and what the business offers?’

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