Conventional wealth management services have been firmly in the cross hairs of the regulator for several years now and there is little sign of this abating.
‘Customer demand for improved service-led offerings and increasingly complex solutions – pension transfers and drawdown, for example – will only bring greater regulatory scrutiny and the need for stronger process and controls,’ said Georg Bauer, a senior manager at Alpha FMC, a wealth and asset management consultancy.
‘The pace and relentlessness of the changes required, exacerbated by legacy infrastructure and siloed operations, comes with a significant price tag, and is something that many wealth managers are still underequipped to deal with.
‘When combined with mounting fee pressure from the low interest rate environment, increased competition and the commoditisation of investment products, you’d think that the industry is set for a winter of discontent.’
With another significant piece of regulation on the horizon, in the form of the Markets in Financial Instruments Directive II (MiFID II), we examine six key effects of regulation on the wealth management sector and how it is responding:
1. Increased workload
MiFID II, a fearsome piece of legislation that has been seven years in the making, comes into force in January next year.
The regulation has a number of significant repercussions for wealth managers, bringing in a new level of transparency of costs and charges and changing how wealth managers pay for investment research from brokers and investment banks.
A typical medium-sized UK wealth manager is spending £3-5 million preparing for MiFID II, according to an estimate from consultancy EY.
‘The implementation of MiFID II has resulted in a significant workload going into 2018,’ said Gavin Haynes, managing director of Whitechurch Securities.
The transparency and accountability sought by the regulator is driving clear benefits for customers and will continue to do so – not least in the form of fees falling across the industry as wealth managers strive to provide competitively-priced solutions.
The increased cost of doing business and reduced fee revenue is resulting in an increased level of consolidation as wealth managers look to protect margins through cutting costs and this is likely to continue to gain momentum.
Listed wealth managers and those backed by private equity are particularly susceptible with a focus on asset gathering to keep shareholders happy.
3. Small company, big benefits
With consolidation resulting in a sector that is dominated by large behemoths, a number of small and new players are touting their distinct advantages. They are able to take a more nimble investment approach and invest in a wider universe, given their access to smaller funds and investment trusts that larger wealth managers would struggle to invest in.
Last summer, Keith Edwards left Quilter Cheviot, which has undergone a string of changes of ownership, to co-found Casterbridge Wealth in the belief that intermediaries want to work with independent, boutique players that are not controlled by a fund group or bank.
The company has so far attracted assets under management of £150 million. It has his sights set on running £500 million by 2020 and £1 billion over the next ten years – but growing no further than that.
4. Passive prominence
Downward pressure on fees has seen a rise in the amount invested in passive funds as the cost of investment comes under growing scrutiny.
With markets on a prolonged upward trend it has been a difficult environment for active managers to justify their fees, but Haynes foresees dangers in a pure passive strategy.
‘When the tide turns I see investors focusing on the cheapest beta options being caught out,’ he said. ‘Our focus is to use both passive and active strategies, and focus on value, not simply going for the lowest cost option.’
5. Tech focus
Wealth managers are seeking outside help to help ease the burden of regulatory reform and drive opportunity from the top line, according to Bauer.
‘The best solutions are inevitably technology-driven, which allow firms to automate, arrange and audit their data and processes to comply better with regulation, and add additional services to their customers at the same time,’ he said.
‘Increasingly, the best defence appears to be a well-crafted digital offence – an offence that can serve to both mitigate fee pressure and reduce cost, and potentially even flex the boldest firms’ positions in the value chain.’