Are the recent jobs cuts announced across a number of wealth firms just the tip of the iceberg for the industry, or are they due to company-specific cost reductions that were long overdue?
It is no surprise that wealth management firms had a tough fourth quarter, with many revealing lower inflows and a decline in assets as markets sold-off. The difficult conditions also saw some firms announce redundancies as a way to drive efficiencies.
For Stuart Duncan at Peel Hunt, the staff cuts seen at companies like Brooks Macdonald and Mattioli Woods are a result of specific issues that the businesses are facing.
‘I don’t think it is something I would expect to see widespread across the sector. They are still profitable businesses. There are pressures, but the pressure on revenue is temporary. Wealth management firms are probably steadier and when things are going well they don’t grow as much, so when things go badly they don’t have to cut as much,’ he said.
The pressures faced
January’s trading updates still revealed the extent of the pressures faced by wealth businesses, and how they are looking to address some of these issues.
Brooks, for example, announced that it is cutting 50 jobs from its administration and IT desks, in an efficiency drive. The company is expecting to derive £4 million in annual savings, after a one-off cost of up to £3 million.
The firm told the market: ‘The proposed changes will help the group respond to clients’ and advisers’ evolving needs, positioning it to deliver an improved, more consistent client experience and make it easier for advisers to do business with the firm. The group has identified a range of opportunities to streamline and remove duplication from core processes, for example, by centralising client account opening and client reporting.’
But for Duncan, this decision came from a need to focus on how efficient Brooks’ business model now is after it doubled assets in five years.
In a note put out last week, he stated that the cost synergies should lead to the ‘enhanced scalability of the business, which should drive the natural operational leverage in the model and subsequently help the shares further re-rate’.
He wrote: ‘Brooks’ new management team has taken decisive action on the cost base, and once market conditions improve the business is better placed to deliver operational leverage. We believe this, plus the growth being delivered, deserves a higher rating.’
Another analyst encouraged by Brooks’ decision was Paul McGinnis at Shore Capital. The broker upgraded its rating on the stock from hold to buy. Brooks’ shares are still down 15% to £16.70 over one year, despite rallying by 10% in January.
He noted: ‘One of the main reasons for our recommendation upgrade, in combination with the beaten-up share price, was that many of the issues that have impacted the investment case over the last couple of years now appear to be largely in the past and the cost efficient announcement, while no doubt painful for the individuals being made redundant, are a sign that a relatively new management team can now start to look forward.’
Almost a month after Brooks’ announcement, Mattioli Woods revealed a similar initiative to cut jobs. The company said it reduced the number of adviser consultants from 130 to 120, with total headcount down from 622 to 604.
The group said the redundancies were due to the relocation of its office in Hampton-in-Arden to Leicester, again a company-specific problem.
It added: ‘We have reviewed our approach to consultancy development, with the number of consultants reducing to 120 (from 130 in the first half of 2018) at period end, following the retirement of several vendors of acquired businesses on completion of their earn-outs and a new consultancy development programme going live in December 2018.'
The company confirmed that it was actively recruiting across all areas with over 30 live vacancies for experienced people in addition to around 25 to progress through its various training programmes.
‘We continue to invest in our IT systems, compliance and training across all parts of the group, with the aim of delivering further operational efficiencies and benefiting from further economies of scale.’
Among non-listed firms, Julius Baer also said that it will cut over 100 jobs after full-year numbers missed forecasts. This came as a bit of a surprise as the Swiss bank had been on an aggressive expansion drive in the UK, hiring eight people in September alone, but the losses were at the group level, rather than the UK.
Julius Baer International chief executive David Durlacher did not rule out reductions in the UK, where the firm embarked on a regional push last year, but said that he does not ‘anticipate any real or meaningful impact to our business’.
He added that the business has in fact confirmed plans to hire around 80 new relationship managers globally this year.
‘The UK is one of Julius Baer’s core markets and with two thirds of wealth outside of London and the South East we will continue to focus on opportunities throughout the UK,’ he said.
‘The investment we made last year, and continue to make, on our expansion will naturally have a short-term cost impact on our P&L, but we continue to think that in the long term, hiring high-caliber individuals with extensive track records and proven credibility, is extremely compelling in the UK.’
Another company that has been actually ramping up the recruitment drive, in contrast to Brooks and Mattioli, is Tilney Group. The firm has been busy hiring in the regions as well as completing a number of acquisitions. In 2017, this led to a 48% increase in staff costs to £80.6 million for the business, contributing to its £9.5 million loss over the year.
Committed to continuing the growth, head of financial planning Andy Grant said: ‘Our growth is driven by the demand we have from our clients. Whereas the cross industry retail investment figures show a steady decline during the course of last year, our own performance held up very well indeed against that backdrop.
‘We believe that the proposition we deliver to our clients is competitive and we continue to be focused on differentiating what we offer, both when we first engage with the client and throughout the course of our relationship with them.’
Driving home the point that staff culling seems unlikely to become an industry-wide issue is Lloyds’ recent announcement that it plans to hire 700 advisers as it builds on its tie-up with Schroders. However, it is unclear where Lloyds will find such a large number of advisers to recruit.
Of course, weak markets, leading to a decline in investor sentiment, are worrying, but Duncan highlights the resurgence of the financial advice industry as the main concern.
‘Unsurprisingly, market conditions manifests itself in two ways: lower asset values, equal lower revenues, and the impact on investor sentiment. Wealth managers have proven to be relatively resilient.
‘The broader challenge is the backdrop to the industry. You have a pool of customers with solutions they need. If you take wealth managers as sort of discretionary managers, the challenge is the resurgence of the financial advisory industry. You have some pressure from the robo-advice type model, which is quite small at this point. And the growth from D2C platforms like Hargreaves Lansdown.’
Duncan also pointed to pressures from compliance and regulatory costs, alongside the general cost of doing business, with companies having to invest in technology and additional people.
He added: ‘The reality is they all have relatively strong market propositions, they are valued by clients. There are pressures around the growth of the IFA industry, they can focus on clients and that changes the type of solutions and services from purely discretionary bespoke to a multi-asset solution. You can see how these businesses will continue to evolve.’
Addresing the headwind
Brewin Dolphin has also been addressing this headwind in recent years, with the firm vocal about investing in its financial planning capabilities. In 2018, the business launched a high-end advice service, 1762, for sophisticated clients, alongside a low-cost simplified platform called WealthPilot.
Ben Williams of Liberum noted: ‘Brewin Dolphin has vastly changed from the business it was at the time of the 2011 strategic review. It now has an asset mix focused on sticky and higher revenue yield discretionary. Financial planning is up 3.3% year-on-year in Q1 versus a year of strong growth. This highlights Brewin’s focus on advice and should support client retention.
‘This is particularly strong given the market falls, all the more so when you consider that full year 2018 saw financial planning up 17.8%. Brewin highlights their financial planning capability as a competitive advantage. We continue to believe that the high number of client-facing specialists with appropriate financial planning expertise should lead to increased client retention and enable the business to continue to deliver the impressive organic net flows that the business has achieved in recent years.’
While there may be more news about staff redundancies across the industry, following strategic reviews of businesses, it is clear that wealth firms are also continuing to expand. The jobs lost in the back office, driven by automation and more efficient systems, look to be broadly made up in the front office as companies increasingly diversify their business models.