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Was Rathbones' private office launch a mistake?

Was Rathbones' private office launch a mistake?

N+1 Singer has questioned Rathbones' decision to launch a private office in a bearish note on the wealth firm. 

The broker, which initiated a ‘sell’ rating on Rathbones with £21.00 price target, believes that while the new private office ‘will deliver positive absolute returns’, it will ‘dilute relative returns in highly competitive markets’.

At 2pm shares in Rathbones were down 1.3% at £23.82. 

In his note on the stock, N+1 analyst Andrew Watson said: ‘We would prefer that resource was focussed on growing in core segments: direct, intermediary and unit trusts - which have higher return on equity and proven track records.' 

Rathbones spent two years building the private office before its official launch in February, to complement its £34 billion discretionary business.  

It made a number of key hires for the division, including Ian Dembinski (pictured), who joined the firm from Credit Suisse where he led the UK private banking team.

'The Rathbone Private Office offers clients the full suite of services they require in today’s global financial environment,' Dembinski said at the launch.

Watson added: ‘We do not have confidence that the Private Office (clients +£10million) will deliver material growth.'  

‘The recruited nucleus team is clearly very experienced but we do not believe that Rathbones can compete with the private office services of large international investment banks (UBS, Credit Suisse, GS etc) on service alone. This is a highly competitive space with lower fee margins.’

Watson noted that while targeting ultra-high net worths (UHNW) will deliver scale, this will come at a lower margin – 25bps on scope of advice and 40-50bps on discretionary assets.

He also pointed out that UHNW clients require access to a broader range of products to deliver appropriate investment solutions, which requires partnerships with other institutions. Last May, Rathbones partnered with Credit Suisse to offer a range of products and services to its private office clients.

‘Entering into this highly competitive segment of the industry, alongside large multi-disciplinary banks (Credit Suisse, UBS, Goldman Sachs) may deliver some earnings growth but we do not anticipate an easy progression,’ Watson said.

‘[We] would rather Rathbones focused on the core competency through differentiating HNW investment management through a strong proposition centred on advice. If necessary, additional services could be delivered through partnerships where Rathbones can extract value without the risk or potential return dilution.’

Growth challenge

This concern feeds into N+1’s overriding view that Rathbones will struggle to meet a lofty 5% organic growth target.

While Watson describes Rathbones as ‘one of the strongest listed wealth managers with an impressive track record and sustained best-in-sector margins', he highlights this aspirational target has not been achieved since its introduction in 2014.

With further margin erosion likely from additional costs to deliver new initiatives such as the private office, Watson believes a 3% target is more appropriate.

‘Having doubled funds under management in the last five years, we believe the aspirational 5% organic flow target will not be achieved from here, with 3% more likely,' he said.

‘We believe that the rate of client acquisition required to supplement existing client flows and hit +5% per annum will not be achieved.’

Watson is not sure if acquisitions will help lift Rathbones towards its target. 

‘There is potential for management to create shareholder value through earnings accretive acquisitions,' Watson said.

‘[However] given the specialist nature of Rathbones’ offering and the target client base, we do not believe that there are many credible bolt-on targets which could be executed upon.’

Ultimately, Watson sees Rathbones as a ‘best-in-breed’ business, which has done well, but with growth prospects ‘constrained’ there is better value to be found elsewhere in the wealth sector.

‘The shares continue to attract a premium 19x FY18 PER – namely vs Brewin Dolphin (15x), which has a more mature growth profile and margin expansion potential. We believe that these headwinds are likely to result in underperformance.’ 

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