Unlocking Value in the Trillion-Pound UK Wealth Market

The UK wealth management industry is a trillion-pound market ripe for growth and value creation. An estimated ￡2 trillion in personal liquid investable assets held by UK households and another ￡1.9 trillion in DB pension liabilities.

The industry has attracted the attention of many investors, including major private equity funds, family offices, and HNW individuals. But what makes the UK wealth market attractive?

In recent years, the wealth management landscape has undergone significant changes driven by regulation, technology advancements, and the impact of Covid-19. These shifts have reshaped business models, enabling superior client propositions and expanding profit pools.

A report from 艾意凯咨询公司 published almost two years ago, "UK Wealth Management: Spotlight on Value Creation", provides a good overview of the industry landscape and why it presents an attractive opportunity today.

A Complex Industry Structure

The wealth management and financial planning industry operates across three main layers:

Client management: Crucial for value-adding activities such as client relationship management, proposition development, client risk assessment, and portfolio design. It includes financial advisers, discretionary fund managers, private banks, and self-managed investment platforms.

Investment platforms: Provide the infrastructure and technology that enable the manufacturing and distribution of investment products. They offer tools for portfolio management, trading, and reporting. Key players include FNZ Group , SEI , BNY Pershing , Standard Life UK , etc.?

Investment vehicles: This layer consists of underlying investment products (funds, ETFs) managed by asset managers. It is affected by shifts in client preferences and platform changes.

Despite a fragmented market with no dominant player, the UK wealth sector is robust, driven by diverse service providers ranging from integrated private banks to independent financial advisors and digital platforms.

Here is the estimated distribution of UK investment assets from 艾意凯咨询公司 report ??

Favourable Growth Drivers

Several factors have consistently driven the growth in the UK's IFA and wealth management sector.

Demographic Shifts

The number of mass affluent and high-net-worth individuals (HNWIs) continues to rise, with HNWIs making up 1.1% of the adult population.

Regulatory Changes

Innovations like Pension Freedoms and compulsory auto-enrolment in workplace pensions are reshaping the retirement landscape, creating new opportunities for wealth managers.

Technology Adoption

Digital solutions are transforming client management and service delivery, making wealth management more accessible and efficient.

However, financial advisors?remain in short?supply, with only about 28,000 advisors able to service 2-3 million clients on an ongoing basis.?

That is why many forward-looking financial planning firms seek to provide hybrid advice and service clients online. New tech players such as JustFA - More than a platform emerged, enabling every financial adviser in the UK to add an online proposition to an existing business in a matter of weeks.

Industry consolidation

The UK IFA and wealth sector is highly fragmented, consisting of over 27,000 advisers across more than 5,000 firms, primarily small and regionally focused.

The market is undergoing significant consolidation driven by several factors:

• Increasing private equity investment in IFA consolidators pursuing "buy and build" strategies
• Ageing IFA business owners, with many advisers over 60, looking to sell their firms and fund retirement
• Increasing regulatory burden and compliance costs, making it difficult for smaller firms to manage
• The recurring revenue model and high client loyalty make it an attractive business

Acquisitions of UK IFA firms hit a record high of 440 deals in the year to September 2022, up 11% from the previous year, mainly driven by PE-backed consolidators.

Major consolidators include Independent Wealth Planners (IWP), Evelyn Partners, M&G plc , Loyal North Plc and MWA Financial , which recently partnered with lender ThinCats .

We have also seen a few high-profile M&A deals:

-?Polar Street Capital acquiring Mattioli Woods for ￡432m

- Rathbones acquiring Investec Wealth & Investment UK for ￡839m

- Royal Bank of Canada acquiring Brewin Dolphin for ￡1.6bn?

- Tilney acquiring Smith & Williamson for ￡625m

Opportunities for Value Creation

The changing landscape in the UK wealth presents good opportunities to create value:

Financial advisor capability: With the increasing complexity of financial planning and investments, the demand for advice has never been higher. Over 80% of UK consumers feel they need financial advice, but only 20% seek it.

Many people are also sensitive to costs. The affordable advice gap has steadily grown, from 5.4 million in 2015 to 6.5 million today.

Companies that can bridge this advice gap can capture a significant market share. Hybrid advice is the future.

Technology adoption: While robo-advisors have not achieved significant scale, technology will continue to play a crucial role in enabling superior client propositions and streamlining operations. Advisers who effectively leverage technology can differentiate themselves and drive efficiency.

Consolidation and vertical integration: The industry's fragmented nature presents consolidation opportunities. Larger firms can leverage their scale to internalize product manufacturing and drive vertical integration, creating a more seamless client experience and capturing a larger value chain share.

UK Wealth Management - what's ahead?

Technology is transforming the wealth industry, enabling new service models and customer propositions. Key trends include:

• The growth of digital wealth management platforms
• Increasing focus on delivering a seamless, integrated user experience
• Use of APIs and microservices architecture to drive efficiency and agility
• Adoption of tools to support an ageing client base, sustainable investing and digital engagement

Successful businesses must balance personal service with digital enablement to meet evolving client needs and expectations. What is important:

• Developing a differentiated client proposition
• Leveraging technology to enable personalized service at scale
• Pursuing strategic partnerships and acquisitions to drive growth and efficiency
• Focusing on client segments with high growth potential, such as high net-worth individuals or clients with straightforward needs

Outlook for Investors

The UK wealth and IFA sector presents an attractive opportunity for long-term investors for several reasons:

• Structural growth drivers supporting long-term expansion
• Significant potential for consolidation in a fragmented market
• Recurring, predictable revenues and cash flows
• High client loyalty and advocacy

Private equity firms are actively pursuing opportunities in the sector, attracted by the potential to build scaled, vertically-integrated businesses through M&A. Publicly-listed wealth managers have also been active acquirers, as evidenced by recent deals such as Rathbones/Investec and Raymond James/Charles Stanley.

The potential headwinds include rising regulatory costs, fee pressure, the need for technology investment, and talent competition.

While not without challenges, the UK wealth and IFA sector offer compelling long-term growth prospects for investors who can identify high-quality opportunities and back teams that can drive synergies and economies of scale and build differentiated, resilient businesses aligned with evolving client needs.

The key success factors will be a clear consolidation strategy, a focus on delivering good customer outcomes, and an ability to embrace technology.

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?? Disclaimer: My posts are personal opinions only. It is NOT investment advice or recommendation. Do your own research.