Following recent speculation, the bank and investment house are building a wealth management JV.

(This article initially ran yesterday and is repeated today; adjusts share prices.)

Schroders and Lloyds Banking Group said yesterday they are joining forces to build a wealth management offering, confirming reports a few days ago that such a deal was being discussed.

The UK-listed firms said the partnership will combine Schroders’ investment and wealth management expertise and technology capabilities with Lloyds’ large client base, variety of distribution channels and its digital know-how. 

Lloyds will shift £13 billion ($16.9 billion) to the JV; Schroders’ ownership stake means Lloyds will receive up to a 19.9 per cent financial investment in the holding company of Schroders’ UK wealth management business. This also means Lloyds’ high net worth customers get access to Cazenove Capital’s wealth management propositions. (Cazenove Capital was bought by Schroders in 2013.)

The deal is a major coup for Schroders, which will be able to use a “big four” bank’s distribution footprint across the UK. In Lloyds’ case, the bank – now fully restored to full private ownership after the 2008 bailout – it adds a renowned investment brand to its stable. Shares in Lloyds were down slightly at the close of yesterday; shares in Schroders were also softer.

The firms will set up a financial planning joint venture company for “affluent customers”. The bank will own 50.1 per cent of the share capital and Schroders the remaining 49.9 per cent. The JV will start operations by the end of the first half of next year, once regulators and other parties have given it the green light.

Antonio Lorenzo, chief executive of Scottish Widows and group director of insurance and wealth, will be chairman of the JV. James Rainbow, Schroders’ co-head of UK intermediary business, will be its chief executive, subject to regulatory clearance.

“Lloyds and Schroders see significant growth opportunities in the financial planning and retirement market and the JV will aim to become a top three UK financial planning business within five years,” the firms said.

The partnership will provide Lloyds with the opportunity to offer the specialist investment management services of Cazenove Capital to charities and family offices, they said. 

Lloyds will also transfer about £400 million of existing private client assets under management to Schroders’ UK wealth management business.

Investment management
Schroders will be appointed as the active investment manager of around £80 billion of the Scottish Widows, Lloyds insurance and wealth related assets (which includes the £13 billion to be transferred to the JV and the £400 million to be transferred to Schroders’ UK wealth management business). In February, Lloyds said it was taking its mandate from Standard Life Aberdeen, a major blow to the latter firm.

Speculation about Lloyds’ investment management operations had been fuelled by the bank's decision to cancel a £109 billion mandate for Standard Life Aberdeen on the grounds that the latter business was a material competitor. The Schroders appointment will be for at least five years, the firms said.

“Lloyds remains confident in its rights to terminate the current asset management agreements and expects the arbitration process to conclude early next year,” they said.

“This [Schroders mandate] appointment will benefit both Lloyds and its customers through providing access to a partner with leading investment management expertise, a stable investment team and strong performance across multiple asset classes,” they continued.

The management of £67 billion of Scottish Widows insurance related assets will start after the current arbitration process with Standard Life Aberdeen is concluded on or no later than when the existing contract ends in March 2022. The management of the £13 billion of wealth related assets and the £400 million of existing private client assets will transfer to Schroders as soon as possible following the arbitration process, irrespective of the outcome.

The total consideration of the $400 million transfer of wealth to Schroders, and the transfer of 49.9 per cent of the JV to that firm, is about £200 million with the combined forecast profits before tax for the 2018 financial year estimated to be £35 million and estimated gross assets of £120 million as at 31 December 2018.

Schroders’ purchase of 49.9 per cent of the JV may involve cash payments to or from Lloyds, subject to capital, which will be determined after three years depending on the net new business performance of the JV. Schroders’ earnings in the first full year after the deal is completed are expected to be enhanced by this transaction, the firms added. 

(Editor's comment: This is one of the larger such joint ventures, involving two prominent UK financial institutions, for some time. With Lloyds no longer hamstrung by being partly owned by the government, it is positioning to be a big domestic wealth management player. The bank spun off its old international private banking arm several years ago, but having a chunky onshore wealth offering is clearly important today. Royal Bank of Scotland has Coutts, HSBC has a significant private bank, as do Barclays and Standard Chartered. So Lloyds clearly felt it needed to raise its game. Some of the offering will be for the mass affluent segment, which Lloyds considers a natural fit for it, while the Cazenove business that comes with Schroders gives it access to high net worth clients. Bedding all this and integrating the teams won't be easy.)