This report – all 53 data-rich pages of it – explains the different revenue, margin, cost and performance characteristics of the UK's various types of wealth management industry players. It notes how private banks, for example, were clear winners in terms of interest margin rises as interest rates were put up.
The UK wealth management industry was affected to differing degrees by market falls and the impact of higher interest rates to curb inflation, but what is remarkable is how resilient the sector has proven to be, according to a report from Compeer.
Falls in assets dented investment management fees, and lower trade volumes after markets settled post-Covid meant that commissions and brokerage fees were affected.
But what is striking is that total revenues increased by 6.1 per cent year-on-year to an all-time high of £8.98 billion ($11.23 billion), the research organisation said in UK Wealth Management Industry Report 2023.
There are causes for concern, however, such as cost pressures.
Compeer said there is still a “huge variance” in profitability across the sector with a large proportion still loss making or earning very little margin.
The study is based on a Compeer “universe” of 162 firms (down from 169 in 2020). Within that total, there are 13 execution-only stockbrokers; 33 full-service wealth managers; 102 investment managers, and 24 private banks.
This is an industry going through consolidation. During 2022 and into 2023, for example, several corporate “marriages” and takeovers took place, such as RBC’s purchase of Brewin Dolphin, Canaccord Genuity’s acquisition of Punter Southall Wealth; Investec Wealth & Investment’s purchase of Murray Asset Management, and the Rathbones/Investec merger.
Inflows have been a cause of comfort, it said.
“With over £100 billion of private client assets lost as a result of the sharp fall in market values, it is not a surprise that overall assets managed and administered by the sector fell to £1.27 trillion, a year-on-year reduction of 7.5 per cent,” it said. “However, asset inflows remain very high, both from within and from external sources. We also continue to see new entrants join the industry and UK wealth firms remain an attractive investment opportunity for private equity firms as they back the consolidators from within. Also, as we move into 2023, we have started to see the recovery and so assets have once again moved above £1.3 trillion in the first quarter, showing another speedy bounce back and why firms still have optimistic growth strategies in the coming years.”
The 53-page report noted that a “saviour” for firms last year was a significant rise in net interest income caused by higher interest rates – a factor that is particularly important for private banks whose margins had been squeezed for years by ultra-low rates after the 2008 crash.
“With the rise in interest rates, wealth management and execution-only firms saw interest margin double, treble or even quadruple year-on-year and this has more than compensated for the fall in other revenue streams,” it said.
“For full-service wealth managers and investment managers, with net interest income representing only a small percentage of total revenue, although they have benefitted it has had less of an overall impact,” the report said.
“That leaves the execution-only stockbrokers for whom the change has been most radical. Net interest income has gone from 4 per cent of revenue in 2021 to more than a quarter of all execution-only revenue in 2022! This therefore surpassed commissions in the revenue stream table. Clients too are benefiting as these firms are now able to offer interest back on balances held in cash, something they have been unable to do in the previous three years,” it said.
But as Compeer noted, while revenue results surprised on the upside, the control of costs is a problem.
Total costs, the report said, increased by 6.1 per cent (the same percentage growth as total revenue). This was primarily driven by further investment in technology (total IT costs surpassed £1 billion for the first time in 2022) as firms continue to embrace the digital revolution and upgrade systems to achieve efficiency gains.
The report noted that hiring staff – adding 42,000 people – added to costs, and rising wage bills turned the screws further.
“Therefore, pre-tax profit margins remain under pressure and many in the industry failed to deliver scalable results during the year,” it continued.
“With the exception of private banks, where the absolute impact from net interest income rises was enough to raise the profitability of these firms, other firm types reported reductions in pre-tax profit margins,” it said.
Revenue by type
The report broke down revenues by the type of firm and how this changed: