Woodford isn’t the only worry for UK wealth managers
Rising costs and falling investor confidence are forcing wealth managers to consolidate
Last week was a rough week for private client investment advisers and wealth managers. The unending vacillations over Brexit capped the final throes of Neil Woodford’s investment fund empire, eroding already weak investor confidence.
Shares in Rathbone Brothers, the adviser to the moderately affluent with a history dating back almost 300 years, fell almost 10 per cent following a five-yearly strategic update that underlined past, present and future challenges for it and other money managers.
Shares in bigger rivals Hargreaves Lansdown and St James’s Place, both well-known backers of Mr Woodford even when his performance flagged, were comparatively steady. So, too, were shares in AJ Bell, the Woodford-backed fund supermarket business that floated on the market last December. But the market’s reaction to Rathbone’s update — unfortunately timed within days of Mr Woodford’s defenestration — is telling.
The “large-scale collapse” of such “a very prominent fund manager . . . will understandably dent investor confidence”, AJ Bell told Small Talk. But it hopes only for a short while. Mr Woodford is, after all, just one of thousands of fund managers running thousands of funds, it said.
Last week, Paul Stockton, who only joined as chief executive of Rathbone this year, blamed “weak investor sentiment” and uncertainty for the customer outflows that weighed down growth in funds under management. He acknowledges Woodford’s fall will spark scrutiny. But he thinks investor uncertainty is less to do with Woodford than collywobbles over global growth and Brexit.
Ditto, says Brewin Dolphin’s Robin Beer. He believes “the uncertainty surrounding Brexit will have a bigger effect than Woodford”.
Still, the Woodford debacle will, and should, press down on money managers’ shoulders — even those like AJ Bell, Rathbone and Brewin that screened Woodford funds out of their portfolio picks years ago.
Woodford’s fall exposed the humbug of those in the industry who lionised him as a computer-beating, stockpicking genius who proved single-handedly that active managers can beat index trackers for long periods.
Critics have focused on calling on regulators to look at fund supermarkets’ tip sheets and best buy lists. These may not be advisory, but they helped mass affluent investors select funds and are widely blamed for sucking billions into Woodford funds.
More broadly, the fiasco underscores the dilemma facing savers who need advice on financial planning, but who — following scandal after scandal in financial services — are wary of the quality of advice and reluctant to pay for it.
That is as true of the rich who have been loyal customers of brokers like Rathbone for generations. In the past, few clients would have questioned the layers of commissions and fees charged by stockbrokers and intermediaries. Now, with the encouragement of the Financial Conduct Authority, they are pushing back on charges and demanding a better and bigger service for their money.
Broker bosses saw the squeeze coming. They have been racing to buy up rival clients lists and expanding into adjacent areas of financial planning and money management services.
Since its last strategic update in 2014, Rathbone has increased assets under management from £25bn to £49bn by picking off smaller peers. So, too, has Brewin Dolphin. Last year, Quilter bought Aim-quoted Lighthouse, lifting its headcount of financial planners to close to 4,000 to match St James’s Place. Last month, Tilney said it was in advanced talks to join forces with Smith & Williamson. Next month, Lloyds Banking Group launches its joint venture Schroders Personal Wealth, with plans to undercut prices and double assets under management to about £25bn within five years.
Last week, though, Rathbone showed starkly what can happen once the acquisitions stop. Even if the brouhaha over Woodford proves a short-term one and the uncertainty over global growth and Brexit clears, it will struggle to lift revenues. Meanwhile, its costs and spending — whether on regulation, IT or hiring and training staff — will carry on rising. Operating margins, which have historically been a juicy 30-plus per cent, will fall to nearer 25 per cent, it said.
Analysts promptly lowered earnings expectations for the next couple of years by up to a tenth. The company’s market value, which a few years ago was worth 3 per cent of assets under management, has fallen to 2.5 per cent. It seems all too likely that at the next quinquennial update, Rathbone’s shares will be worth closer to 2 per cent.