One of MDRC’s findings is that the majority of the smaller firms competing for the remaining 20% of discretionary assets still only offer traditional "long only" investment models to their clients, rather than proving a wider wealth management and financial planning service. Richard Williams commented "Most of the smaller wealth managers are product centric in outlook, many have little strategic marketing activity and few have attempted to address the decline in demand for their traditional product. Most of the firms in the bottom quartile acknowledge the difficulty in recruiting clients in the face of increased activity by the larger firms."

The largest firms offering private client wealth management are also potentially the most profitable. In this research study MDRC estimated that the average gross margin generated by the largest 28 firms (revenue expressed as a % of assets under management) is over 160 basis points, while the firms in the bottom quartile of the market generate an average gross margin of less than 100 basis points.

However much of the revenue advantage enjoyed by the largest firms is eroded by relatively inefficient structures and processes. MDRC’s research suggests that the operating cost:income ratio in the UK wealth management sector averages 78%, with surprising little variation across the industry. However, the best of the larger firms report operating cost:income ratios below 70%, indicating that the larger firms have much greater potential for profit improvement.

Economic theory suggests that clients will move to firms that evolve with the market and offer better or cheaper products. Firms that do not evolve will disappear and competition between the surviving firms will keep margins (prices) at a "market clearing" rate. As wealth management is a knowledge based industry, a skill-pool of sufficient size is also a requirement. So how sustainable is the current UK market structure in the face of economic theory?

MDRC’s research suggests that to invest in the people, processes and systems required to maintain a competitive position in the long term the wealth management industry requires a minimum margin of 150 basis points. This level is achieved by larger firms, but the majority of the smaller UK private client wealth managers are unable to generate this level of income.

Richard Williams, added: "Our study shows that the UK wealth management industry is highly competitive, profitable and growing. However, continuing pressure from clients and regulators is placing the smaller firm at a competitive disadvantage. Merger or acquisition may be the only strategic option for many of the UK’s smaller wealth managers"

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