UK WEALTH LESS CONCENTRATED
London - Research carried out by strategy consultants Market-Dynamics Research & Consulting Ltd (MDRC) suggests that he UK wealth management sector has become LESS concentrated since 2004 when MDRC carried out a similar study. Smaller firms have grown proportionally faster than the largest firms.
Market Structure - the 80/20 rule? MDRC found that 80% of HNW discretionary assets are now managed by 22% of firms, 34 of the 148 active in the UK market. This is a significant change from the 2004 study that found that 17% of firms were managing 80% of HNW discretionary assets, 28 out of the 151 active in the UK market.
One of MDRC’s findings is that the larger firms have become less successful at capturing client “share of wallet” than their smaller competitors, and the reason appears to be related to an increase in staff turnover at the larger firms compared to smaller firms. The study found that “share of wallet” was consistently higher for relationship staff that had been managing client relationships for over 3 years with one firm – and these are more likely to be found in smaller firms.
How profitable are the firms?
The study examined profitability at both large and small wealth managers. Although theoretically larger firms should be more profitable, in practice there is little difference between the profitability of firms by size. Where there are differences in profitability between firms, these are driven largely by differences in business strategy and management focus. One noticeable change since the previous study in 2004 is that smaller firms have made significant investments in IT permitting them to grow without increasing the operational overheads associated with more clients.
In this research study MDRC estimated that the average new business gross margin generated by the largest 34 firms (revenue expressed as a % of assets under management) is approximately 185 basis points, while the remainder of the market generated new business gross margins of approximately 170 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%. However, the best of the wealth management firms report operating cost:income ratios below 60%, indicating that the industry as a whole has potential for profit improvement.
Conclusions
Richard Williams, managing director of MDRC in the UK commented, "Market concentration is decreasing in the UK because wealth management firms of all sizes are able to offer clients or potential clients a wide range of investment solutions, and the IT systems available to all firms provide powerful portfolio management and reporting tools. This means that firms have to be far more focused in the way they present themselves and marketing has become a key driver of business success in wealth management.”