2016 was the first year since the 2008 financial crisis that the revenue pool of traditional asset managers fell worldwide, along with profits. Although AUM grew, margins contracted, as pressure on managers’ fees continued to increase in both the institutional and retail segments.
Mergers and acquisitions (M&A) are likely to play an ever-increasing part in the growth plans of wealth managers in the coming months and years, as firms look to bolster the outlook for their businesses, as well as bring them into the 21st century.
The industry is facing a number of issues that threaten the existence of some firms, while providing significant challenges for others. Firms are currently torn between traditional ways of achieving growth and building scale, to more modern techniques, including inorganic growth strategies.
Wealth management has become incredibly competitive, as companies fight for the business of the retired, or those nearing retirement. There is added pressure on firms, due to the leakage occurring from portfolios, as clients live longer.
In order to tackle the headwinds facing the sector, it is perhaps unsurprising that firms are looking to leverage economies of scale. More firms may now aim to own the whole of the value chain in order to get back the margin erosion they’ve lost on their core business, due to the downward pressure on fees and charges, along with increasing connectivity with clients.
Changes in technology, asset performance and customer preferences are beginning to leave many firms with unsustainable business models. Some may be able to make required changes organically; for others, M&A may be the more attractive option. As the industry’s economics continue to deteriorate, M&A activity will likely accelerate.
M&A is crucial
It is clear from speaking to senior executives at some of the UK’s leading wealth management firms for our latest report, UK Wealth Management at a Crossroads, that many see M&A as a crucial factor in the industry’s growth.
One respondent believed there was a significant pressure on some of the smaller wealth managers, saying, “Scale is important, especially when faced with pressure on fees or an identified need to invest in new technology. The bigger firms can withstand the buffeting.”
However, not all firms have the capacity for inorganic growth – in part because of the appetite of the larger players in the sector acting as consolidators. In these cases, they may aim to make strategic acquisitions of smaller, more specialist, teams, rather than businesses or books of businesses.
This will allow them to help expand their proposition, potentially appeal to a new type of client, all the while making every effort to hold off the increasing external pressures.
Of course, M&A isn’t one-sided – it’s not all about acquisitions; it’s about divestments, too. Used as a means for firms to hone their business models and produce cost efficiencies, divestment is an effective way to avoid confusion about a firm’s strategic aims, and to shed divisions which are no longer core to their operations.
Regardless of the reasons behind it, M&A is expected to be an extra increasing part of the sector –giving rise to the typical integration challenges faced by firms. This will require a great deal of planning and action on everything from culture to technology.
When buying a business, successful execution of the integration of firms will be crucial. With the vast pressures already facing wealth managers, they cannot afford to get it wrong, so having the digital infrastructure, investment solutions and client communications in place will help give the merger the best chance of working out for all sides.
Without a solid plan for integration, firms may be less adaptable in an ever-changing environment and will face losing the competitive edge that is so desperately needed if they are to sustain a profitable business.