Buy wealth managers to build your wealth

The word “consolidation” usually has the power to excite investors because it holds the promise of a wave of profitable M&A.

But a hesitant response has come to a new forecast of consolidation in the global asset management industry.

Turmoil is looming, but shares of UK players have been largely overlooked, unlike their US counterparts.

Is this an opportunity, especially as US asset manager Blackrock believes all types of UK stocks are attractive right now, with bad economic news priced in?

In a report this month, the PwC consultancy says 73 percent of asset managers are considering a bid or other deal, with one in six firms at risk of being swallowed up.

These churn predictions follow last year’s drop of nearly 10 percent to $115.1 trillion in savings entrusted to the care of these professionals. Most prefer to call themselves ‘wealth managers’ – perhaps because in a time of high inflation it is more difficult than ever to maintain client wealth.

PwC’s Olwyn Alexander says: “Existential challenges are sweeping this industry against a backdrop of social, economic and geopolitical disruption.

“Companies that effectively leverage technology such as generative artificial intelligence (AI) and robo-advisors, build meaningful pathways to new and existing customers, diversify recruiting, and deliver exceptional customer experiences will be well positioned to not only survive, but thrive .’

This prediction coincided with even more consolidation among UK players, after Rathbones deposited £839 million into Investec Wealth.

Gresham House, which specializes in renewable energy projects, is being acquired by US private equity group Searchlight Capital for £470 million. The announcement of the 1,105 pence per share offer sent Gresham shares up 55 percent, an uplifting development for anyone with cash in Henderson Smaller Companies and Martin Currie Smaller Companies. Both trusts own Gresham House shares.

But despite this evidence that UK asset managers appear to be the US private equity cup of English breakfast tea, shares in many of Gresham’s peers are anything but perky.

FTSE 250-listed Liontrust, which is seeking to take over Swiss firm GAM, is down 45 percent since the start of the year.

Over the same period, Jupiter has plummeted 14 percent to 115 pence, which is 40 percent below its 2010 IPO price. Ashmore, Brooks Macdonald and Quilter have also failed, eyebrows raised. Ashmore has a dividend yield of 8.24 percent and the other two are seen as likely bid targets.

On the rise: Shares in Abrdn, the group comprising Aberdeen and Standard Life, are up 25% this year

These declines may reflect Bank of America’s gloomy assessment of the UK asset management industry released in January.

But the weakness in the stock price underscores the view that size is more important than ever. Some argue that only those with assets under management (AUM) in excess of £100 billion can survive and thrive.

For example, shares of Abrdn, the group comprising Aberdeen and Standard Life, are up 25 percent this year; assets under management are £367 billion. Shares in St James’s Place are down 12 per cent in response to much-criticized fee cuts.

But it has an impressive customer retention rate (a key metric) of 95.6 per cent and assets under management of £157.5 billion.

Hargreaves Lansdown has £134 billion in assets under management and its shares are up 12 per cent over the past month.

Most analysts consider the stock a “buy.” But not everyone believes that this platform (financial supermarket) will be a winner thanks to its cheap offer.

Rhea Shah, an analyst at Deutsche, now rates the shares as “sold” on the grounds that there is more downside than upside prospects. Many investors will be baffled by the generally gloomy perception of UK asset managers in light of our aging population: more retirees will need help managing their pension pots.

As an insider, Dan Boardman-Weston, CEO of the independent BRI Wealth Management, sees positives. He says: ‘The sector is an attractive market due to favorable demographic developments and the growing demand for savings and investment advice. The sector offers good recurring income and strong profit margins.’

He believes there will be trade and private equity buyers on the prowl.

The FTSE 100 is up nearly 2% this year, held back by recession fears and apparently unimpressed by Blackrock and others’ belief that this and other index is full of bargains in asset managers and every other type of company. However, sentiment can quickly turn.

If you’re convinced that asset managers are poised to thrive on increased demand for their services and succumb to bids, now seems like the right time to take a chance.

But if you prefer to take more direct steps to increase your wealth, check out your wealth manager’s credentials against rivals at findawealthmanager.com.