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Fortunes in flux: reinventing the UK wealth management industry

The wealth management industry in the UK stands at a pivotal juncture, influenced by a confluence of economic shifts, regulatory changes, and evolving client expectations. The article explores the current landscape and offers strategic foresight into the future.

By Michelle Sartorio | Founder and CEO | True Value Creation

Recent insights from the ‘Latest Trends in UK Wealth Management’ event, hosted by Compeer Limited shed light on these transformative times. Drawing from data on over 200 prominent wealth managers, including execution-only stockbrokers, full-service wealth managers, and private banks, this article explores the current landscape and offers strategic foresight into the future.

Revenue streams and market dynamics

In 2023, the UK wealth management industry saw its revenues reach an all-time high of nearly £10 billion, underpinned by net interest income streams from a total of £1.3 trillion in assets. While this figure is impressive, it is essential to consider the broader context. The growth in savings and net interest income was likely driven by anticipations of a change in government, prompting people to save more in the years leading up to an election. Despite this revenue surge, advisory services face challenges to prove their value for money, whereas discretionary services are delivering better returns on assets.

Customer loyalty and market behaviour

Customer loyalty remained strong in 2023, with wealth management clients showing significant “stickability”. They were inclined to switch investments based on market conditions rather than changing their wealth managers. This loyalty suggests a high level of satisfaction with their current service providers but also highlights the importance of consistent performance and trust in maintaining client relationships.

Private equity’s growing interest

The concentration of the UK wealth management industry is noteworthy, with the ten largest firms holding 42% of investment assets. This concentration has attracted the attention of private equity firms, which are increasingly targeting mid-sized wealth managers to foster growth and access larger client bases. This trend could lead to more consolidation within the industry, potentially driving efficiencies but also posing challenges related to maintaining personalised client services.

The significant concentration of the UK wealth management industry, where the top ten firms control 42% of investment assets, is increasigly prompting private equity firms to target mid-sized companies for growth.
Rising operational costs

The cost of running a wealth management firm continues to rise. Notably, a 6% increase in costs was driven by companies supporting their staff amid the UK’s rising cost of living. A still ‘shy’ portion of cost growth is also attributed to marketing, suggesting firms are still focused on their ‘old ways’ to grow business. For wealth managers to thrive in the emerging WM setting, they must invest strategically in marketing to attract new clients, particularly younger investors, rather than relying solely on word-of-mouth.

Migration trends impacting the industry

The number of millionaires in the UK has fallen by 8% over the past decade, according to a recent research by Henley & Partners – The Firm of Global Citizens®, in contrast to most other major economies across Europe and beyond. For example, the number of HNW individuals in Germany has risen by 15% over the same period, while the number in the US jumped by 62%. Henley & Parnters’ projections also indicate that the UK is expected to lose 9,500 millionaires this year, on top of the 16,500 millionaires it lost in the six-year period following Brexit.

It is now crucial for wealth management firms to innovate and tailor their services to meet the evolving needs and expectations of their existing clients. Additionally, they must map and clearly visualise the demands of a changing demographic, particularly focusing on female and Generation Z investors.

The UK is expected to lose 9,500 millionaires in 2024, on top of the 16,500 millionaires it lost in the six-year period following Brexit.
Regulatory challenges and consumer trust

The Financial Conduct Authority’s (FCA) 2023 Consumer Duty survey, conducted by Ipsos with over 1,200 wealth management firms, revealed some concerning insights in relation to the financial services industry: 49% of fund managers in the UK do not believe they have vulnerable customers, and only 41% of adults have confidence in the UK financial services industry.

These statistics underscore the need for wealth managers to adopt a more customer-centric approach, recognising and addressing the needs of vulnerable clients and working to rebuild trust in the industry. This concern will only grow as the great wealth transfer takes place, with an estimated 70% of global wealth expected to transfer to women. These new wealth holders are likely to view and manage their money differently, prioritising factors such as sustainability, social impact, and comprehensive financial planning. Wealth managers must be prepared to cater to these evolving preferences and ensure their services are aligned with the values and expectations of this significant demographic shift.

UK-based wealth managers are faced with the challenge to adopt a more customer-centric approach, recognising and addressing the needs of vulnerable clients and working to rebuild trust in the industry.

Future-proofing the industry

Wealth managers face several challenges in future-proofing their businesses. They must justify their fees and deliver value through performance and innovative products that meet the expectations of new investors. This includes adjusting services to better serve women investors, who are expected to control a significant portion of wealth in the coming years. There is also a rising demand for ESG services among HNW individuals, driving a focus on sustainable investment products.

The following factors will shape the future of the industry:
  1. Interest rate reductions: Expected reductions in interest rates will necessitate new strategies for generating returns.
  2. Intergenerational wealth transfer: As wealth transfers to younger generations, wealth managers must adapt their services to meet the preferences of these new clients.
  3. Eco-conscious investing: Growing interest in ESG and impact investing will require firms to offer sustainable investment options.
  4. Tax reforms: Potential tax reforms by the new UK government could impact HNW individuals in areas such as non-dom regime, capital gains and inheritance for individuals with foreign assets, prompting WM to enhance advisory services for strategic financial planning.
  5. Regulatory scrutiny: Increased regulatory demands for transparency, driven by the Consumer Duty regulation, will require firms to enhance their operational practices.
Strategic recommendations

For the wealth management sector to thrive, it must undertake several transformative actions:

  • Transparent communication: Firms must simplify their narratives, use clear language in communications, and offer accessible service and fund performance overviews.
  • Fair pricing: Review and adjust fee structures to ensure they represent fair value for clients.
  • Regulatory collaboration: Engage proactively with the government to secure regulatory and legislative clarity, enabling investment and growth.
  • Digital and human interaction: Consider a mixed offer of (a) face to face discretionary and advisory services and (b) digital-first tools.
  • Consumer incentives: Develop tools and incentives to encourage saving and investment, fostering confidence and financial stability among clients.
  • Innovation and adaptability: Embrace innovation and adapt services to meet the changing needs of clients, particularly female and younger and more socially conscious investors.

To win, WM firms will need to fundamentally review their strategy and transform their value propositions: they need to serve not only their existing clients, but also women and young investors.

The UK wealth management industry is at a crossroads, facing complex challenges and unprecedented opportunities. To thrive, wealth management firms must implement more transformative strategies, including transparent communication, education to vulnerable customers, pricing adjustments, regulatory engagement, and innovative adaptations to client needs. The net negative migration of wealth investors demands a strategic shift towards innovation and personalisation in wealth management services. Firms must navigate these changes with strategic foresight, embracing innovation, and placing customer needs at the forefront of their operations. By doing so, they can build sustainable businesses capable of thriving in a dynamic future.

Get in touch with us to explore how forward-thinking wealth management leaders can adjust their visions and strategies to future-proof their businesses.