Wealth management sector shrinks under tighter regulations

Fri Apr 4, 2014 10:23am EDT

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By Joshua Franklin and Simon Jessop

LONDON, April 4 (Reuters) - The fragmented UK wealth management sector is shrinking as firms quit, bulk up or look to service a more profitable slice of the country's growing number of rich clients, to cope with costly new regulations.

There were 147 firms managing 554 billion pounds ($918.92 billion) of business in the sector, including private banks, private client investment managers, full service wealth managers and execution only brokers, at end-2012 according to industry data provider ComPeer.

This week saw Rathbones Brothers, Jupiter Fund Management, Pictet & Cie, Berenberg Bank and Deutsche Bank's fund arm all shaking up their operations.

New rules brought in last year, as part of global efforts to make markets safer, are squeezing the profits of the smaller players in particular. Wealth advisors have to take more exams and systems must be in place to monitor client accounts. Commission based selling was also banned.

"We see the business is becoming more regulated and the cost of that regulation is the same for a 300 million pound firm like ours and a 3 billion pound firm, and so you need extremely robust processes in place," said Charles MacKinnon, chief investment officer at Thurleigh Investment Managers.

"To be a mom and pop sitting in one room is no longer viable for this business," MacKinnon added, in the week it agreed to merge with Ingenious Asset Management to create a firm with 1.8 billion pounds in assets.

Total compliance spend in the wealth management sector rose 10.7 percent to 153.5 million pounds between 2010 and 2012, ComPeer said.

"This (regulation) puts pressure on the smaller players particularly," said Numis Securities analyst David McCann. "The large players have the advantage that they have the fixed costs largely covered already."

Among the deals this week Rathbones bought some assets off Deutsche and Jupiter, looking to sell more generic products to the "mass affluent".

Deutsche Bank decided to focus on tailored investments for ultra-high net worth and high net worth clients - worth $100 million-plus and at least $1 million respectively, according to the Boston Consulting Group.

"It's about volume versus margin," McCann said. "The larger customers are likely to be much higher margin but there are just fewer of them. Both models can work."

Jupiter decided to exit the sector completely and instead focus on its core mutual fund business, while both German private bank Berenberg and Swiss private asset manager Pictet & Cie, said they would expand their London-based operations for the super rich.

In the past RBS-owned private bank Coutts has been rumoured to be up for sale, but new RBS Chief Executive Ross McEwan has committed to keeping and growing the business instead.

London is where most wealth managers will seek to retain a presence, given it has more dollar millionaires than any other city in the world, at 339,200, research firm New World Wealth said.

"London is very much seen as a place where wealth is growing and that by definition should encourage wealth managers to have some sort of operation here," said Stuart Duncan, analyst at Peel Hunt.

"A lot of wealth managers, not just Rathbones, would like to take advantage of the opportunity to consolidate the market because there are a lot of smaller wealth managers around."

($1 = 0.6029 British Pounds) (Editing by Elaine Hardcastle)

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