Time to look for a wealth manager?

Nothing concentrates an investor’s mind more than a thumping annual loss on the portfolio.

That is exactly what hit the clients of UK private client wealth managers last year, as investments were battered by the effects of global financial turmoil and inflation, and the homegrown shock of the Liz Truss premiership.

With the typical balanced portfolio, mixing domestic and international stocks and bonds, falling around 10 per cent, it was a year to forget for the affluent and wealthy investors who use advisory services. To add insult to injury, the FTSE 100 closed this difficult year 1 per cent up — so a simple punt on British stocks would have done better than the average fee-bearing managed account.

Fortunately for wealth managers, global markets, led by the US and Japan, have recovered somewhat this year, creating a bit of breathing space in conversations with clients — and reminding investors of the merits of global diversification.

But markets remain jittery, as central banks struggle to make clear how they are going to tame inflation without even tougher interest rate increases that could further depress economic growth and impose pressures on the more fragile of the banks.

“Uncertainty. That’s the mood of the clients,” says Monty Montgomery, chief executive of wealth management at M&G, the funds group. “People wake up every morning and check their portfolios. They read the news and they are worried.”

In a week that the Bank of England has again raised rates, the news is particularly uninspiring in the UK. Inflation sits stubbornly at 8.7 per cent, for the year to May, compared with 6 per cent in the eurozone and 4 per cent in the US. The BoE is expected to keep increasing rates, even as homeowners with mortgages face the biggest budget squeeze since the global financial crisis.

Indeed, after the drop in 2022, the collective assets of UK wealth managers’ clients could fall again this year and next, if the recent price drops in housing — most British holders’ biggest investment — accelerate.

Meanwhile, few of the global risks of recent years have gone away, whether it is Russia’s war in Ukraine, US-China tensions over Taiwan or conflict in the Middle East. The Covid-19 pandemic may have retreated but its consequences live on in long-term sickness and overburdened healthcare services.

Uncertainty leads many investors to question their investment approach. Some may decide to take more advice — and turn from do-it-yourself investing to a wealth manager. Others may switch firms. As Hugo Bedford, chief executive of JM Finn, a wealth firm dating back to the 1940s, says: “People now appreciate an investment manager with an explanation. When you get a challenging environment in the markets, it triggers people to reassess.”

Moreover, chancellor Jeremy Hunt has changed the outlook for many UK savers by changing pension tax rules — driving many more people to look for financial advice with his sweeping expansion of the fiscal breaks. In the first days after his Budget announcements, wealth advisers were flooded with requests for help. Three months later, many advisers are still working on detailed new financial plans to maximise returns, minimise taxes and, often, boost the inheritance left to heirs.

As Gareth Wilson, head of UK banking and capital markets at consultant Capgemini, says: “The changes have created an impetus for clients to come into private client wealth management. This brings in new clients, not only now but in the future” as this wealth is passed on from one generation to the next.

Advisers tell FT Money for this wealth management special report that all this comes at a time of other, more technical, challenges in the industry — ranging from digital technology (including automated financial advice), tightening regulation (such as the new consumer duty law), making sense of ESG investing and the ever-present need to control costs and answer client complaints about fees.

Plenty of choice but hard to choose

For savers, finding a wealth manager has never been easier. An industry which once operated largely by word-of-mouth recommendation has embraced the internet. From face-to-face services to online-only platforms, or a mix, investors can select what they want and can afford.

But choosing remains tough because comparing investment performance, quality of service and even fees is a struggle. Despite recent improvements in transparency, there are no standardised rankings. 

To help readers, FT Money this week looks at wealth managers in co-operation with Savanta, our data research partner. Together we are publishing a list of wealth managers with detailed information.

We focus on discretionary managers, who typically take on a portfolio and make investment decisions for the client. They target affluent and wealthy savers, for whom these services are cost-effective. Such clients generally have between £250,000 and £5mn in portfolio assets, not counting their homes and other property.

Above £5mn, the market is dominated by private banks, including independent British institutions such as Rothschild, the wealth arms of banks such as HSBC, and international rivals including US financial groups and the Swiss giant UBS (which has just become much larger with its rescue takeover of Credit Suisse).

With portfolios of less than £250,000 it becomes increasingly tough to give face-to-face advice profitably. The advance of automated tech-based advice systems is allowing companies to cut costs and increase their reach but there is still a yawning advice gap for those with modest savings. 

According to industry estimates, out of 37.9mn savers, only about 3.4mn mostly richer people receive wealth advice. Boring Money, a consumer-oriented research company, this month published a survey showing that just 16 per cent of the non-advised savers ranked advisers among the “most trusted” professions. 

The percentage doubled for people taking advice — suggesting that the industry can win people’s confidence. And the government is pushing for more companies to offer low-cost advice to customers with modest means. 

But it is a slog: Vanguard, the world’s second-largest asset manager, in March closed its UK financial planning arm less than two years after its launch in April 2021 after too few customers signed up.

Capgemini’s Wilson expects others to try, with technology in support. He sees wealth services “starting to trickle down” as companies acquire better data allowing services to be targeted more cost effectively.

Generational transfer

The accelerating transfer of wealth from the postwar generation, the richest cohort in history, also increases the need for advice. As older people’s wealth is concentrated in their homes, these tend to be sold and the proceeds released. Some of the funds go back into property, of course, but many heirs already own houses and will increasingly put their inheritance into financial assets.

Women play a growing role in the process — as surviving spouses in a generation where men are generally dying first, they take the family assets into their hands. They are being joined by increasing numbers of wealthy female professionals and entrepreneurs. They all want good service from wealth managers and complain they don’t always get it.

In this year’s Savanta survey, wealth firms were asked how well the industry served female clients with inheritances. Ten of 24 gave positive answers but, tellingly, 13 said “inadequately” and one said “poorly”. And this is the industry marking its own homework. The reality may be worse: a survey from Schroders, the investment group, last year found only 5 per cent of wealth managers have a specific strategy for women clients.

Meanwhile, younger people too struggle to access wealth advisers. While the travails of Generation Rent are well known, this cohort also includes finance professionals and entrepreneurs who have earned substantial amounts, often from tech and fintech.

Before 2022, they swarmed into cryptocurrencies and day-trading only to learn the hard way that prices which rise stratospherically can fall equally fast. The Financial Conduct Authority said this year that it wants to see young people approach investment with the same seriousness as dating — with less emphasis on social media, and with greater care. Lucy Castledine, FCA director of consumer investments, said it wanted to “encourage a more mindful, confident approach to investing”.

Tough investment outlook

Whether young or old, clients want good advice from wealth managers, not least on the investment outlook. While it’s always hard to predict the future, today’s uncertain conditions present particular challenges. 

Even cautious investment strategies can spring nasty surprises, as last year when bonds, a mainstay of cautious portfolios, plunged. Data from ARC, a company measuring performance from 140 firms, shows that portfolios in its lowest-risk “cautious” category fell 7.6 per cent in 2022, compared with the 9.1 per cent drop for “balanced” accounts and 11.4 per cent in the equity-heavy high-risk segment.

Nor is cash problem-free. Bank rates of 5 per cent and even more might sound attractive in comparison with the decade before mid-2022, when they started shooting up. But with the current inflation rate, that’s a guaranteed loss in real value of about 4 per cent annually.

Helen Watson, chief executive of UK wealth management at Rothschild, says: “With inflation higher than for many, many years, it’s much harder to achieve real returns. You can’t always beat inflation in the short term. But we always look at this in the longer term [that is seven years].”

For many wealth managers, equities remain key, given their long-term record in beating other investments. But some also now see opportunities in bonds, betting on central banks succeeding in driving down inflation and so eventually bringing down interest rates, which would create conditions for a bond market recovery, possibly a sharp one.

Timing equity purchases is tricky. The US economy looks resilient and the tech sector is fired by artificial intelligence plans, so this year’s American stock market rally might look like a sign of a broader return of global market confidence.

Or maybe not. Mark Haefele, chief investment officer at UBS’s wealth arm, points out that the tech rally seems vulnerable as it is based mainly on the outperformance of seven big companies which look expensive even compared with their own “eternal expensiveness”.

While Britain’s richest savers are largely insulated from the cost of living crisis, those just below them on the wealth ladder are not. Schroders found in a survey of financial advisers published this month that 89 per cent of advisers have clients who have adjusted budgets due to inflation, up from 53 per cent in November. 

Older clients, who dominate wealth managers’ books, have mostly paid off mortgages. But younger people, even those in high-paid jobs, are suffering from rising mortgage rates. Gary Smith, financial planning partner at Evelyn Partners, says: “Such a sudden ratcheting up of housing costs borne by both mortgage borrowers and renters is bound to have a disruptive effect on saving.”

And if saving is disrupted, so will the flow of funds into markets. Little surprise then that in Savanta’s survey, just three of 20 wealth managers see the FTSE 100, now at around 7,600, hitting 10,000 before the end of 2025. Six don’t see it getting there in the next five years.