How will the Rathbones-Investec tie-up affect me?

This week’s Rathbones deal to snap up the wealth and investment division of Investec in the UK and Channel Islands will create a powerhouse in the sector, managing £100bn of assets.

The deal, which values the Investec business at £839mn, positions the enlarged Rathbones group as the biggest discretionary fund manager in the UK in terms of funds under management.

Investec Group will have a 41 per cent stake in the combined company, which will keep the historic Rathbones name dating back to the early 1700s. Investec’s bank and international wealth business are not part of the deal and remain wholly owned subsidiaries of Investec Group.

What impact will the deal have on customers?
Rathbones said customers will have the same investment manager or financial planner as now. Clients of Investec will also retain their existing relationship manager. Iain Hooley, chief executive of Investec Wealth & Investment UK, said: “Continuity for our clients is top priority. The business is built on longstanding relationships.”

The firms’ fee models differ. For example, Investec currently charges a management fee of 1.25 per cent on the value of a portfolio up to £1mn and 1 per cent on the next £1.5mn. Rathbones charges 1.2 per cent on the first £250,000, then 1 per cent on the next £500,000 and 0.75 per cent on the next £750,000.

Fees and charges will remain the same for now, though this could change once the deal is approved by regulators.

What benefits will the deal bring for clients?
Investec and Rathbones said the enlarged business will bring benefits of scale in a market battling pressure on fees from passive investment funds and higher costs. As a combined group, Rathbones said it will have a broader research capability and larger teams across financial planning, fund management and banking services.

“Our combined research capabilities are something we would like to leverage. We expect the combination to deliver significant benefits to clients in terms of proposition and service, but enhancements will be introduced very carefully over time,” it said.

Rathbones expects the deal to create £60mn of annual synergies by combining technology systems and shrinking the real estate portfolio — savings which will be reinvested into the business.

However, deals to combine two companies often fall down on integration and implementation — not least in the financial services sector, where so much depends on retaining quality staff. Clients should keep an eye on who is managing their account — and how well — and speak up if they see any problems.

Will the branding and buildings change?
Customers of Investec can expect their communications and product branding to change to Rathbones over time. Rathbones, currently based at Finsbury Circus in the City of London, will relocate to Investec’s headquarters in Gresham Street. Investec and Rathbones have emphasised that culture was a key factor underpinning the deal.

What could the deal mean for the clients in the longer term?
Fewer players in the industry could mean less choice for customers and potentially less competition on fees. However, Paul Stockton, chief executive at Rathbones, said the UK wealth market, which he estimates is £5.1tn in size, “is still highly fragmented”.

He added: “Even in the long term, the way we’ve set up our business model, we’ll be a larger wealth manager but the proposition we’re offering is a whole-of-market choice. That enables clients to have the choice of investing globally.”

With significantly more assets under management, one analyst said the enlarged group might be obliged to select bigger, more liquid investments for customers. And, as a corollary, harder-to-run small funds that invest in small companies — say, a £100mn fund — will be too small to serve their many customers.

Ben Yearsley, investment director at Shore Financial Planning, an advisory group, said: “You can’t just go and buy the smaller investment trusts, or the more interesting stuff, otherwise you’ll end up owning the whole book or won’t have liquidity.”

A key driver of wealth management mergers is also the need to invest in technology and in regulatory management. By reducing these costs, a merger can benefit clients — even if they don’t see it.

Are there other risks to watch out for?
The group said its strategy will remain the same, although the enlarged Rathbones group will aim to build its advice capability and take advantage of Investec’s banking services for clients across the company.

In the year or more it would typically take such a merger to complete, risks may arise within the business or among clients. Yearsley said: “You’ll get disaffected employees worried about their future, clients asking ‘what’s happening’, and back office workers asking if their job is on the line. It also gives other firms the opportunity to step in, poach staff, investment managers and clients. These things never go smoothly when you have a lot of crossover.”

Stockton said the business would remain focused on relationships between clients and managers. “Size is really important, but we don’t want to appear big to our clients. It’s a personal service business, so no matter what goes on in the background, we’re making sure we invest in our people and client service.”