Rathbones/Investec: consumer duty will test mettle of defensive merger

Managing money in the UK is tougher than it has ever been. Markets are weak. Fees are low. Businesses are subscale. All three drivers are reflected in the latest wealth management tie-up. Rathbones is bringing Investec’s UK wealth business into its fold.

A “consumer duty” imposed on financial businesses this July may be a further reason for an all-share deal valuing the Investec unit at £839mn The new duty will be avowedly “outcomes based”. For a discretionary manager such as Rathbones, that may sound ominously retrospective. Investments do not always work out as advisers and clients hope.

Critics fear the consumer duty will spur litigation and dent City competitiveness. The new rules will also boost rapidly developing passive investment managers.

Greater scale should be some help to Rathbones. Combined funds under management of £100bn remain small compared with the client assets of passive giants such as BlackRock and Amundi. But the figure is roughly double assets at Brewin Dolphin, which was acquired by Royal Bank of Canada for £1.6bn this time last year. 

The deal will leave Investec shareholders with a 41.3 per cent economic stake and 29.9 per cent of the votes in the combined business. Rathbones is paying a price equivalent to 2.1 per cent of Investec’s assets. That is a third below some comparable deals, notably RBC’s purchase of Brewin Dolphin and Rathbones’ acquisition of Saunderson House in 2021. On a standalone basis, Rathbones’ shares trade at about 1.9 per cent of assets.

The stock has fallen about 10 per cent since the start of 2020. That reflects tough operating conditions and IT investment. The latter shaved almost 4 percentage points from operating margins that last year hit a multi-decade low of 21.3 per cent.

Margins were expected to bounce back to the high 20s by 2024. The new consumer duty may make that target harder to hit. Much depends on whether politicians support rigorous enforcement. Backers of the FCA are scarce within the current administration.