In January, we shared our perspectives on the shifting landscape of the wealth management industry, setting out four themes likely to shape the sector this year.

The first half of 2023 was marked by challenging macroeconomic conditions, including persistent inflation resulting in the highest interest rates in decades. Wealth management firms also faced increasing challenges as a result of regulatory changes and continued pressure to advance their technology and digital solutions. In this article, we look back at our earlier outlook, discuss what is to come for the rest of 2023 and start to scan the horizon for 2024.

Continued Consolidation

The global cooldown in M&A that started in 2022 has continued this year, with activity falling sharply in H1 amid tightening financing conditions and valuation gaps. Private equity firm’s deal appetite has been particularly affected, and many PE-backed wealth management firms are slowing down their acquisition spree.

According to Dealogic, there were 29 M&A wealth management deals in the UK in 2022, totalling £2.25 billion in value. By contrast, there were only six deals with a value of £979 million[1] from January to April this year.

Looking ahead however, we believe that ‘organic' growth and scale will continue to be challenged by the inflationary environment, regulatory changes and technology investment requirements; these factors will continue to drive consolidation and sustain interest from both PE and corporate investors.

Additionally, buyers will likely put greater focus on return on investment (ROI) given the higher cost of borrowing. With some acquirers still trying to deliver on their value creation strategies, there will be increasing interest in the differentiated capabilities (i.e., products, client servicing offerings, digital and technology) of target assets. The narrative will shift to more than just bolting on more advisers and Asset Under Management (AUM) growth.

Digital & Data

We previously highlighted that investment in technology capabilities would continue to grow. The sector continues to lag the rest of the financial services industry when it comes to embedding digital platforms and leveraging data, especially in adviser and client experience. Although recent platform discussions have focused on fees and margins on cash, there will be increasing focus on ability for platforms to attract and retain advisers – the platform’s “stickiness” – by offering robust and consolidated tools to enhance productivity for advisers.

In H1, rapid advancements in generative AI have made the technology a top area of interest across all industries. The potential use cases in wealth management include the creation of tailored investment strategies, automation of portfolio management/monitoring and risk assessment activities.

In our view, genAI is unlikely to replace human-led advice, at least in the short-medium term. Soft skills, direct knowledge of clients’ circumstances and face-to-face interactions are still highly valued aspects of an advisory relationship[2]. Data privacy and security concerns are another concern. That said, it has a role to play in the development of hybrid-advice offerings, improving the client and adviser experience, and optimising administrative tasks.

Talent shortage

The lack of a talent pipeline in wealth management remains a critical issue, with data showing that 76% of IFAs plan to quit within 10 years[3]. The problem of diversity persists too, with female advisors accounting for 16% of regulated financial planners in the UK.

Albeit slow, there has been some progress in this area. Among the many companies addressing the imbalance is Abrdn, which introduced diverse interview panels for recruitment and “blind” CV judgement, thus achieving improvements in gender targets, including in leadership roles. There are other examples where wealth management firms are putting initiatives in place to proactively address the diversity gap.

Efforts to recruit and retain fresh talent more broadly is also vital, including actions such as having a well-defined career path for new joiners, continued education and initiatives to support the needs of the various demographics. One positive development in recruitment is the focus on adviser academies, which are no longer left to the large wealth managers as demonstrated by Asco Lloyd’s new Adviser Academy[4].

Looking ahead to 2024

Wealth management leaders should consider the following as they plan for 2024:

Regulatory changes: Under the FCA’s Consumer Duty rules, which took effect for new products on 31 July, advisers will be required to demonstrate their charges provide fair value to customers. To meet that, advice firms will have to clearly define a target market for each of their products and services. Recent research by NextWealth show that most businesses are yet to undertake this exercise on a formal and demonstrable basis, highlighting the need for the industry to accelerate efforts on that direction.

The FCA has also recently published details of its Advice Guidance Boundary Review. For business leaders, there are some key considerations, including operational implementation and risk mitigation. We will be observing how wealth management firms respond to this evolving regulatory environment.

Differentiated service: The strong performers in wealth management will be able to offer a clearly differentiated service and experience to clients. This differentiation is not only required to attract clients and drive new inflows, but a key part of a firm’s valuation prospects. With many advisers still looking to exit the sector and others looking to “share the load” through mergers, the firm’s ability to demonstrate what they bring to any partnership will be critical.

Leadership. Action. Results.

A&M has worked with some of the largest European and global financial institutions to stabilise financial performance, transform operations, drive growth and accelerate results through decisive action. Our professionals have both operational and advisory experience together with a proven track record in leading businesses through tough, complex situations.

To speak to us about our experience delivering transformation and performance improvement initiatives for leading businesses, please get in touch with our team.

[1] https://www.ft.com/content/6bd98d0c-e556-4358-aa0a-a80e1628517f

[2] https://www.mandg.com/wealth/platform/knowledge/news-and-views/2023/ai-and-the-ifa-what-could-chatgpt-mean-for-financial-advice

[3] https://www.theactuary.com/2023/05/31/fears-over-future-ifas-most-due-retire-decade

[4] https://www.ascotlloyd.co.uk/latest-news/articles/573-ascot-lloyd-launches-new-adviser-academy