The wealth management market is a structural growth sector. The chief driver is the long-term need for people to save more for their retirement. There is also a stable core of wealthier members of the population – the average customer of a wealth manager is aged 60 and has £500,000 to £1mn in pensions and other assets. These customers are looking for capital preservation; moderate, stable and reliable income; tax planning; retirement planning, inheritance planning and advice. And they are happy to pay for someone else to manage their money. These clients are sticky and long-term (average stay is 20-plus years) in nature, which gives this sector a solid income and profit backbone, making this arguably both a growth and a staple sector.
Dispelling some misconceptions
One notion circulating about wealth managers is the idea that outflows will increase if more investors buy annuities (provided by insurers such as Legal & General) rather than draw down a pension and live off a portfolio’s income. The argument here is that if keeping back wealth is less attractive as pensions are now subject to inheritance tax (IHT), investors may as well spend on an annuity. While annuity rates are higher than they have been for most of the past 15 years, surrendering all of your funds to an annuity provider (leaving nothing for inheritance) rather than leaving 60 per cent after IHT makes no sense to me. A well-managed portfolio can typically match an annuity for income so, day-to-day, there would be little benefit anyway. Even if this does become a trend, pensions only account for around 25-30 per cent of the sector’s assets under management (AUM).
One thing that could put fresh pressure on outflows is a combination of more gifting (to avoid IHT) and maximising pension drawdown in order to facilitate this. It is likely that more people will look to give more of their estate away before they die, but again this is very much on the fringes and would occur over a very long time.
Overall, the main pressure on funds managed by wealth managers is the renewed ability to make acceptable returns and achieve capital preservation with zero risk by buying government bonds or opening savings accounts. The tide here is slowly turning, but it might take longer to persuade some investors to return to managed equity investments.
The next bid target?
One reason for looking at this sector afresh was the take-out of investment platform market leader Hargreaves Lansdown (HL.). However, musing on which business is next in line for consolidation is a risky strategy and should never be the basis for an investment decision.
There is a lot of corporate activity in this sector, with Hargreaves Lansdown and several advisers and small regional players being mopped up by private equity, while the listed businesses are also consolidating, especially where they want to be able to provide more and/or better services. There was also a merger between Investec Wealth & Investment and Rathbones (RAT) last year, but this was more of a strategic alliance of two similar-sized but slightly sub-scale businesses.
There has been speculation that something similar may happen with Brooks MacDonald (BRK) as its assets under management (AUM) are around £17bn and viewed by many as sub-scale (the post-merger AUM at Rathbones is greater than £100bn). A problem for smaller wealth managers is the cost of admin and the scale of IT needed to invest in platforms, AI tools, apps and data security, and this is typically a high and fairly fixed cost that needs to be spread over the largest possible fee base, ie the largest possible AUM. Brooks has been looking to add more advice income (achieved through two recent acquisitions but with the benefit offset by dilutive disposal) and that should be positive, but earnings per share (EPS) growth here is in the low single-digit per cent range. While Brooks might fit the bill as a target, investors should focus on the fundamentals.
How the sector is valued
This is an uncomplicated sector with two highly visible and easily understood sources of income: fees on the AUM and charges for advice. While it might be tempting to look at the AUM as some form of asset value equity driver and use that for the valuation, this is not viable because none of that money belongs to the wealth manager and can leak away, potentially to a major extent. These are essentially trading businesses making a straightforward margin, so the valuation approach is pretty simple – a basic PE ratio.
Where to invest
The sector is generally under a cloud, with client money leaking away, but this is just a timing issue and the low-/no-risk returns drawing funds away are likely to drop over the next two years – Goldman Sachs potentially sees UK base rates at 2.75 per cent by the end of 2025. That said, the Office for Budget Responsibility's (OBR) forecast that gilt yields will rise slightly from their already elevated levels. Analysts believe that fund outflows for the wealth managers will reverse as interest rates fall, but this now looks further out. As more people are likely to want/need more advice and planning, this could bring forward the flow of new funds, and most sector analysts believe Q1 or Q2 of 2025 will be the turning point.
Rathbones is a good, old-fashioned, long-relationships wealth manager seen as safe and capable by clients and those feeding it new business. A number of customers chose not to stay – and there is still outflow today from ex-Investec customers, but this is stabilising. The integration looks to be working well and sizeable synergies (more efficient IT & platform costs plus costs to acquire and service customers are more efficient at greater scale) are expected to help drive EPS growth. AUM is forecast to grow at close to 7 per cent compound in the coming two years, with the scale/efficiency benefits filtering through to EPS at 10-11 per cent annually. This leaves the stock trading on a PE of 9.5 to Dec 2025, about as low as it has ever traded. This does not square with double-digit EPS growth in a structural growth market. Add in a 5.5 per cent yield and this stock is looking oversold.
While it would be wrong to assume a return to the giddy heights of 5-10 years ago (money was flowing in strongly given the almost zero returns elsewhere plus greater pension freedoms), a PE into double digits (say 12) would more fairly reflect the prospects. Any re-rating is likely to need to see a return to fund inflows before getting underway, but with patience, it should be possible to achieve a total return over the next two years of potentially 35 per cent.
Quilter (QLT) has a slightly different profile, with wealth management services running alongside a wider array of financial products and services (platform services, institutional fund management, personal & business protection and investment products sold on third-party platforms). This means a broad and balanced offering, with the business largely split between traditional wealth management and independent financial adviser (IFA) services. Having started from a low base, Quilter has avoided an outflow-led de-rating. Instead, operational improvements have encouraged inflows, and its shares have doubled in a little over a year. This leaves limited value for now, with a PE in the low teens, but further rises in estimates and scope for more positive earnings surprises could keep this one interesting.
St James’s Place (STJ) has been a fairly controversial stock in recent times (high charges, exit penalties, poor performance, and a restricted offering model) leading to a share slump of 75 per cent. But since its low this April the shares have doubled. The main attraction for clients at SJP is its advice service and, following the Budget changes to IHT, this is a strong lure both per se and for the kick it could bring to the AUM. This will be needed to offset the client losses, higher internal costs and pressure on fees that are today forecast to see profits over the next three years drop by around 7 per cent, although more bearish analysts see nearer 20 per cent. The year two PE is higher than Rathbones’ at 11 times. In a year’s time this may have risen to 13 – the hoped-for advice boom and some hope of recently departed clients returning could lead to something akin to a recovery rating, but will the premium rating this stock once enjoyed be restored? That is a long shot and any restoration here could be a long haul.
Platform stocks
While we are primarily focused on the long-term, relationship-driven wealth management stocks, there is another side to this industry that concentrates on private investors, including those who are younger and have fewer assets, and allows them to manage their own pensions and individual savings accounts (Isas). These are the platform stocks that provide mechanisms to easily access and manage investments online without planning or advice. Typically, customers are looking for performance/growth rather than stability and income, and this means that the fee base has an additional driver versus the wealth managers.
Following the Hargreaves buyout, the best-known listed player here is AJ Bell (AJB), a stock that has had an amazing investment performance in 2024, rising more than 60 per cent. Customers are attracted by the low account management and dealing fees and no-frills approach. AUM is now more than £83bn (from £23bn in 2014) and forecast to rise to £113bn by its September 2026 year-end – that is more than 10 per cent compound, impressive given the net outflows at the wealth managers. EPS growth (15 per cent compound) is forecast to beat AUM growth, but that growth comes at a price, with a hefty PE premium over the wealth managers – the PE to September 2025 is 21-plus – but growth is faster and the business model more dynamic. The shares are showing a modest retrenchment after a strong 12 months, so perhaps consider this one close to 400-420p (now 458p).
In a similar vein, we have Integrafin (IHP), which provides an investment platform (Transact) based on its IP that it provides to smaller financial advisers for their clients to use. Integrafin makes its money from both commissions on platform activity and charges for the platform use. It also provides advice services through another proprietary platform, T4A, or Time for Advice. This makes Integrafin more of a technology – or even a software as a service (SaaS) – business than a pure financials player, and that supports a higher rating. Similar to AJ Bell, performance in 2024 has been strong (25 per cent), but Integrafin is sustaining better share price momentum but, with a similar rating (PE of 22) and also EPS growth of more than 10 per cent, there is not a great deal to choose between these platform players. Both offer good long-term attractions, but with IHP perhaps having an edge due to its stronger technology credentials.
Overall, Rathbones is the prime pick in this space.
