St. James's Place & UK Wealth Management | In Practise

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St. James's Place & UK Wealth Management

Current Head of Strategy at Quilter and Former Corporate Strategy at St. James's Place

Why is this interview interesting?

  • The segmentation and growth drivers of UK independent advisors
  • How regulation has driven industry consolidation
  • Risk of roboadvisors to incumbents
  • Comparison of the vertically-integrated model versus indepedent advisors
  • How private equity funds are rolling up advisors to challenge incumbents
  • How to value FUM when acquiring independent advisors
  • Impact of the gestation period of funds on future cash flows

Executive Bio

Alex Bogdanovskij

Current Head of Strategy at Quilter and Former Corporate Strategy at St. James's Place

Alex is the Current Head of Strategy at Strategy at Quilter, one of the largest wealth managers in the UK. He has over a decade of experience in wealth and asset management and is currently responsible for strategy across the whole Quilter group including scaling advisory distribution, platform positioning, and the core asset management business. Alex previously spent 3 years working in Strategy for Quilter Investors after spending 3 years in Corporate Strategy at St. James Place where he was responsible for product development in the alternative space. Prior to St. James, Alex spent 5 years as an Investment Specialist at AAG Wealth Management where he dealt with HNW clients. Read more

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Interview Transcript

Alex, could you paint a picture of how you view the structure of the UK wealth management industry, today?

The way I tend to think about it is, you have approximately, 30,000 advisors, so I will start with a distribution view. The last reliable number we have from the FCA we have is that that number has been remarkably constant for quite a while. Obviously, the advice population is of a certain age; there’s quite a lot of retirement happening, but there is also quite a lot of academies, quite a lot of young guys coming through, so that number tends to be around the 30,000 mark.

From there, you have approximately, 8,000, 9,000, 10,000 advisors that are part of a large wealth management group, such as St James’s Place, Quilter and some of the medium-sized ones, such as Openwork. You would almost say that they are not exactly tied, but they are certainly not IFAs; they are not independent financial advisors. They belong a vertically, or semi-vertically, integrated, national, probably FTSE-listed, company.

Then you probably have about another 9,000, 10,000, 11,000 that are truly independent. These can be anything from a guy working out of a garage, to a 20 to 30 strong, independent financial advisor business. The FCA are very good at giving out these numbers. These guys say, we truly believe that you have to be independent, whole-of-market, so I can pick out, for my clients, the best possible product solutions.

In the middle, in the remaining 10,000, there’s a whole bunch of combinations. Some of them work for banks, building societies; some of them are semi-tied; some of them are part of a network for advice on mortgages only or protection only. There is this real mix, in between.

But to answer your question in a very simple way, I tend to think of it that, at one end, you have the really big, vertically integrated businesses and at the other, you have the really independent ones. The two are diametrically opposed in their view of the world. The big guys say that you don’t need access to 3,000 funds in the market because you cannot possibly monitor them. We will pick the best 50 or 60 for you and get really good deals and make sure that they perform, via investment committees, research, oversights, risk governance. The other guys say, no, I want to be able to pick this particular small-cap manager because I think it has the best outcome for my client. In the middle, there is a combination of the two.

How is the regulatory landscape shifting the number of advisors, between those three different channels?

Since the implementation of RDR, back in 2012, the regulatory burden and the cost of compliance has risen almost every year. Your cost of professional indemnity insurance goes up, the amount of stuff that you need to report and the regulations coming down on you, has increased. Again, it’s probably a good thing, because the business is now better regulated than before; the entry hurdles are higher. But what that means is, if you are an independent one, two, three-person band, you’re having to pay quite a heavy, fixed regulatory cost, to be in business. Therefore, there is almost safety and more efficiency, to be part of a larger group because then that fixed cost gets spread out over a larger amount of advisors and the business can allow itself to employ professional business assurance teams, checkers, compliance teams and so on.

There has definitely been a drift towards the smaller guys either moving towards the big ones or the big ones buying the smaller ones and integrating them. In that polarization I talked about, the middle is being picked off by the big guys. But there is still a fiercely independent amount of IFAs that refuse to join any of the big companies. Again, the short answer is that it’s getting harder and harder to be in business, if you’re small, unless you occupy a very particular niche.

What about the IFAs at the banks?

Banks have tried to get into advice. They’ve done this before, about 20 years ago, very unsuccessfully. Now there is another effort to go back into it. Schroders and Lloyds is probably a great example of someone who is doing it really well. Wealth management is decently high margin, it’s sticky money. Deposits aren’t earning anything, but you already have the trust of the customer, as a bank. So the banks are trying to get into advice. HSBC are doing pretty well. There are definitely pockets of success but, on average, the banks are moving into this space, quite aggressively. It’s just that they’ve never managed to do it as well as some of the independent, large wealth managers.

Why is that?

I don’t actually know the answer to that. It’s not their core business and, obviously, if you go to Coutts and HSBC Private Bank and so on, if you go to the high net worth space, they’re absolutely fantastic at it. But if you go into the mass affluent, £10,000, £15,000, £20,000, £30,000 investable, they’ve just never really cracked it. It’s always been trying to sell your in-house products, which aren’t necessarily always the best ones. Or trying to sell house insurance or whatever it is. It always feels very forced.

But if you look at Shroders and Lloyds, they’ve done it the right way, which is a much more wealth management-based approach, as opposed to a guy in a bank trying to shift product. I think, the second time around, they’ll probably get it more right than they have so far. But it’s lucrative and you can get more wallet share and more revenue out of your existing clients; it makes total sense.

It’s likely that you think we’re going to see a continued attrition of smaller IFAs, to bigger groups, due to the regulatory burden and the challenges operating at such a small scale?

As I mentioned before, the other thing is that the IFA population at large – let’s say they have an average age of about 55 – there’s quite a lot of them that are due to retire in the next five to 10 years. Octopus Capital did a piece of research on the IFA market and they found that something like 25% of the current pool of IFAs are due to retire, in the next five, six, seven years. There’s going to be quite a large attrition of AUM and so on. One of the great things about joining a large, national firm, such as St James’s Place or Quilter, is that you almost have an exit strategy built in, from day one. You go to SJP, you work for seven, eight, nine years; you build up a nice business with a nice recurring income stream. Whenever you are ready to retire, you can sell that business back to the company, that will give you a check and they will take your pool of clients and give it to a new advisor. If you want to monetize your clients and get ready for retirement, it makes total sense to do that.

Again, there are quite a lot of consolidators, at the moment, that are private equity backed, that are going around and buying up all these small advisors. Maybe they want to cash out or they want to partially cash out, or they want to retire. There is a serious amount of consolidation happening. At the same time, the big guys, like us and St James’s Place, they’re looking to grow and you’re not going to grow by hiring one, two, three people. You want to just buy a couple of hundred at a time, because the due diligence is the same. I might as well buy 200 and then integrate them. There is a definitely a lot of consolidation pressures, which is why multiples are going up; there are less and less good deals. Some of the people like SJP and us are trying to move away from this acquisition-led growth and are trying to grow organically, in academies, because it’s very expensive to buy them now. But there are still a lot of opportunities in the middle and PE are amazing at this, at buying them, smashing them together, integrating them, cleaning them out and turning some average into something quite beautiful, that they can then sell to me.

At a higher multiple.

At a higher margin.

In terms of when you value the funds under management of IFAs, how have you seen the valuation change, over the last five to seven years?

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St. James's Place & UK Wealth Management

July 8, 2020

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