Has the UK private client industry been wildly over-hiring asks ComPeer report - 01.08.2008
Wealthnet
More than 500 new client-facing professionals joined the UK private clients market last year, creating significant additional capacity at a time when new business levels are slowing in the uncertain economic environment.
This estimate of the pace of hiring comes from the annual wealth management survey by researchers ComPeer, which finds that the active pace of recruitment impacted on overall advisory industry productivity and meant that in total, front office staff costs increased at the same rate as revenues.
“This is not a sustainable position and firms either need to find new business to utilise capacity or further productivity improvements; otherwise we can expect to see a drop in remuneration levels and/or squeezed profit margins in 2008,” the ComPeer analysts declare.
Total staff employed by wealth sector increased by 7 percent to 28,303 last year, when revenues of £3.9 billion were generated, it reported, in analysis which points to the increasing importance of cost control in an industry which is starting to see client investment patterns affected by the global credit crisis and market volatility.
Total costs as a percentage of investment assets increased slightly in 2007 as a result of a 12.9 percent rise in costs compared to an 11.2 percent rise in assets. This increase comprised a 15 percent rise in in-house staff costs, 8.5 percent in non-staff costs and 14 percent in outsourced and transfer charges.
Profit margins still improved because of stronger revenue growth, particularly on net interest income, banking and wealth structuring/financial planning fees, ComPeer found.
The most significant impact of the credit crunch to date has been to boost treasury revenues, as private banks and client money firms took advantage of favourable inter-bank rates to increase margins on client cash. Net interest income grew by 25 percent, accounting for just over 30 percent of the total growth in revenues.
While the wealth management sector has to date remained largely immune to the economic and market condition, it is “unlikely that this will remain entirely the case and we can expect a period of at best slower growth”, ComPeer stressed.
The industry has expanded in recent years on the back of the high levels of wealth creation in the UK. The drivers of that wealth creation, from inflating asset values (particularly property), the City of London and entrepreneurial activity, look likely to slow, reducing the natural flow of new money.
At the same time, revenues are heavily dependent on market levels and although firms have widened their propositions with a more diversified multi-asset class approach, market growth will be subdued as firms take more defensive positions for their clients.
Even in 2007, 30 percent of firms surveyed failed to grow assets by more than 2.7 percent, suggesting “difficulties ahead for these firms in 2008’s tighter market environment.”
ComPeer declared, “We therefore anticipate that we will enter into a period of much slower growth with greater differentiation between the winners and losers. Winners will be those firms that can clearly demonstrate added value to clients in whatever sector of the market they elect to compete.”
Overall, the wealth management industry in the UK last year grew investment assets under management by 10 percent to £402 billion, off from the 18 percent growth recorded in 2006. It generated revenue of £3.9 billion, up 16 percent and pre-tax profits of £1 billion, up 28 percent.