How to avoid overpaying for underperfoming wealth talent

How to avoid overpaying for underperfoming wealth talent

A decade-long run of steady year-on-year increases in wealth management assets came to a shuddering halt in last year’s volatility, putting a far sharper focus on balance sheet discipline to sustain profitability.

Benchmarking firm Compeer’s 2019 UK Wealth Management Industry Report, published in August, shows that after total client funds held by private client investment businesses rocketed from £362 billion in 2008 to a peak of £966 billion they slid 5% last year to £948 billion.

While pre-tax profits across the industry continued to climb – almost 15% higher over the year at £1.9 billion – sector analysts such as KPMG partner Abhijit Rawal warn of ‘significant variability’ underlying this and suggests that wealth managers will face an extended period of belt tightening.

Lester Petch, chief executive of survey participant TAM Asset Management, said: ‘The next couple of years will be driving the margins down and the investment management business needs to be fully prepared and super-efficient in handling, managing, onboarding and administering clients.’

So how can a generation of wealth firms which have benefited from the following wind of quantitative easing (QE) now chart a route through choppier waters?

Star talent: caveat emptor
A key issue for wealth management firms is the murky relationship between what they pay for talent and the actual revenue growth generated by ‘star’ teams or individuals, said Compeer: whatever metric sector employers are using to measure value appears to be only weakly correlated with staffing costs .

Notably, both the variance and the slope of the graph appear to be greater for companies with the largest profit margins.

Report author and Compeer head of client services James Brown suggests this ‘could imply poor levels of productivity, or that firms are overpaying their front office professionals in comparison to the revenue they bring in and compared to what rival firms pay their front-office-professionals.’

Businesses ‘are seeking what they believe to be the best talent in the industry and so are offering significant pay to convince them to switch. But as it stands, they have been unable to bring in the expected new business and so revenue is behind the peer group benchmark'.

Christian Holland, chief investment officer at Sussex-based Facet Investment Management said: 'we believe there has been a drop in the amount of money switching between investment managers and fees have fallen and are therefore more closely aligned.'

The largest firms tend to use relatively blunt-but-effective asset-based performance targets – Brewin Dolphin, for instance, set a benchmark of £75 million to £100 million per manager last year based on the company-wide average of £80 million. But smaller firms may have more freedom to tailor goals to desired outcomes. 

Holland said at Facet: 'Administrative and support staff are paid according to peer averages. Sales of new business are linking to AUM. Directors are linked to the performance of the business. '

Bristol-based RC Brown eschews targets for individual employees. The business’s investment director Alan Beaney said ‘we don’t think internal competition helps the firm’, but it has a company-wide target of attracting inflows of £20 to 30 million a year.

In his view, the lack of productivity is largely due to underinvestment, as ‘many firms don’t have the technology in place' so investment managers spend a long time reporting. Our reports are all out in three days [because] we launched 10 years ago and don’t have any of the legacy system problems.’

Petch agreed. Pay ‘can only be aligned to corporate profitability and then allocated from resource that is available to the staff that went above and beyond.  Benchmarking against anything else could be catastrophic in a lower margin environment'.

Dart Capital CEO Richard Whitehead takes a similar approach. He said that his three investment managers, who together manage around £530 million, are paid bonuses linked to the success of the company against its budget. While ‘it is expected they will gain some new clients each year’ there is no numerical target for each investment manager, though there is one at a business level.

He noted that the firm tracks productivity information about investment managers, while ‘each investment manager has a balanced business set of objectives too’. But stressed ‘it is fair to say that the investment manager cannot function effectively without a team of other talent working alongside them within the business’.

Looking at the issue from a birds-eye perspective, KPMG’s Rawal said that better alignment of front office productivity and compensation is likely to be a by-product of a 'broader industry transformation’ brought about by more effective mergers and acquisitions and management of change.

Revenue rises Compeer surveyed 153 UK wealth managers – defined as full service wealth firms, investment managers and private banks – and 16 execution-only brokers to compile the report, all of which commanded at least £50 million in client assets. 

Despite the pain inflicted by the markets, overall revenue rose 5.7% – down slightly from 6.7% in 2017 – to reach a record high of £7.2 billion. This was mainly down to fee revenue buoyed by rising asset values in the first three quarters of last year, with all firm types recording growth and private banks earning the most new money at £170 million.

Industry profit before tax rose 14.9% to £1.9 billion, though there was considerable variance in margins between firm type and individual firms, with top performing brokers pulling the number upwards. Notably, private bank margins grew from 23.5% to 26.8%, while full service wealth managers saw a decline from 19.6% to 18.4% and investment managers’ edged up to 21.9%.

Total costs expanded 2.9% to £5.4 billion, with full service wealth managers and investment manager expenses making up the bulk of the increase. The former spent £79 million more year-on-year, a 6.2% rise that brought their overall figure for 2018 to £1.37 billion – more than a quarter of the total. The latter’s spend of £51 million took their contribution to over £1.4 billion.

Staffing costs

Staffing costs were the propelling force in all cases. Headcount at wealth managers went up by 436 to 32,691, with total staff costs in the non-execution only (XO) segment rose by 3.2% to £3.44 billion. Full service wealth managers and investment managers each saw their front office staff numbers grow 2.6% to a combined 5,846 over the same period, while ‘corporate and compliance’ headcount increased by 4.3% and 2.4% respectively.

In line with these figures, salary, commission, bonus, national insurance and pension contribution expenses for investment managers at wealth firms rose by 3.9% to above £1 billion for the first time. This represented an absolute rise of £37.72 million – the greatest among all roles. Across the industry as a whole, including brokers, the average pay for 4,840 investment managers rose by 1.9% to £207,900.

Client assets held by wealth managers fell £7.2 billion in total last year, and at private banks by £2.4 billion. Investment managers held up relatively well, seeing a more modest decline of £77 million.

As direct securities held in custody across all firms fell by £26 billion to £435 billion, XO stockbrokers bore the brunt of the dip – seeing their assets reduced by £8.3 billion.

Brown said the period was ‘the straw that broke the camel’s back’ as ‘the concoction of declining European equities, increasing trade tariffs, slowing economic growth in China and the looming uncertainty of Brexit contributed to one of the worst fourth quarters of the last 50 years'.  

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