DC Advisory

How Consolidation Will Affect the Asset and Wealth Management Market

February 15, 2021 | Belay Associates

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As the landscape of asset and wealth management begins to change and adapt to the ‘new normal’, there continues to be a considerable shift towards M&A, thus presenting a wide range of opportunities and a very healthy willing buyer-willing seller dynamic.

While across Europe and the US there may be a disconnect between capital markets – which recovered quickly from the initial pandemic downturn – and the economy, which still requires substantial government aid, the asset and wealth management industry is poised for continued momentum and activity.

As the industry’s end clients are becoming increasingly diverse in their tastes and with new disruptive technologies taking market share from traditional platforms, inorganic growth is the focus of many players in the industry.

DC Advisory’s global Financial Services and Fin Tech team explores the main drivers of change >

Motivation for consolidation

A key driver in consolidation for both asset and wealth managers arises from end-client behaviour. The need to have a varied, multi-asset portfolio is becoming increasingly important as investors look for diversification, accelerated, in part, by the pandemic, which has had a fundamental impact on the valuations in some sectors [1]. This, coupled with a growing focus on ESG investment (with US$110tn ESG assets under management globally [2]) means that asset and wealth managers need to expand their offering. This diversification takes a slightly different form in each case:

For asset managers, seeking better and more diversified returns for clients, gaining greater control of the distribution value chain and driving much closer proximity to the end-client is driving their M&A activity.

Additionally, M&A can also be used to broaden access to new sectors (e.g., renewable energy) [3] – now a key driver for investors around the world as impact investment strategies gather greater pace, as demonstrated by BlackRock’s announcement to make climate change a focal point of its investment strategy for 2021 [4].

For the major wealth managers, particularly independents, acquisitions have been focussed creating scale and geographical expansion. In Spain, for example, larger corporations such as banks continue to consolidate, creating opportunities for independent players to acquire not only new clients, but also experienced executives [5]. In addition, other players in financial services are starting to converge; insurances companies are starting to aggressively develop their asset and wealth management businesses through acquisitions and are likely to become key players in both segments.

In India, distribution networks tend to be physical, offline networks with consolidation happening to extend branch coverage.

We are seeing high levels of structural flexibility on transactions although, in most cases, acquirers are keen on a clear path to majority ownership. The consolidation trend is clear, with 35% of the industry’s overall assets controlled by just 10 firms and it is predicted to increase, post-pandemic [6].

New disruptive technology

As emphasised during the pandemic, adoption and implementation of new technologies is key for driving innovation, growth and increased efficiency [7]. For asset and wealth managers, consolidation in this area is critical for continued existence in the market, with predictions that middle and back-office costs linked to personnel will reduce from 50% to 20% over the coming years [8]as a direct result of technology. In short, traditional operators risk falling behind if they do not embrace this trend.

However, as technological change advances exponentially, cost efficient and strategic technology is not the only area encroaching on traditional institutions. As we noted in 2020 [9], disruptive and advanced technology such as ‘Robo-Advisors’ are emerging in more and more markets having already achieved significant scale in the US and provide an emerging competitive threat. It is predicted that by 2025 assets managed through Robo-Advisory services will be over $16.0 trillion, c. three times the amount of assets managed through BlackRock [10]. However, as robo-advisers becomes more advanced and more sophisticated, they are also becoming more personalised and more varied [11]. Using aggregation and data, robo-advisors are able to be hyper-personalised and targeted in their offering. This customisation across a client’s journey is likely to present significant competition to traditional wealth firms [12] over the next decade.

Technology, and its application in asset and wealth management, is therefore a critical consideration for managers wishing to remain ahead of the curve.

In emerging markets, such as India, where the asset and wealth management market is more junior, there is a potential for fintech companies to overtake more traditional methods and the market will bypass growth in these areas, instead favouring the ease and frictionless process of using digital tools. For example, Paytm, which has developed from a digital payment app to an investment app that serves over 6 million users, has now surpassed Zerodha, one of the largest retail brokerage firms in the country, by volume [13].

Conclusion

Given the very clear drivers in the sector and very strong willing buyer-willing seller dynamics, we expect this consolidation trend to continue unabated for a number of years, as those seeking to employ an inorganic strategy look to achieve scale, create margin efficiency, enhance distribution and create a more diversified propositional offering to their clients [14].

References:

[1] Diversifying for the future, Russell Investments, November 2020
[2] Asset allocation handbook, Wealth Manager, 2020
 
[3] M&A in 2021: asset management primed for consolidation, Financial Times, January 2021

[4] $7 trillion asset manager BlackRock makes climate change central to its investment strategy for 2021, CNBC, December 2020

[5] Spanish Bank M&A: Reaching the next level of efficiency gains, The Corner, September 2020

[6] The six themes that will shape the future of asset management, CityWire Selector, December 2020

[7] Asset management in 2021: Five things to get right, Accenture, December 2020

[8] Asset management trends 2021, Oliver Wyman, December 2020

[9] Re-defining ‘future-proof’: the next chapter for the UK asset & wealth management sector, DC Advisory, June 2020

[10] The expansion of Robo-Advisory in Wealth Management, Deloitte, 2020

[11] Robo-Advice in Insurance: Technlogy trends, Life Insurance International, December, 2020

[12] The top wealth management trends in 2021, CityWire, November 2020

[13] Paytm Money surpasses Zerodha with 6.6 million users, Mint, September 2020

[14] Financial services: towards digitalisation and consolidation, JDSUPRA, December 2020