The high income, own nothing, wealth manager

August 13, 2021

The wealth management industry has been an unlikely beneficiary of the pandemic; Investment Managers, Financial Planners, and Private Bankers have been busier than ever. However, M&A activity will time and time again reinforce the value in owning a wealth management business.

The wealth management industry has been an unlikely beneficiary of the pandemic. Investment Managers, Financial Planners, and Private Bankers have been busier than ever. After the initial panic of falling markets, clients were well coached by their wealth management professionals to stay invested, and indeed by all accounts clients were eager to invest more. The future looks bright for Investment Managers, Financial Planners, and Private Bankers, and the continued M&A activity in the sector is an endorsement of this future.

M&A activity will time and time again reinforce the value in owning a wealth management business. An ever increasing pot of money will continue to chase an ever diminishing number of firms (until we get to the deconsolidation phase, but that’s another article) and valuations will just keep on rising. Great if you’re a retiring IFA who owns a book. More widely in the industry, though, only small number will reap the benefits of this M&A activity. There will of course be some short term incentives, like lock-ins, but for the vast majority in the sector they rely on their salary and bonus. A defined bonus if you’re lucky and a discretionary bonus at many firms. Actually, we think there’s nothing wrong with the latter. The employers in the sector provide great working environments, career opportunities, and great salaries. Most importantly, the power of their brand delivers clients. Clients go to the well-established brand and are loyal to this and the “burden” of hunting for new clients is removed. Many of these firms do actually provide excellent training on how to find clients and for those early in their career this too can be invaluable experience.

However, over time frustrations can creep in. There is a point of diminishing returns around training, the wealth manager starts to generate referrals from their own network and quite often takes pride in not needing company leads, and some find out something about themselves they never knew – they are great at hunting. Some would argue it’s personality traits that make them good at this. We think in part it’s true, but the best salespeople in most instances have a process. They’ve developed process that delivers clients. The assets they gather deliver consistent revenues and, perhaps most importantly, the enterprise value of their firm is increased significantly. This can particularly rankle with long serving team members who are on a salary and bonus remuneration structure and hence why independent contractor models are proving so popular, not just in wealth management but industries like law too. The revenue generators in these industries have realised that they own nothing, despite creating huge amounts of value.

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One of the arguments that stops many from becoming an entrepreneur is that the complexity of running a regulated business, of the lack of admin and marketing support, and generally feeling alone and isolated. Individuals are also worried about losing their salary. We’d agree that starting any business can be a struggle for the first couple of years, and, yes, regulated businesses have added complexity. Losing a salary also isn’t an option for most and this enormous hurdle often stands in the way of many would be entrepreneur. However, there is a middle ground between being entirely self-employed or part of a network and being an employee with no long term incentives. There are a myriad of outstanding boutique wealth managers, with board capability to work with even the most complex clients, who have great salary, bonus, and equity remuneration packages. The key thing is finding one that is right for you, where you share the same culture and values as the senior leadership team, and one that has a plan for growth. Getting this right could bring forward the retirement of many in the wealth management industry, it could provide them with greater flexibility, and many will achieve something they’ve always wanted – ownership.