Britain’s big banks are usually the targets of market disrupters, rather than the ones doing the disrupting. But with the sector finally on the hunt for new areas of growth after years of restructuring and regulatory issues, companies in the financial advice and wealth management sector are gearing up for a fight.
Most UK banks pulled out of providing financial advice to all but the most affluent customers after regulatory changes that came into force at the end of 2012 made it a more costly and risky business. Their retreat was a boon for specialists such as St James’s Place, Brewin Dolphin and Hargreaves Lansdown. Shares in Hargreaves have increased more than 200 per cent since 2013; the FTSE UK Banks index has declined over the same period.
Now, however, the banks are making plans to return.
“We should have been slugging it out with people like Hargreaves Lansdown for the last decade”, an executive at one of the big five banks said.
Santander was the first group to re-enter investment advice as early as 2016, but activity has sped up in recent months. Most notably, Lloyds made expanding its insurance and wealth management business a key pillar of its latest three-year plan, while Royal Bank of Scotland became the first UK bank to launch an automated investment advice service late last year. US group Citi, meanwhile, has put wealth management at the centre of its new UK strategy.
Salman Haider, head of Citi’s UK consumer banking business, said advice would become an increasingly important way for banks to differentiate themselves as technology make basic services easier to provide.
“From day one, engagement is a big play, because everything else is becoming increasingly commoditised,” he said. “We can add transaction banking capabilities on top of that, but a multi-currency debit card isn’t a hook on its own any more — customers expect that now.”
Banks are hoping that a combination of new tech and established networks will give them an edge over specialist providers, allowing them to take advantage of their more thorough data on existing customers’ finances and make more efficient use of branches as customers do more of their day-to-day banking online.
Antonio Lorenzo, Lloyds director of insurance and wealth, told investors earlier this year that “no one else in the market has the access that we have . . . we will have access to all intermediaries in the market at the same time that we will have access to the number one branch and retail banking network in the country and the number one digital bank”.
Specialist advisers have acknowledged the potential threat to their businesses. Andy Thompson, chief executive of Quilter’s financial planning business Intrinsic, said: “the impact of high street banks offering financial advice should not be underestimated. Not only will they be able to reach parts of the population other firms can’t, they will also bring more people into the profession and that in turn will also close the gap.”
An executive at another wealth manager said: “The banks will have a bigger and stronger brand than us. Everyone’s heard of HSBC but not everyone has heard of us.”
However, executives also stressed that there was space for banks to expand in some areas without putting much pressure on incumbents. Andrew Croft chief executive of St James’s Place, said “the people who are missing out on advice at the moment are the mass market”, people with investable wealth of less than £50,000. “Below that are people struggling to find advice and those are the mass market, which we wouldn’t tend to deal with as much”, he said.
Chasing the richer “mass affluent” market, in contrast, would take more investment and qualified staff, and several senior industry figures suggested banks may struggle to attract the staff required to provide more tailored wealth management services having let thousands of people go in the past.
“I can’t imagine any existing IFA [independent financial adviser] or St James’s Place partner would rock up and join Barclays,” said one executive.
Despite the potential costs, however, banks have not limited themselves to “mass market” online products. Lloyds already provides financial planning and advice through IFAs and its private banking business, and said it was “exploring how best to support our retail banking customers with their financial planning and investment needs in branch”. Citi, meanwhile, is explicitly targeting customers with a minimum of £150,000 in savings.
Mr Haider agreed that “it takes a lot of investment dollars to re-enter wealth — you can go with automation if you’re only playing in the £30,000 to £50,000 space, but if you want to be just below private banks, that needs effort, time, tech and the right people”.
But he also pointed out that his business has the resources of one of the world’s largest banks behind it. “There are not many places in Citigroup where you get to feel like an underdog or entrant challenger.”