Price pressure in the UK wealth management market continues to intensify. LGIM’s launch of a model portfolio service (MPS) at 5bps last week sets a new benchmark for low-cost portfolio management. MPS providers who charge 30bps or more are starting to look very pricey, while the LGIM launch highlights the growing chasm between the cost of models and fully bespoke portfolio management.

This pressure creates a conundrum for wealth managers – more distribution via third-party advisers, or focus on their own private client business?

The growth of wealth managers’ own private client business has been relatively anaemic in recent years. Most private client books rely on referrals for growth, both from professionals and existing clients. These have become harder to come by in recent years. Accountants and solicitors have become more reluctant to refer clients. And where they do refer clients, it’s often to financial advisers instead. COVID-19 has also hit referrals from existing clients – how much AUM was left un-gathered in 2020 thanks to the closure of golf courses?

Conversely, the distribution of wealth management services via financial advisers is booming. Financial advisers have increasingly focused on financial planning, outsourcing portfolio management to wealth managers. AUM in platform-distributed model portfolios grew by 25% in 2020, according to our UK Wealth Management: Market Overview report, published this week. Model portfolios managed off-platform grew even faster, at 40%, although from a lower base.

But the financial adviser market is tough. Financial advisers see it as their job to squeeze the costs their clients pay, to help justify their own fees. So wealth managers will need to build substantial scale to reap profits in this market. And the competition is set to intensify as even more wealth managers look at distribution through financial advisers.

More information on our UK Wealth Management: Market Overview report is available on our website.