NatWest has become the latest bank to acquire a wealth manager, after competitor Lloyds Banking Group fully acquired Schroders Personal Wealth last year.

The acquisition of Evelyn Partners was confirmed last week following a report by the Financial Times in August of a potential deal.

The sale is expected to complete this summer and bring further diversification of income for NatWest by increasing fee income, according to the bank, as well as increase its exposure to what it describes as a high-growth, capital-light segment.

“I think banks are starting to realise they need to go back to giving advice, in order to generate an additional revenue stream, and to de-risk the economics of their legacy models,” says Emiko Caerlewy-Smith, a partner at consulting firm Elixirr.

“The Evelyn deal gives . . . immediate market exposure to the hugely underserved, emerging high-net-worth and mass affluent segments, and at a pretty big scale.

“I don’t know if it’s the beginning of a trend, but I do think it’s highlighting the risks that the legacy banking model has.”

Evelyn Partners is being sold by Warburg Pincus and Permira, having been private equity-owned since 2014. According to the latter, Evelyn Partners’ assets under management increased from around £5bn to £69bn under its majority ownership.

Combined with the £59bn AUM and administration of NatWest’s existing private banking and wealth management business, the acquisition will lead to NatWest overseeing more than £127bn.

The sale is the latest in a series of transactions for Evelyn Partners, which sold its employee benefits consultancy, professional services and fund solutions businesses over the past two years.

Why banks are buying wealth managers

NatWest’s acquisition of Evelyn Partners comes four months after Lloyds Banking Group bought Schroders out of Schroders Personal Wealth, a wealth management and advice business that was launched as a joint venture in 2019.

Soon rebranding to Lloyds Wealth, in October the banking group said the acquisition supported its ambition to deliver an end-to-end wealth offering to include execution-only share dealing, self-select digital investment and pension propositions, financial planning and advice.

“Banks are constantly seeking ways to serve their customers,” says Simon Kent, a partner at consulting firm Kearney.

“In the UK, the demographics are such that many require professional advice on how best to make smart decisions both at and in retirement. The current regulatory regime has not delivered the outcome hoped for, with advice being largely unaffordable or uneconomic to provide.

“Banks enjoy vast customer numbers and a great depth of data, which makes them an ideal provider of financial advice.”

Caerlewy-Smith from Elixirr says traditional banks are also starting to recognise the risks in the long-term viability of their business models.

“We’ve seen rate cycles are now more pronounced, they’re more unpredictable,” she says. “The traditional way that banks make money — the tie to the volatility in interest rates, and the unpredictability in interest rates — is starting to bite.

“I think they’re seeing a lot of competition from neobanks,” she adds. “That competition is exaggerated by the fact that these big traditional banks have got some legacy technology and data challenges to overcome . . . and [with] the cost of regulation ever-increasing, I think it’s becoming more expensive to be a retail-focused bank, and or even a private bank without an additional line of revenue.”

An ageing population is another reason for the interest in wealth management from banks, and could also attract insurers and pension firms, Caerlewy-Smith says.

“There’s an ageing population that requires more and more wealth advice, just like we’re going to see more pensions go into drawdown.

“If those pension assets go into drawdown, then they risk leaving the pension accumulation vehicles they’ve been in. And so what [can] those pension providers do? They [can] create a wealth management capability, so they can continue to manage assets in drawdown and post-drawdown.

“So I think insurers and pension firms are a place that we might start to see picking up wealth management businesses.”

Permira’s exit to NatWest marks the culmination of a 12-year investment in Evelyn Partners. According to the investor, the £2.7bn sale is the largest ever private equity-backed wealth management exit in the UK.

“Private equity firms have always been attracted to capital-light, cash-generative businesses, and wealth advisory is a prime example,” says Kent from Kearney.

“Over the next four years there will be a string of exits, as private equity looks to realise value from the roll-up of small adviser [firms]. Banks will see this as an opportunity to enhance existing capability and position for the new regulatory rules.

“The government would like to see the movement of money from cash into stocks to support their growth agenda. Banks need to find new sources of income as the interest cycle shifts. Private equity is looking to realise value. All these factors point to this just being the beginning of a wave of deals.”

But it is not just private equity investors that have been selling. In August for example, Aberdeen sold its financial planning business to Ascot Lloyd, the national financial advice and planning firm.

Nevertheless, Caerlewy-Smith says she thinks there will probably still be asset managers that buy wealth managers as distribution channels.

“But it comes with a lot of regulatory responsibility and risk,” she adds. “So I’m not sure whether we’ll see asset managers buying up wealth managers as quickly as maybe banks or pension providers, which have a better regulatory consumer side to their framework.”

While banks such as NatWest and Lloyds have demonstrated their interest, sales of financial planning and wealth management divisions by companies such as Aberdeen indicate that advice firms are a better fit for some business models than others.

Source link