The dash for cash

Wealth management provides an obvious opportunity as an ageing population grows more prosperous. AIB is not alone in targeting the wealthy, typically defined as those with at least €250,000 available to invest and a net worth of more than €1m. Stockbroker Davy confirmed its position as Ireland’s largest wealth manager last week by acquiring part of Danske Bank’s wealth management business in Northern Ireland.

Other wealth managers are in expansion mode too. Last month stockbroker Cantor Fitzgerald acquired L&P Group, a firm that specialises in advising religious orders and charities. Bank of Ireland Private Banking has bought Covestone Asset Management, whose origins lie in managing the wealth of the Roche family, founders of the CRH building materials group.

Brian McKiernan, the Davy chief executive, predicts more consolidation, with smaller players squeezed out of the business by the need to invest heavily in better investment advice and the growing burden of regulation. “We see continuing opportunities for appropriate bolt-on acquisitions,” he said.

Technology is another driving force, with substantial investment required. “The pace of consolidation has been slower than expected, but the bigger players who can afford the scale of investment required in technology will continue buying books of business,” said Seán Ó Murchú, a former managing director of Bank of Ireland Private Banking and now head of its life division.

Wealth management has been in a state of flux since the crash wiped out the fortunes of many clients. Apart from severe retrenchment at AIB, and the collapse of industry kingpin Anglo Irish Bank, Ulster Bank exited wealth management in 2011.

Foreign players have tried to fill the vacuum, with varying degrees of success. Brewin Dolphin and Smith & Williamson teamed up with local Irish firms, and Quilter Cheviot set up a greenfield operation in 2003, but HSBC and Merrill Lynch abandoned the sector following unsuccessful attempts to go it alone.

“There were 16 Irish stockbrokers when I started in this business of which only three remain: Davy, Goodbody and Campbell O’Connor,” said one wealth manager. “The others have been bought or replaced by boutique wealth managers. The industry has changed rather than consolidated. Firms that stuck with an old business model have died.”

While some of the wealth destroyed by the crash has been restored in the recovery, much of the growth is simply money being recycled from within the broader financial sector.

Davy is the undisputed industry leader with more than €14bn under management

JULIEN BEHAL/PA WIRE

Some money is being switched out of insurance-based funds as technology disrupts their traditional dominance of retail investing. Stockbrokers offer a bespoke alternative at a cost similar to what insurance companies charge for a generic fund. This trend is facilitated by a tax system that discriminates against the insurance sector by imposing a 1% levy on the funds it sells.

Pensions are another source of recycled funds, especially as former staff take advantage of generous transfer values offered by many companies with defined benefit schemes, to encourage them to give up their entitlement to a guaranteed income in retirement.

With more than €14bn under management, Davy is the undisputed industry leader, accounting for up to half of the market. This includes an estimated €1bn invested through Davy Select, an online funds supermarket developed for its clients and those of independent advisers. While some see the platform as a potential Trojan horse for poaching business from independent firms, about 400 advisers have signed up for Davy Select, white-labelling the service as their own.

Goodbody manages an estimated €5.25bn; Investec, Brewin Dolphin and Bank of Ireland Private Banking are believed to be the other wealth managers with more than €1bn on their books.

Wealth management provides a useful bedrock for stockbroking firms, whose other earnings can be highly volatile. “The beauty of a private clients’ business is that the money should stay with you from year to year, generating a steady percentage of the funds under management,” said Paul McCarville of Clarus Investment Solutions, an adviser. “It’s a predictable stream of income compared with institutional clients, where you’re paid on a transactional basis.”

Private clients are estimated to account for about half of earnings at Davy, picking up the slack after traditional institutional share and bond trading slowed down.

The sector still lives in the shadow of the failure six years ago of Custom House Capital, which misappropriated €66m of client funds. The Central Bank of Ireland has stepped up oversight of the sector, focusing on firms regulated under the EU’s markets in financial instruments directive (Mifid), which allows wide discretion on managing clients’ money.

“The Central Bank of Ireland sees smaller Mifid firms as more risky — at least that’s how it’s perceived in the sector,” said McCarville. “It requires them to have a large layer of compliance, which changes the economics of the business for smaller firms.”

The burden of regulation may yet be the ultimate driver of consolidation within a fragmented sector.

Clients will still expect the dream combination of good returns and minimal risk. Those who invested in AIB have no cause for complaint — yet. With shares trading above €5 last week, the average shareholder is sitting on a profit of more than €6,000.

PROPERTY OBSESSION MAKES LIFE TOUGH FOR ADVISERS
Davy faced a dilemma in 2013. With only £120m (€137m) under management, the office it opened in Belfast in 2007 was considered sub-scale. The options were to close the office or grow through acquisitions. Following a strategic review, the stockbroker chose the latter.

Over the next four years, Davy bought four businesses: Square Seven Financial Planning; Graham Corry Cheevers; Pension & Financial Consultants; and, in a deal confirmed last week, the discretionary portfolio management business of Danske Bank.

These deals have propelled Davy’s assets under management in Northern Ireland to £1.75bn, giving it a business north of the border that dwarfs those of many of its competitors in the Republic.

Stockbroking is an easier sell in Belfast than in Dublin, according to Stephen Felle, Davy’s chief executive in the UK.

“There’s a greater awareness of equities in Northern Ireland and not the same obsession with property as an asset class,” he said.

“It makes it easier to present our offering.”

Despite the crash, there is no evidence that the Republic’s rich have reconsidered their investment preferences.

“The utter fascination with property continues unabated,” said Paul McCarville of Clarus Investment Solutions.

“Investors have been well rewarded [since the crash] although the level of gearing [and returns] have been lower than in the past.”

Even the well-heeled take a myopic approach to investing, according to Rory Gillen of GillenMarkets, an investment adviser.

“People gravitate towards what they know, which for many means property,” he said.

“Everyone is more cautious than in the past, but this doesn’t mean they have a greater understanding of what they are investing in.”

A long-running debate about how wealth managers charge for their services rumbles on, although it is unlikely that the commission structures that dominate the sector will be curtailed.

Commission creates an obvious conflict of interest, because it means advisers are paid only when they make a sale.
Yet the Central Bank of Ireland is reluctant to intervene, claiming a ban on commissions would be too much of a shock.

Gillen sees this as a retrograde step. “While the regulatory regime is getting very onerous, the Central Bank won’t deal with an incentive structure that’s inherently biased.”