UK wealth managers fear that regulations aimed at protecting clients could lead some advisors to excessively shun risks, thereby hitting potential returns, while red tape may also make advice increasingly unaffordable, a KPMG report says.

UK
wealth managers fear that regulations aimed at protecting clients could lead
some advisors to excessively shun risks, thereby hitting potential returns,
while red tape may also make advice increasingly unaffordable, a KPMG report on the UK sector
says.

The report, UK Wealth Management at the Tipping Point?
argues that there is increased evidence that affluent clients are taking their
own direct investment decisions without advice, and individuals now also have
more bargaining power with advisors in the past. Such forces are putting
advisors’ margins under pressure.

“Clients are also becoming more rigorous in their dealings
with wealth managers, more curious about the robustness of institutions holding
their money and more sceptical about investing in institutions’ own products,”
the report says.

The findings were drawn from a mixture of quantitative and
qualitative surveys by KPMG, including comments taken from 41 chief executives
in the UK wealth management industry (accounting for about two-thirds of the UK
sector by assets under management); it also polled more than 300 ultra high net
worth and HNW clients, as well as analysing KPMG data and information from
Compeer, the research firm, and other third parties.

Dangers of over-regulation

“At a time when the economy and government need people to
be building retirement pots, many everyday investors are being steered towards
lower risk investments or are shunning financial advice altogether,” said Tom
Brown, European head of investment management at KPMG.

“Whilst lower risk strategies will be appropriate for many
clients, particularly those at, or near retirement, there will be clients who
are at a stage of life when they could be taking more risk with some of their
investments, to improve longer term rewards and meet their retirement
aspirations.  The long term policy impact
on 2030 retirees, who are now in their 40s and should be building their
long-term savings, could be significant,” Brown said.

“Our research found that many financial advisers fear being
punished by the regulator for misselling riskier products. As a result they may
be over-cautious and inadvertently provide the wrong advice to some
investors.  An appropriate and
well-managed level of risk is essential to all long term investment strategies,
as the typical investor wants the chance of a better rate of return on their
investment portfolio than they could get from their regular savings account,”
he continued.

Do it yourself

The report also discusses how the rising cost of financial
advice is encouraging younger investors in particular to shun professional
advice and manage their own portfolios, which is not always necessarily in
their best interests, KPMG said.

The number of portfolios in a range from £250,000 ($387,219)
to £1 million on execution-only stockbroker platforms increased by 122 per cent
from 2008 to 2010; portfolios of £1 million to £10 million increased by 73 per
cent over that period.

The report highlighted significant cost pressures facing the
industry, with KPMG predicting that increasing costs could discourage new
entrants and force some firms to exit the sector.

Data on full-service stockbrokers shows that for a portfolio
with an average size of less than £100,000, fees per £1 million in AuM fell 15
per cent from 2009-2010; for portfolios of between £100,000 to £250,000, fees fell
by 16 per cent and for portfolios of £250,000 to £500,000, it fell 12 per cent.
For investment managers, meanwhile, some of the declines in revenues have been
even sharper. For example, among managers, where an average portfolio size was
more than £2.5 million, revenues as share of AuM slumped by 39 per cent between
2009 and 2010.

“Since 2008 - for the first time in 20 years - costs are
rising faster than revenues and we predict that if revenues fall by another 15
per cent, close to one third of wealth managers will be making a loss. As
profitability is challenged, it is inevitable that businesses will be passing
on some additional costs to clients, which will unfortunately further
discourage investors from getting financial advice,” Brown said.