Consolidation
Lessons from the institutional world
The UK wealth management sector is expected to represent £2.5tn of assets by the end of 2025, across c.5,500 organisations. But as wealth firms continue to scale up through M&A, are there any lessons to be learned from the institutional world?
Institutional investors across insurance, pension funds, endowments and sovereign wealth have been managing fast growing, large asset pools for decades (centuries in some cases).
In the UK at least, assets under management range from the low billions right up to hundreds of billions. Sovereign wealth funds can be particularly chunky – in fact, Norges Bank in Norway is larger than the entire UK wealth management sector.
These large asset pools bring a few key benefits:
Lower costs: Driven mainly by economies of scale. Cost reductions include the obvious – such as management fees - but also more opaque ones relating to trading, tax efficiency and administration.
Improved outcomes: Through their ability to access a wider range of investment opportunities, particularly in alternatives and private markets.
Reduced risk: Because a more robust governance set up can be justified. This increases oversight and due diligence input.
Are there any lessons to be learned from the institutional world?
In and of itself, having more assets doesn’t automatically bring about lower costs, outcome improvements and reduced risk. All of this comes through deliberate evolution of teams, structures and processes as scale is built. In our experience, for institutional investors between £1bn and £20bn, there are a few features the most successful investment teams share:
A lean team with reliance on “fill the gap” expertise: The core portfolio needs are handled by the internal team, who can flexibly call on specialists where needed. Alternatively, we sometimes see teams focussing on the new investment ideas and research, whilst external support provides oversight and monitoring of the existing portfolio.
Outsourcing: Nearly $5tn of institutional assets are managed by Outsourced Chief Investment Officers (OCIOs) and this is expected to keep growing at 7-8% a year. There is a lot to be said for being able to tap into deeper resources than the internal team can support, as well as transferring responsibility for idea generation, oversight and execution.
U.S. Outsourced Chief Investment Officer (OCIO) Market Outlook
How Big Is OCIO Market? At Least $4.79T, per Chestnut Advisory
A smaller number of large, strategic partnerships with asset managers: Reducing the portfolio line items has many quantifiable benefits - from economies of scale that drive fees down and the flexibility to create segregated account with customisable features, right through to reduced risk of overdiversification.
They sweat the small stuff: When investing at scale, and all the basics are covered, investors can save meaningful sums through optimising tax structures and trading approaches. Selection of an execution platform is an important consideration that could provide significant savings in transaction costs. That results in additional performance vs your peers, going directly into the hands of end-beneficiaries.
