Jury still out as venture tries to win over the hearts of advisers
One of the most closely watched soap operas in UK financial services this year peaked last month, when banking giant Lloyds revealed who will get to manage a mega £109bn mandate that was up for grabs.
Shortly after Lloyds announced that it had assigned BlackRock to oversee £30bn of the assets, it made another big call: Schroders will not just manage the other £80bn, but will enter into a new “strategic partnership” with the bank.
The companies will join forces to create a financial advice joint venture, which aims to put them among the “top three UK financial planning businesses within five years”.
Lloyds will own 50.1 per cent and Schroders 49.9 per cent of the JV, which is set to go live by the middle of next year.
The ambitious plans have raised eyebrows among advisers.
Both Lloyds and Schroders declined to provide us with any more details than what was in the announcement, saying it was too early to know further arrangements.
What details we do know from the stock exchange briefing, however, have led to a vigorous debate as to whether the firms are on course to create the next advice market superpower.
The big bad banks are back
Panacea Adviser director Derek Bradley says he has seen a number of negative comments from advisers wary of the return of the big banks to financial advice.
He says: “We have seen it so often before after the various misselling scandals over the past three decades that has seen them pull out, re-enter, pull out, re-enter and so on.”
Alan Steel Asset Management’s Alan Steel cites his 45 years’ worth of experience in the financial advice profession as the reason behind his scepticism.
“They have all been pretty disastrous,” he says, looking back at some of the scandals in which partnering between banks and wealth management has gone wrong.
“I wouldn’t be surprised if [the Lloyds and Schroders JV] was said to be a failure in two or three years’ time.”
Others, however, see the potential in a bank-advice alliance.
IFS Wealth and Pensions director Alan Chan says: “I definitely think it is a good idea for the bank. There are many people who certainly need basic advice, and banks are very well positioned for that.
“They have branches, they have the numbers of staff that will do that, but not for the wealthy; that market is really quite saturated.”
The companies’ announcement that they are seeking to “address the growing gap in the advice market” through the partnership certainly piqued the industry’s interest too.
The term “advice gap” is used to refer to people who cannot or will not pay for full regulated advice.
Lloyds’ “high net worth customers”, who the companies are also looking to target with their JV, hardly fit the bill.
Chan says: “I wasn’t too convinced when they said that the whole point of that partnership was to close an advice gap for the wealthy. There certainly isn’t any advice gap for the wealthy, it is very well catered for by wealth managers and IFAs, so it baffled me, the reason behind it.”
The bank and asset manager combination could have the tools to help close the actual advice gap, however.
Chan says: “I think there is a space for banks to enter financial advice, because there are lots of underserved individuals who might need some basic financial advice, and obviously it is not commercially viable for IFAs or wealth managers to deal with them.”
Similarly, Bradley sees the arrangement as an opportunity to take advantage of economies of scale.
Bradley says: “The adviser community simply does not have the capacity to deliver advice to the masses in volume and in this situation, big businesses like these who traditionally have depended to a great extent upon intermediated distribution need to find other ways to get their product to the market.”
Bradley says that both firms’ “brand strength, financial and technology resources available” will make their tandem “a big player”.
Director, Shore Financial Planning
I think it’s an interesting deal and, if they get it right, probably a decent challenger to SJP.
I wouldn’t be concerned if I were a client as the investment side is moving to Schroders which is an excellent investment house. So from that point of view it’s good news for investors, with better investment management, hopefully leading to better long-term outcomes.
What is always a concern is when clients are migrated over to a new platform. It’s never as easy or as simple as expected – I don’t have any experience of Schroders’ Benchmark Capital adviser platform technology to be honest, but just look at Cofunds.
From Schroders’ perspective it is an interesting move and adds to Cazenove and its stake in Nutmeg. No one knows where the industry is going, but Schroders has a foot in many camps now so is well-positioned.
The digital mission
When Lloyds announced its three-year strategy plan back in February, the bank trailed that it would seek to boost its financial planning and retirement business.
By teaming up with Schroders, it does exactly that. But with the partnership, Lloyds is also working to fulfil another goal outlined in the strategy review: digitisation.
Apart from its asset management experience, Schroders also brings some technology potential to the table. In the companies’ stock exchange statement, Schroders group chief executive Peter Harrison praised Schroders’ “award-winning technology” which would sit alongside Lloyds’ “significant digital capabilities”.
Much of the financial planning technology at Schroders’ disposal is enabled by Benchmark Capital, the advice and technology company in which Schroders bought a 65 per cent stake in 2016. Benchmark includes adviser network Best Practice, IFA Aspect8, network and financial planning firm Evolution Wealth, and platform Fusion Wealth.
The Benchmark buyout has boosted Schroders’ revenues and, according to the company’s latest half-yearly results, Benchmark’s various businesses contributed £700m to the company’s overall £1.2bn net inflows.
Syndaxi director Robert Reid, whose firm has used Benchmark technology with its advisers for years, says he welcomed the move when Schroders became the majority shareholder in the adviser support company.
Reid says the deal “enabled them to speed up some changes on the platform”.
He sees Schroders’ latest deal as another positive for Benchmark, which takes on another new partner with significant resources.
Reid says: “I would rather have a platform that is fully resolved financially than one that suddenly crashes, because replatforming and moving assets is a tedious process and takes a long time to do.”
The partnership is basically a marriage of Lloyds’ distribution and network capabilities with Schroders’ management expertise. In theory, both are bringing what they are good at to the table.
The one thing I would flag is that a fair amount of money is held in funds with Lloyds (some of which now will cross over to Schroders), that are only partially active (known as closet trackers) and that were set up a long time ago. At the time, they were generally available across the market. But nowadays they have been surpassed by a) more active vehicles and b) cheaper passive vehicles. They are stuck somewhere in the middle. People need to review that there are better options now available. That has been the case for years. It wasn’t prompted by this partnership – if anything, the new focus on the partnership may freshen up the approach to these funds.
Lloyds has pretty ambitious targets in terms of its push into financial planning and retirement. It’s targeting one million new pension clients in the next few years. It will have to push to get there, because the government’s auto-enrolment programme has largely made the movements in the industry.
From Lloyds’ perspective it makes sense to team up with investment specialists, as it had fallen at odds with Aberdeen, which had formerly managed a large chunk of assets for Lloyds, until Aberdeen merged with Standard Life, a competitor of Lloyds’ Scottish Widows proposition. Lloyds is pushing into the financial planning/retirement space because it diversifies the income stream away from core banking activities such as credit cards, mortgages and savings.
Laith Khalaf is senior analyst at Hargreaves Lansdown
A call to arms
By looking to become one of the top three UK financial planning businesses, the Lloyds and Schroders JV has tasked itself to form a 3,000 adviser-strong business to compete with the size of St James’s Place and Openwork currently.
In its partnership statement, Lloyds said it would transfer associated advisers from its existing wealth management business to the JV.
The companies also disclosed that “a referral agreement will be set in place to enable Lloyds’ customers to benefit from this enhanced proposition” as part of the arrangement.
They did not, however, provide any further information on how they will expand its ranks of planners for their JV – which is still yet to be officially named.
One of the ways the power couple could go about attracting such a big number of advisers is through acquisitions.
The JV’s financial advisers could have to operate under a restricted status in some shape or form, which potential acquisition targets would have to bear in mind.
This caused trouble when Standard Life advice business 1825 attempted to buy up some firms and convert them from independent status, with some of the financial planners deciding to exit.
An attempted acquisition of Almary Green by 1825 two years ago prompted some departures from the firm, for example, with the deal eventually falling through as advisers failed to get on board with the shift in status.
Most notably, Fiona Sharp and Stephanie Clark left the firm to set up a new independent practice, Verve Financial Planning.
As part of the deal, Lloyds will also now own a 19.9 per cent stake in Schroders’ discretionary fund manager Cazenove Capital, but it is also unclear at this stage what this arrangement will mean.
Questions may be asked by advisers eyeing up the new firm over what proportion of Lloyds’ products will find their way into Cazenove’s propositions.
Some figures from the financial advice profession that Money Marketing talked to about the partnership expect to see Schroders portfolios filled with Lloyds’ products, but others said they expect Schroders will go about its business of managing assets as usual.
Either way, Lloyds and Schroders made a loud and bold statement last month.
As more details emerge, all eyes in the financial advice profession will be on them and a potentially huge new financial planning challenger in the making.
The market is hoping that the JV will not turn out to be another failed experiment of trying to mix banking and advice, but instead help bring planning to a wider audience.