The wealth management sector in the UK saw a strong surge in profits in 2005 as well as a healthy flow of net new money into wealth managers...

The wealth management sector in the UK saw a strong surge in profits in 2005 as well as a healthy flow of net new money into wealth managers, but performance is still very much dependent on stock market levels, according to a report from ComPeer, a London-based financial consultancy.

ComPeer’s research contained in its annual UK Wealth Management Industry Report found that assets under management in the wealth management sector in the UK were up 17 per cent in 2005 to £308 billion ($565.3 billion) in 2005, with net new money flows coming in at £8.6 billion.

The report also said profit was up 74 per cent for the sector last year.

Nevertheless, ComPeer said performance continues to be very dependent on market levels and an average profit margin of 16 per cent does not provide much protection against less favourable stock markets.

The report noted other areas of concern for the sector as well: the level of direct participation by clients in the UK equity market is decreasing; and the affluent client is the least well served but potentially most profitable sector of the market.

ComPeer’s research found that in contrast with the bull market of the late nineties, the last three years of strong stock market growth have not seen private clients returning to equity investment.

The proportion of sold trades has increased, suggesting that clients have taken the opportunity of increased market levels to take profits and sell. It is estimated that £14.6 billion has been taken out of UK equities by private clients during the last three years, mainly be self directed investors.

“Firstly, clients are spending money. Secondly, active traders are moving to CFDs (contracts for difference) and spreadbetting,” said Richard Bethell, a partner at ComPeer.

“These provide a lower cost way of accessing and managing market exposure, particularly given their favourable tax treatment compared to direct equity investment. And thirdly, clients are clearly still wary of equity investment after the dotcom bubble. The sale of UK plc has flushed out a large number of small investors who are not returning to the market, their money remaining in cash.”

ComPeer added that although trading volumes increased strongly in the first quarter of 2006, they fell back during the more volatile markets of the last six weeks.

The report also highlighted the growing importance of the affluent client in turns of profitability, which, according to ComPeer, is least well served.

“Increasingly, wealth managers are targeting the higher net worth client in the UK,” said Alison Malton, chief executive of ComPeer.

“However, the affluent investor is a much bigger market and less well served. Our analysis shows that they are less price sensitive than the higher net worth client and services can be provided on a cost effective basis with good product design. The key to attracting clients in this market is strong distribution, clear marketing strategies and simple, quality products. A number of smaller regional and London-based firms are now growing very strongly by targeting this segment.”