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Wealth manager Brooks Macdonald firing on all cylinders

The wealth manager's performance reflects a change in regulation and a tectonic shift in the way we save
Wealth manager Brooks Macdonald firing on all cylinders
In focus: Regulation and the we save for retirement have helped the wealth manager.

The wealth manager Brooks Macdonald (LON:BRK), whose shares are up 25% in the year to date, is firing on all cylinders.

Funds under management rose by an industry-leading 13%, and underlying profits grew by the same figure, while the dividend increased 17%, last month’s full-year results statement revealed.

The performance reflects a change in regulation and a tectonic shift in the way we save. The two have combined to create a supportive environment for wealth managers such as BM.

Let me explain what I mean. The retail distribution review (RDR) enacted two years ago, the Chancellor’s recent pension reforms and EU edicts contained in MIFID II, when they are introduced in 2017, have changed, or will change, the face of the long term savings industry.

The RDR has had by far the biggest impact thus far.

Much has been said about the eradication of commissions and the introduction of paid for counselling from independent financial advisers, but there have also been some more subtle changes in behaviour.

Advisers who once managed client funds are now looking at specialists to do that for them.

“Suitability is the word de jour,” Brooks Macdonald's deputy chief executive Andrew Shepherd told Proactive Investors.

“The adviser finds the most suitable investment solution for the client and then they pass it to us and say, ‘this is what’s right for the client, now you manage it to those objectives’.”

BM has relationships with 775 advisers, but is targeting a wider grouping of around 2,100 out of a total population of 14,000.

Shepherd expects “strong asset flows” to be created by pension reforms that make the individual rather than the state responsible for retirement savings.

“For years, individuals have been mollycoddled by either our own companies that have provided final salary schemes, or by the government,” he explained.

“That is just not the case anymore; there are no new final salary schemes and the government is clear you have to look after yourself in retirement.

“My belief is people understand that and are ready to take responsibility for their own situation.

“The person who will help them through this is an adviser.

“So then it is a case of which type of advisers are going to win the war for this money. And actually I think all types, direct to client, one-stop-shops and professional advisers, will win – the opportunity is so big.”

The trend towards self-invested personal pensions (SIPP) that carry significant tax breaks should play to BM’s strengths.

As well as doing well on home turf, the company is starting to enjoy its first successes overseas.

It is targeting markets that are likely to see reforms similar to RDR; so South Africa, Singapore and Dubai are top of the list.

After obtaining a licence to operate in South Africa in June, it has moved quickly, winning a mandate worth £26mln (US$40mln) to run half of all South Africa-based Personal Trust International’s offshore portfolio. 

BM also has an estates arm based around a firm it bought in 2010 called Braemar.

“We acquired a great little business that was nicely diversified from what we do in investment management, but still part of the wealth management piece,” said Shepherd.

“The other part was a funds business and we didn’t have a funds business. That gave us additional expertise we didn’t have.”

That funds business Shepherd talks about now has £660mln under management.

Given the prospects for BM it is little wonder Shepherd says there is only a slim chance of making acquisitions.

Valuation is also an issue. Firms in BM’s sector are traditionally worth around 3% of funds under management yet it is being offered deals at 4-5%.

“We just can’t make the numbers work at that sort of level,” said Shepherd.

“You want them [deals] to be profit-enhancing and FUM [funds under management] enhancing. Organic growth is better value.”

Indeed, Brooks Macdonald has been doing very well under its own steam.

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