DIY Investors set to benefit from economies of scale? Banks returning to financial advice

As people become increasingly engaged in their finances in the face of an uncertain future there has been increasing activity as wealth managers, online brokers, fund supermarkets and even retail banks duke it out for a bigger share of the growing UK market for financial advice.

It was recently announced that the acquisitive DIY investment platform Interactive Investor had bought smaller rival Alliance Trust Savings (ATS) in a £40m deal that could result in lower prices for ATS customers.

Interactive Investor is currently the second-largest fund supermarket in the UK behind Bristolian behemoth Hargreaves Lansdown; over the past two years it has grown its assets under management (AUM) tenfold after a series of acquisitions including TD Direct Investing and Trustnet Direct. Interactive Investor was a relatively minor player before its deal with TD Direct Investor added £14.5bn AUM, making it the second-largest platform in the UK

‘it has grown its assets under management (AUM) tenfold after a series of acquisitions’

Its purchase of smaller rival ATS will swell the company by 110,000 DIY investors, adding £16bn in AUM and is further evidence that investment platforms and wealth managers are seeking scale in a market facing downward pressure on prices and more burdensome regulation.

Alliance Trust put ATS, which had struggled with the integration of Stocktrade, which it bought in 2015, up for sale when it decided to focus on its global equity portfolio; the platform suffered a £13.2m exceptional charge due to the write-down in the intangible value of the Stocktrade business and posted a £19.3m loss in 2016, although it returned to profit this year

With margins thin and competition increasing from wealth managers, fund supermarkets and the new breed of digital wealth managers – robo advisors – Interactive Investor has Hargreaves Lansdown in its cross hairs which could be good news for investors.

Hargreaves has 40% market share in the DIY investment market with more than one million customers and £90bn AUM; Interactive Investor will now cement its position at number two in the market with 300,000 investors and £35bn invested.

In a market that still struggles to deliver on the Financial Conduct Authority’s quest for fee transparency, Interactive and ATS customers have been used to a reasonably similar flat fee structure.

In time ATS could see their fees come down if they move to Interactive’s tariff of £90 per year compared with the £120 annual fee paid by ATS customers; transferring customers will also have access to a wider range of investments, particularly shares traded on international exchanges.

The ATS fee includes four online trades a year, and £9.99 per trade thereafter to buy and sell funds and stocks and shares; regular investments via a direct debit are charges at £1.50 per trade; Interactive Investor customers can earn back their annual management fee in dealing credits and its additional charges are similar to ATS at £10 on buy and sell deals up to £100,000, with regular investments at £1.

Holly Mackay, of consultancy Boring Money, said the deal would be good for ATS customers.

‘Alliance Trust Savings has been starved of investment for the last few years and everyone knew a sale was on the cards.’ she said. ‘It’s been a fairly bare bones proposition in that time so my sense is that for most customers it will be cheaper and they will benefit from investing in a business that is growing, so that’s quite a few boxes ticked.’

Meanwhile, on the high street Lloyds Bank has announced a new partnership with asset manager Schroders in its bid to build up its financial planning business; retail banks largely retreated from offering advice after the financial crisis

The new joint venture will offer financial planning and investment services to wealthy ; Schroders will look after £80bn worth of investments formerly managed by Standard Life Aberdeen.

Lloyds and Schroders will also enter into a joint venture to ‘address the growing gap in the advice market through a personalised, advice-led proposition’ for affluent customers.

But Lloyds also said it was working with Schroders potentially to offer ‘investment propositions and advice for Lloyds’ retail customers’, for which Schroders would provide active asset management services; in 2014 Schroders became one of the high profile backers on UK robo advice trailblazer Nutmeg.

Lloyds was one of many high street lenders that moved away from offering financial advice but many are now being lured back by growing demand for financial planning and investment advice.

The banks tentatively began offering automated investment services to their customers online rather than face-to-face advice via a range of strategic partners and acquisitions, an example was  Royal Bank of Scotland, which launched an automated investment advice service late last year. See more activity at Muckle.

The lure of a potentially lucrative pool of pensioners has led to a number of banks looking to re-enter the market in recent months with Santander restarting branch-based investment advice in 2016, offering personalised advice including tax planning and discretionary wealth management as well as investment funds to smaller savers.

Santander has become the latest high-street bank to offer robo advice, by delivering a ‘Digital Investment Adviser’ targeting first-time investors – more.

The bank’s research found there are 1.8 million first-time investors with an average of £247 per month spare cash they can invest, and that is the target of this new service.