Last month, Lloyds [LLOY] along with Schroders [SDR] revealed their plans for a new wealth management business that is set to start a price war with major rivals, offering the banks a lifeline as their sector struggles to deal with the impact of global economic uncertainty.
Indeed, getting into wealth management is a key part of Lloyds efforts to grow profits. As part of its mission to protect its margins, the bank is hoping that the venture will grow its assets from £13bn to £25bn over the next five years, equivalent to annual growth of about 14%.
The move has the potential to eventually pit the bank ahead of Barclays [BARC], which may struggle as economic headwinds abound.
In September, Barclays gained 10.1%, while Lloyds grew by 9.1% as the prospect of a no-deal Brexit seemed a little less likely and US-China trade quietened. But Lloyds may be looking at positive long-term gains.
Why the joint venture could be a success
According to the Financial Times, customers who choose the wealth manager will pay fees worth 3.65% of their total investment in their first year, mounds lower than the 7.95% charged by St James’s Place and Brewin Dolphin’s 4.7%. Fees at both St James’s Place and Brewin Dolphin are reported to drop to 2.95% and to 2.7% respectively, after the initial year.
This will put pressure on St James’s Place in particular, which has stirred controversy with its staff incentives that have at times gone on to offer luxury cruises and more. Since news of the Lloyds and Schroders plan broke on 17 September, the share price of St James’s Place has fallen by 7%. In the same period, Brewin Dolphin’s stock has dropped by 1.6%.
Fundscape CEO Bella Caridade-Ferreira points out in an interview with Portfolio Advisor that Lloyds has reason to believe the venture could provide long-term success.
“Lloyds already has a vast army of captive clients so it doesn’t need to spend money finding new clients, it can data mine its own client base to find thousands of clients with significant assets or large pots of money languishing in deposit accounts,” she says.
“Lloyds already has a vast army of captive clients so it doesn’t need to spend money finding new clients, it can data mine its own client base to find thousands of clients with significant assets or large pots of money languishing in deposit accounts” - Fundscape CEO Bella Caridade-Ferreira
SPW’s pricing claims have been met with some scepticism. As wealth management firms have been notoriously quiet about how much they charge, it can be difficult to verify whose claims are correct, but here are some of the criticisms about Lloyds’ new plans.
Firstly, St James’s Place has argued that the figures the new venture has calculated are inaccurate and are a “wholly misleading” misrepresentation of its charges. While the exact figures may be incorrect, analysts do agree that St James’s Place is well-known to be on the pricier side.
Secondly, a string of advisers have dismissed the price war as being “irrelevant”, according to FT Adviser. Charlotte Ransom, founder and chief executive of wealth manager Netwealth, told the publication that the thought of the price war actually impacting clients is “laughable”.
Netwealth offers robo-advice services, which means it doesn’t have to employ as many salespeople. As a result, it charges a 1% fee, which drops to 0.85% when a client has assets of over £500,000 – a significantly lower fee than that proposed by the new venture.
Writing for the Financial Times, Merryn Somerset Webb says that SPW has claimed its opening price will be even lower, at 1.7%, than first reported. However, she holds that this is still “pretty pricey”.
Despite this, she says the move is nonetheless causing a gradual disruption in the wealth management industry, forcing wealth firms to become more transparent about how much they will charge investors. So far, SPW has said it will be fully transparent from launch.
Will Lloyds top Barclays?
If the bank is able to take market share from firms such as St James’s Place from November, then its share price should see mid- to long-term growth.
Lloyds share price has grown by only 1.4% year-to-date (YTD). The stock is currently 22% off its 2019 high of 66.70p, which means there is plenty of room to grow.
|PE ratio (TTM)||9.65||8.05|
|Quarterly Revenue Growth (YoY)||-12.60%||-4.20%|
Lloyds & Barclays share price vitals, Yahoo Finance, 08 October 2019
The current consensus among 22 investment analysts is to buy the Lloyds stock, according to CNN consensus ratings. This rating has held steady since September, with 11 analysts rating it a buy, two an outperform, six a hold, one an underperform and two a sell.
Meanwhile, Barclays share price has dropped by 4.1 YTD. The stock is 15% off its yearly high of 169p.
CNN says the current consensus is to buy the stock. Out of 19 analysts, 10 say it’s a buy, two an outperform and seven a hold.