Schroders Needs Its Lloyds Wealth Venture Bet to Pay Off

(Bloomberg Opinion) -- Joining forces with a high-street bank to target rich customers might not be the most obvious way for a blue-blood firm to avoid the myriad woes assailing asset managers. But Schroders Plc is to be congratulated for seeking a creative response to the troubles the industry is struggling with.

Like its peers, Schroders suffered in the fourth quarter as market volatility prompted clients to withdraw funds, as the firm detailed in its full-year results on Thursday.

In 2017, net inflows of 9.6 billion pounds ($12.7 billion) were augmented by 31.6 billion pounds of investment returns. That reversed last year, as net outflows of 9.5 billion pounds were exacerbated by 19.6 billion pounds of market losses, reducing assets under management to less than analysts had anticipated.

The company’s cost-to-income ratio edged higher to 64 percent, up from 63 percent at the mid-year and 61 percent at the end of 2017. That in part reflects a one-time charge of 56 million pounds for making “structural changes” to concentrate on businesses deemed to have the best growth potential — namely catering to the rich.

The firm’s wealth management unit bucked the trend by winning net new business worth 1.7 billion pounds last year, almost matching 2017’s 2 billion pounds of inflows. Market losses of 2.9 billion pounds, though, meant the division’s assets under management shrank.

The net operating margin in the wealth management division was unchanged in the year at 61 basis points, higher than Schroders’s overall operating revenue margin of 47 basis points. At a time when fees for managing other people’s money are on a downward spiral everywhere you look, that’s a pretty good performance. Hence the renewed focus on catering to high-net-worth individuals.

In October, Schroders won the mandate to manage 80 billion pounds of assets for Lloyds Banking Group Plc as the pair teamed up to form a joint wealth management venture with the aim of making Schroders Personal Wealth into “a top three U.K. financial planning business within five years.”

The plan is to leverage the pukka Schroders brand by offering its services to Lloyds’s customers through the bank’s 1,750 branches. The joint venture is scheduled to start operating by the middle of the year.

Lloyds has ambitious targets for the initiative, aiming to increase the amount the bank manages in retirement and industry products by a cumulative 50 billion pounds by the end of 2020. With about 15 percent of its customers over the age of 70, there’s certainly a pool of elderly savers for the venture to target.

It’s far from clear that the combination will work. Trying to boost the number of wealthy clients you serve is hardly a novel approach in the world of finance. But both partners need the enterprise to succeed — and at least Schroders is willing to lend its good name to a venture its founders might have turned their noses up at.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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