• What are some the biggest threats and opportunities facing the financial services industry?

Robert Nye, Cazenove Capital“Various parts of the financial services industry are undergoing substantial changes; whether that is the increasing market share of passive investment vehicles, the increasing volume of capital allocated to private debt/equity markets or the increasing prominence of sustainable finance. These present material changes to incumbents’ business models and we are already witnessing forward-looking businesses reallocating resources to these areas.

“Technology presents a double-edged sword; on the one hand some of the largest players suffer from  ‘tech debts’ accrued over several decades which make it hard to deliver modern service efficiently. On the other hand, the fact that there are still remarkably manual and inefficient areas of the industry presents enormous opportunities for entrants willing to grasp these nettles at scale.

“In our specialist area (wealth management) there remain strong demographic tailwinds; as western populations grow older, wealth is becoming more concentrated leading to greater to demand for tailored advice and investment services. In an era of substantial macroeconomic change, there remains a significant opportunity to meet the need for professional assistance.”

Andrew Davies, LGT Wealth Management LLP“With the baby boom generation increasingly focusing on succession planning, there is a huge opportunity in the industry for the strong players as the baby boomers are the generation who have grown up within the global asset boom. They have benefited from house price growth through their lifetime, strong pension provision and, latterly in the UK, pension flexibility and, for many, quite low taxes. As a result, there is an unprecedented amount of global wealth to transition to the next generation.

“The threat on the other side of this golden coin is that the younger generations who didn’t benefit from this wealth creation are now facing years of student debts, unaffordable house prices and poor quality pension provisions, coupled with relative high tax rates. They need to make difficult sacrifices to have any chance of building assets. Theoretically they face circa 30-40% tax on their income, 9% student loan payments and should be paying 15% into pension provision, in addition to facing housing costs of 30-50% of income. It is very clear that leaves nothing to spend on living life and comes at the sacrifice of building an asset base. This is if they are lucky enough to have a good job and AI doesn’t strip this from them.

“There is then the polarisation of wealth created by digital businesses. Digital businesses can claim 30% plus of the global population as clients. This is done with relatively small workforces, given the size of the client base, and the wealth generated by these businesses is increasingly going to a small shareholding elite whom are generally already wealthy on a relative global basis. In my opinion, this combined with AI that has the capability to undertake many of today’s jobs and concentrate even further the spoils to a shareholding elite, means increased taxation of wealth rather than income, is almost inevitable. This will, in general, be resisted by the wealthy and it is unclear how this will shape society over the next 25 years and therefore the wealth management industry.”

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• How has the financial services industry changed in the last 12 months? How do you see it changing over the next few years?

Andrew Davies, LGT Wealth Management LLP“The last 12 months have been difficult in the wealth management industry as the world shifts from an unprecedented asset price growth era as a result of ultra-low interest rates and quantitative easing ending. This started in 2022 with major falls in equity markets and bond values and the ripples from this have been felt throughout 2023. As a result, many clients are now looking at asset values that haven’t changed in three years during a period when inflation has been nearly 30%.”

“These inflection points in macroeconomics are often difficult for clients to adjust to. Combined with the increasing realisation of the economic challenges of climate change, increasing geopolitical tensions after a period of relative calm plus the ongoing dislocation of markets from digitisation, can make it difficult to have conviction in long-term plans and therefore investment thesis. I think the next few years we are going to see an increase in volatility in all forms and increasingly polarisation in most aspects of life. As a result I think the need for financial plans to increasingly focus on individual goals rather than broad theses will increase.

“This will be beneficial for clients who can afford good financial advice from highly skilled individuals able to implement individual plans. It will also provide good opportunities for technology-focused advice solutions for clients who cannot afford or justify personal advice, however it could prove difficult for larger businesses that are focused on distributing a ‘one size fits all’ model solution.”

Robert Nye, Cazenove Capital“Over the last 12 months the most striking change has been the ‘paradigm shift’ in the interest rate environment. This is fundamental and affects all aspects of financial services – this change has affected almost all geographies too. Clients – personal and corporate alike – have been reconsidering their investment and borrowing plans in the face of this new outlook and seeking advice on how best to tackle this change.

“In the coming years we will see the impact of AI across the board – slowly at first and then all at once – but that is a whole topic in its own right. In the near-term we have an intense period of democracies going to the polls, which will have knock-on effects in terms of macroeconomics and regulations in the period that follows.”

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• Which sectors are you seeing the most activity in? Are any particularly fast-growing?

Robert Nye, Cazenove Capital“The sectors with most activity of late reflect emerging areas including wealth management, private assets and sustainable investment. A key driver of activity has been industry consolidation by both incumbents and new entrants with a specific ‘buy and build strategy’. A combination of price pressure in established subsectors and the increasing costs of both talent and capital has meant that achieving ‘scale’ has become a key focus.”

Andrew Davies, LGT Wealth Management LLP“As a wealth manager, we generally only see the successes. Being based in the South West there seems to be a particular niche growth in the biotech area with a number of companies in the region growing quickly; but increasingly every business is becoming a tech business in some way.”

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