Until about a decade ago, segregated mandates were the preserve of large institutions. Sovereign wealth funds, pensions funds and other institutional investors have used segregated mandates to access fund managers while maintaining greater control and influence over the underlying investments. Retail investors are far more likely to invest via pooled funds, typically OEICs.

Wealth managers, looking to capture additional value and bring down costs for clients, began launching their own funds, using segregated mandates to access professional investment managers. The main driver of this has been financial – in terms of both cost and profit. Large vertically integrated wealth managers are able to access investment managers for a fraction of the cost of buying an off the shelf OEIC. The wealth manager takes a fee to manage the investments, adding to their profit margins.

NextWealth has today published a white paper that defines and describes segregated mandates in a retail context. It explores the drivers for wealth managers to become ‘manufacturers’, and the considerations for both wealth managers and asset managers. The whitepaper also touches on the burgeoning DFM-as-manufacturer market.

This paper is published by NextWealth. We offer research and consulting services to wealth managers, asset managers and other support providers in this market.

NextWealth View

NextWealth expect the market for wealth manager and DFM segregated mandates to swell to £180bn in the next two years. This is based on conservative estimates of growth for existing wealth managers and the transfer of assets from pooled funds held by DFMs and large financial advisers to segregated mandates.

This represents a more than doubling of assets to these mandates. This will have a profound effect on the margins for asset managers.

We believe the winners will be the big asset managers who get the relationship with wealth managers and DFMs right. These firms will offer a service that mirrors the best of institutional and retail. The relationship will be a priority. Reporting and communications will be proactive and tailored and appropriate experts will be available to meet the different needs of head office management and financial advisers in the field. Boutique asset managers offering good performance but at a low price will also stand to gain.

Wealth managers and DFMs will profit from the rise of segregated mandates, particularly in the short run. But as the regulator requires more disclosure of the underlying fees, wealth managers and DFMs will pass more of the cost savings to investors. This increased disclosure will have a ripple effect to the rest of the retail market. Asset managers will be pressured to offer funds at lower charges to investors who buy through smaller IFAs and other channels.

In short, segregated mandates in retail will grow rapidly in the next two years, putting price pressure on asset managers and forcing further transparency on fees.

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About the Author

Heather is a data and research expert specialising in retail investment distribution. Heather is the Managing Director and Founder of NextWealth. She is also a Director of Clive Waller Consulting Ltd and serves as Vice-Chair of The Investment Network and the Schroders UK Platform Awards.