It sometimes seems that small firms within the asset and wealth management universe no longer exist.
They all seem to have metamorphosed into “boutiques” to judge from an impressionistic – and necessarily limited – survey of the terms’ usage in the financial media.
“Small firm” and “boutique” have become almost interchangeable terms.
The problem is, however, that although boutiques tend to be small not all small firms operating in asset and wealth management are necessarily boutiques.
For boutiques often seem to encapsulate a plethora of desirable attributes over and above those associated with stereotypical small firms.
“Better performing”, “dynamic”, “disruptive”, “innovative”, “more profitable” and “specialist” are just six attributes that could differentiate a boutique from a small firm, for example.
But this is just the first step on the way to attempting to resolve this particular lexicographical or taxonomical problem.
If a boutique is a subset of the small firm universe this raises additional questions about the nature and definition of small firms. And in some respects these pose even greater challenges.
But let’s focus, initially at least, on the boutique.
New York-based Investopedia, a financial website that claims to be “world’s leading source of financial content on the web” provides on first acquaintance a very serviceable definition of “boutique”.
“A boutique is a small financial firm that provides specialised services for a particular segment of the market,” it says. “Boutique firms are most common in the investment management or investment banking industries.
“These boutique firms may specialise by industry, client asset size, banking transaction type or other factors to address a market not well addressed by larger firms.”
The definition doesn’t go on to provide any further guidance as far as firm size is concerned, or identify and expand upon some of more qualitative attributes mentioned above. Nonetheless, it provides a sound foundation upon which to progress the discussion.
At first sight, within the UK at least, there would be relatively few firms that would meet this definition of a boutique, even before size-related questions emerge.
The reality is that most small firms active in the UK wealth management sector tend to be generalists, rather than specialists.
Of course there are plenty of exceptions.
One of the recent developments in the UK market is the emergence of specialist firms that focus on ESG or impact investing.
EQ Investors and Tribe Impact Capital are two firms that come to mind in this respect. But there are probably others.
Similarly, there are a number of firms that consciously focus on a more tightly defined client group, often with relatively high investment thresholds.
Capital Generation Partners, Cerno Capital Partners, Eighteen48 Partners, Lincoln Private Office, Saranac Partners and Stanhope Capital are six firms that immediately come to mind in this respect.
And there are yet other firms that set their stall by focusing on a very restricted range of services.
Although the range of activities encapsulated by wealth management have expanded to include advice and wealth and financial planning a number of firms remain committed to focusing purely on private client investment management.
Many aspirant boutiques also claim to offer much higher levels of service than those offered by more mainstream firms, especially larger institutions. But these claims are often debateable.
Which brings us on to the question of size, or more pertinently or the factors that determine whether or not a firm is “small”, “medium”, or “large”.
The problem here is that in absolute terms most of the firms active in the UK specialist private wealth management sector are very small, especially relative to their asset management peers, in terms of the usual metrics, i.e. annual revenues and assets under management.
In the UK, any firm that generated more than £100 million in annual revenue and had more than £20 billion of client assets under full discretionary management and/or administration would be large.
A firm that generated between £30 million and £100 million in annual revenues with assets under management of between £10 billion probably fall within a medium category. Anything less would be small.
Contrast this with a definition of a UK asset management boutique devised by Professor Andrew Clare of Sir John Cass Business School at City University, London. In a recent study, he looked at the investment performance of UK investment management boutiques.
His upper limit of £77 billion, based on the firms he analysed would make them giants in the UK private client market.
The good news for proponents of boutiques is that the UK wealth management market has a superabundance of small firms. So the opportunity set from which boutiques can be identified is large.
Apply the criteria used by Investopedia in its definition, however, and the potential number of boutiques reduces considerably.
Of course the Investopedia definition is not definitive. Apply the more qualitative attributes associated with boutiques and a different opportunity set could emerge.
Nonetheless, the suspicion still remains that the number of genuine boutiques, as opposed to small and very small firms, active in the UK wealth management, is much more limited than the financial media, or indeed many market participants imagine.
