Investing.com -- UK wealth management stocks have fallen sharply following “Liberation Day” on April 2, with sector shares down 7% on average in Q2.
This follows a 7% decline in Q1, leaving the group down 13% year-to-date. RBC Capital Markets analysts attribute most of the post-April declines to a 4.3% estimated fall in client portfolios, based on the WMA balanced index.
The market reaction has broadly matched profit sensitivity to asset declines. However, some dislocations are evident.
St. James’s Place, despite strong Q1 performance, has fallen more than implied by its earnings exposure. Meanwhile, Rathbones and Brewin Dolphin (OTC: BDNHF ) appear underpriced given their limited profit impact.
Importantly, client portfolios are not purely equity-driven. RBC assumes a typical 60/40 mix of equities and fixed income, which has cushioned overall asset declines relative to equity indices like the FTSE 100 , which is down 8% over the same period. This balanced portfolio composition has softened the drop in asset-based fee income.
The degree to which AUM declines affect profits varies across the sector, primarily due to differences in revenue composition and operating margins.
Firms with higher non-market-linked income—such as AJ Bell, RAT, and Tatton Asset Management —have shown greater resilience.
Interest income, particularly from corporate or client cash balances, has emerged as a key revenue stabiliser in the face of market pressure.
Margins are also a critical differentiator. Higher-margin platforms like AJB, TAM, and IntegraFin are better positioned to absorb revenue declines.
These businesses operate with largely fixed cost bases, so changes in top-line revenue flow directly to profit.
In contrast, lower-margin firms like STJ, which also rely heavily on AUM-linked income, face steeper earnings declines from asset movements.
Some firms—including RAT, BRK, and Quilter Cheviot—bill based on quarter- or month-end asset levels.
That means current market volatility only affects earnings if AUMs remain low at billing dates. This factor may delay the visible impact of Q2’s asset declines for those businesses.
RBC sees several second-order risks ahead. With portfolios now roughly 5% lower on a 12-month basis, recent market volatility is likely to dent investor sentiment.
This could dampen retail inflows in Q2 and beyond, especially if volatility persists. April is usually a period of high inflows due to the start of the UK tax year, so commentary in upcoming trading updates will be key.
Interest income, while currently a revenue buffer, may come under pressure if economic conditions lead to rate cuts.
That would impact net finance income for names like STJ and Quilter, and client interest turn revenue for AJB and RAT.
The latter would likely experience more delayed effects, as rate adjustments are often shared with clients.
Despite earnings headwinds, all names in the sector trade below their five-year average price-to-earnings ratios.
RBC’s adjusted “live” FY26 P/E estimates, which factor in the 4.3% AUM drop, show that AJB, IHP, and RAT are trading at the widest discounts.
While the initial market reaction to Liberation Day appears broadly justified, RBC notes that prolonged volatility could shift investor focus from immediate asset-linked revenue impacts to longer-term effects on flows and interest income.
TAM stands out as a potential outperformer in this environment, having delivered 16% organic growth in 2023, compared to a sector average of 4%.
