FINANCE up confidence in banks. Billions of pounds left UK banks in October when the Irish government moved to guarantee all customers’ money deposited in Irish banks. At the same time Northern Rock, nationalised in February after the first run on a British bank in more than a century, was forced to close its leading products to new savers after a surge of deposits, attracted by its government guarantee, put it close to breaking competition rules. This may be less of an issue for HNWIs because protection schemes only cover cash on deposit and their limits do not necessarily represent a high floor. For HNWIs diversity is the key. They might have accounts with several institutions worldwide, so they don’t have all their eggs in one basket. The need for a safe haven in troubled times is equally true for asset allocation strategies. According to the 2008 World Wealth Report, published by Merrill Lynch and Capgemini, the early months of 2007 showed HNWIs betting heavily on riskier asset classes. But as the year wore on, and financial market turmoil and economic uncertainty intensified, HNWIs began to retrench, shifting their investments to safer, less-volatile asset classes. The report found that cash/deposits and fixed income securities accounted for 44% of HNWI financial assets, up nine percentage points from 2006. Fixed income securities saw a six-percentage-point increase in asset allocation, accounting for 27% of holdings, up from 21% in 2006. Globally, HNWIs continued to decrease their holdings in North America and showed greater interest in domestic market investments, preferring more familiar ground amid economic uncertainty. “We are seeing extremes of behaviour in terms of moves into cash and gold, but most wealth managers are advising clients to sit and hold,” says Tillotson. “The stocks affected by subprime and the credit crunch have been primarily financial and property-related thus far, so a well-diversified portfolio should not be falling through the floor. There has also been a big globalisation of portfolios over the last decade – the trend for fund-based investing in particular has given greater access to international markets – and this should help to support returns. “HNWIs are also seeing opportunities in private equity deals that would not normally cross their desks because private equity players do not have access to leverage at the moment, which limits what they can do. Hedge funds, despite their successes and failures, will still be attractive because there is a big demand for non-correlated assets. The same for commodities. Structured products will still have a place in the portfolio but they will need more transparency. Private clients will
WEALTH MANAGEMENT THE PICT OF THE BUNCH Pictet & Cie, Swizerland’s second largest privately held bank, has benefitted from increases in net inflows as investors look to put their money into less risky operations
want to know who is underwriting them and who the counterparties are.” And how is it best to advise clients in the midst of a crisis? “As frequently as possible,” says Tillotson. “Wealth managers should be trying to speak to all their clients, especially those banks that are being forcibly merged.
A DIVERSIFIED PORTFOLIO SHOULD NOT BE FALLING THROUGH THE FLOOR Clients want to be kept informed and frontline staff should be fully briefed. It won’t just be a matter of giving the house view but responding to specific concerns with conviction. For now it is crisis management – they must have something sensible to say to clients who ask ‘what does this mean for me’? And, when the dust settles, they must have a coherent strategy in place.” Even more delicate is the need to justify fees when investment returns are negative.
The key here is to be outperforming the core indices. “Wealth managers almost always talk about performance in respect of a benchmark, particularly in down markets,” says Tillotson. “There has been debate in recent years about wealth managers moving to performance-related fees but, perversely, the current market probably favours traditional asset-based fee structures because clients will be wary of incentivising their wealth manager to take silly risks. As Warren Buffet has noted, in the investment business you get paid as much for stepping over a one-foot bar as you do for jumping over a seven-foot bar.” What is certain is that wealth managers are operating in an extremely competitive arena at a time when private clients and their assets are likely to be at their most volatile and capricious. The US market, in particular, has been ravaged and is set to suffer great convulsions. According to a survey from US private wealth market researcher Prince & Associates, 81% of investors with $1m or more in investible assets plan to take money away from their current advisor and the irritation is especially high at the “brand” firms. There is much to play for.
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