‘It’s a difficult world out there,’ admits Chris Kenny, investment director at Smith & Williamson, the wealth management and accountancy group. ‘There’s the recession, the economy teetering between inflation and deflation, higher tax rates, increased risk and lower returns all round.’
While market risks have soared, investors’ faith in the people charged with looking after their money has plummeted. ‘Private clients’ trust in investment managers has pretty much collapsed,’ says Kenny. ‘I don’t think many people in our industry have been good enough at apologising and saying “mea culpa” when things have gone wrong.’
So what exactly has been going on in wealthy investors’ minds while the financial world has tumbled around them? Between March and May this year, Barclays Wealth surveyed 2,100 high-net-worth individuals around the world to find out. On the positive side, 88 per cent said that they saw significant investment opportunities in the current environment. On the negative side, 68 per cent of these also said they were steering clear of the opportunities because they believed that the risk of further price falls was too high. Only a minority — 28 per cent — plan to increase risk levels in their portfolios during the next year.
In short, affluent investors have been frightened into inaction. Indeed, more than half of those surveyed by Barclays Wealth said they would not be adjusting their major asset-class allocations at all during the next 12 months. Those who do plan to tweak their portfolios intend to retreat to simple, familiar assets such as real estate, government bonds and commodities.
There’s good reason why wealthy investors’ nerves have been jangled by the financial crisis: it’s their own life’s work at stake. ‘Most high-net-worth individuals take the view that they’ve taken risk in their personal and professional life — and that’s what has generated their wealth. So they want to keep the assets that they’ve realised in pretty conservative investments, while continuing to take risks professionally,’ says Gavin Rankin of UBS Wealth Management. ‘This makes an economic environment like this particularly troubling for clients.’
Ironically, however, excessive risk aversion is itself one of the biggest risks that wealthy investors currently face, argues Rory Gilbert, a senior executive at Barclays Wealth. ‘You clearly stand to lose less money by sitting on cash. But you also miss the opportunity to achieve your portfolio objectives.’ Rankin goes further: ‘The only way to protect the real value of your capital, particularly after tax, is by participating in financial markets. So you have to take risks — but do so in a diversified, controlled manner.’
How are wealth managers responding to the fact that their clients are acting like rabbits caught in the headlights? ‘First, you’ve got to rebuild trust,’ says Kenny. Being realistic with clients about potential returns — factoring in taxation, inflation or deflation — is crucial, he adds. ‘The days of 15 of 20 per cent returns from an equity portfolio are not going to come back any time soon. Realistic expectations mean that there is less scope for disappointment.’
Winning back trust also tops the agenda at UBS. ‘When I first started in finance, somebody who’d spent their entire life in wealth management told me that an individual chooses their adviser on three criteria: first, whether they like you; second, whether they trust you; and third, whether they think that you’ll make them money — in that order,’ says Rankin. ‘Rebuilding trust is not something that can be done overnight; it’s quite a lengthy process.’
Simpler, more transparent investment products and services are also essential for winning back clients’ confidence, wealth managers admit. ‘Product-based solutions and the “one-size-fits-all” approach haven’t given clients the visibility to understand how their investments might behave and what’s coming over the horizon,’ says Kenny. ‘More than ever, clients want to find out what’s going on under the bonnet of their portfolios.’
Next on wealth managers’ priority list is steering clients away from their historic inclination towards inertia. ‘Private investors tend to be late in when markets are rising and late out when markets are falling,’ says Gilbert. But how do Barclays Wealth and its competitors strike the balance between responding to clients’ wish to be cautious, and cajoling them into taking greater risks where managers believe it makes good sense to do so?
‘If we think people ought to do something, we should be pretty resolute in explaining why that is,’ says Gilbert. ‘If our clients understand that we have worked out who they are and what the right answer is for them, they tend to listen to us. If they think we’re trying to sell them something, they tend not to — and in my view rightly so.’
Yet Gilbert admits that Barclays has also had to make some concessions to investors’ demand for back-to-basics investment products. ‘Over the last six months or so, we’ve had to recognise that it’s probably worth us sticking to some pretty traditional ideas — making sure that we can engage with clients on things that we think are good ideas, and that clients will be able to swallow.’
UBS is also bowing to client demand for simple, low-risk investments. ‘We still believe that properly diversified portfolios will include instruments such as hedge funds and other alternative investments, but we’ve got to recognise that clients have been thinking otherwise in recent months,’ says Rankin.
What investments are proving palatable to wealthy investors in the current climate? ‘Clients have been searching around for low-volatility, low-risk assets that will generate a return of 4, 5 or 6 per cent — such as corporate bonds,’ says Kenny. Rankin adds that there has also been a sharp increase in demand for exchange traded funds, which Charlotte Moore discusses on page 31. Meanwhile, HSBC has been investing more of its wealthy clients’ money into sovereign and corporate debt in recent months, says Charlie Hoffman, managing director of HSBC Private Bank.
Yet there are tentative signs that investors’ appetite for racier assets is returning. ‘We are starting to hear clients talking about hedge funds, structured products and taking on leverage again — which you wouldn’t have dreamed about six months ago,’ Rankin says.
‘Clients are still relatively cautious but they are very aware that there are selective opportunities in every asset class to benefit from the last 12 months of market disruption,’ adds Hoffman.
Where do wealth managers think that the longer-term rewards lie for their clients? ‘The reconfiguring of the world economy probably means that we will look to emerging markets for less volatile but higher growth in the future,’ says Kenny. Gilbert agrees. ‘If Asia does indeed lead the world out of recession, then it would be a terrific place to start to build some exposure.’
Closer to home, the optimum portfolio mix will hinge on whether the future brings inflation or deflation. Inflation would hurt cash investments, while deflation could harm property investments. ‘We’re not yet clear whether we’re going to be like the 1970s in the UK, or like the 1980s in Japan,’ says Kenny. ‘When that’s a little bit clearer, it will shape portfolio allocations for the next five years or so.& #8217;
While they wait for clarification, humility, simplicity and honesty will remain wealth managers’ mantra. ‘The ability to say sorry, and to change direction if things aren’t going as you expect, is absolutely crucial,’ adds Kenny. ‘We’ve seen the back of the days of large investment houses gathering private clients and feeding them whatever product happens to be on the shelf.’
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