As we sign off ahead of the holiday, Group Editor Tom Burroughes looks back at an extraordinary 12 months for the wealth management industry and wider world.
At the end of most years I have to think for a while about what was the dominant theme for wealth management. There’s no doubt what the big story is in 2020, though. The pandemic (now even affecting the South Pole) dominates conversation like a drunken bar room bore.
Wealth managers have, along with so many other sectors, had to adapt to lockdowns and restrictions, embracing tech in weeks rather than years. Working from home – already a reality for some advisors – is now the norm. We’ve all got to know Zoom and similar platforms. We know how our colleagues decorate their rooms. Digital workflow tools such as Slack and Basecamp are equally common now. Advisors have shifted in-person presentations and meetings to online forums. This news service has moved events to the virtual world, with success. And even after the pandemic is past, these tools are here to stay.
People are social creatures and many advisors and clients will be keen to get out and meet up, although they might avoid shaking hands for a while. Business trips will take a while to resume. It is hard to imagine, however, that they will not come back to some extent. The due diligence checks that can only be done via on-site meetings and so on, need to be made. And this is, after all, a “people business”.
Based on my conversations with executive search figures, many firms acted rapidly, with RMs calling clients more frequently than usual during the gut-wrenching early spring when markets swung violently. That heightened engagement appears to have continued. With family offices and their advisors, a challenge has been to make sure family members regularly communicate, particularly when they fret about older family figures’ health. I have noticed how the boundaries between wealth and health have become blurred. It may be a bit over-used as a term, but wealth management has had to become more truly “holistic”. And it has also had to remind itself that good wealth management is about risk management.
As we recounted earlier this year, the evolving discipline of behavioral finance had another chance to show its benefits when markets became volatile. Keeping clients poised became an essential task; the behavioral finance approach, drawing on evolutionary psychology and analysis of human conduct over the ages, is becoming more practical. This will be a field to watch next year.
So far, the wealth sector has held up relatively well, as far as it can be judged. Financial results from earlier this year showed banks had to set aside provision for bad loans and a number of lenders’ results took a knock. As 2020 wore on, and equities rebounded – helped by a lot of cheap central bank money – so did some of the financial metrics. What will be closely watched over the next, however, are the net inflows of money, margins and revenues, not simply AuM. If the underlying real economy remains tough next year in certain sectors, as seems likely, until a vaccine really makes a difference, the pipeline of next HNW clients could be squeezed. In the end, a vibrant wealth industry needs prosperity to replenish the soil in which it grows. A more slow-growing market is also likely to produce some M&A as firms try for economies of scale. 2020 saw a number of deals go through. There was a flurry of speculation in the summer/autumn that UBS and Credit Suisse might tie the knot. It remains to be seen whether that is soundly based.
Cost pressures remain. While there has been some deceleration of regulatory activity this year, red tape and rising client expectations still create costs. US wealth managers have had to wrestle with Regulation Best Interest rules that came into force in 2020 (to some criticism). Regulators continue to keep a beady eye on money laundering and there have been plenty of cases, such as in Malaysia and the Baltic states, to remind firms of the costs of being careless. Ensuring rules are followed will continue to drive compliance-related tech spending.
With working from home, technology really has proven its value spectacularly. The businesses based in Silicon Valley and other tech hubs have been among the heroes of this year, even though it is fashionable in certain quarters to throw rocks at Big Tech. Of course, there was also more commentary in 2020 about cybersecurity risks with so many people working from home. Those risks will extend into 2021. Like viruses, digital viruses and bad actors are constantly evolving.
International financial centers
It has been a strange year for IFCs. Restrictions on foreign travel has curbed the ability of these places to attract visitors and potential residents. But their attractions in terms of stability, given international worries, have not faded. Switzerland, the world’s largest single IFC, is certainly challenged by forces such as negative official interest rates and partial loss of bank secrecy, but it remains a magnet for foreign clients. Its introduction of a new regulatory regime for external asset managers has caught attention. And other IFCs are upgrading and bringing out new offerings. Singapore in January 2020 introduced its Variable Capital Company (VCC) structure, which gives it competitive edge as a domicile for funds and family offices. (Singapore also benefits to some extent from mainland China’s national security law imposed on Hong Kong this year.) The various IFCs linked to the UK, such as the British Virgin Islands, the Cayman Islands, Jersey, Guernsey and the Isle of Man, are moving toward public registers of beneficial ownership of companies (but not trusts). The devil is in the detail here, but it is increasingly difficult for critics not to concede that the offshore world is greatly different to how it was two decades ago. Dubai and Abu Dhabi in the Gulf are also important, and growing. A cluster of international banks now call it their home.
The UK is already an “offshore center” by some measures, and as it moves out of the European Union’s orbit, it is likely to become more so. A few days ago, New City Initiative, a UK-based industry think tank, called for the UK to develop new forms of cross-border funds, and to deepen financial links with Asia, among other places. In talking to the Luxembourg funds industry, I was struck by how some Continental European financial industry figures want to reduce the frictional costs of Brexit as much as possible. The supposed demise of London as a financial hub may be much exaggerated, but it will have to adapt. It will be interesting to see how cities such as Paris, Amsterdam, Frankfurt and Milan, to give just four, adapt. Luxembourg and Dublin were already important fund-registration hubs prior to Brexit; it is hard to see that changing greatly.
As far as the US is concerned, its own “mini-IFCs” of Delaware, South Dakota, New Hampshire, Nevada and Alaska are important domestically, and possible tax hikes under a new President will keep the tax-mitigation industry busy. Two weeks ago, the US Senate voted by a veto-proof margin to outlaw anonymous shell corporations – this could force some changes in Delaware, for example. I intend to watch developments here closely.
Another big theme of 2020 – in some ways magnified by the virus – is that of environmental, social and governance-themed investing. I have been bombarded by ESG media press releases this year. An issue is whether supply of genuine ESG investment opportunities can match demand. Expect more alerts about “greenwashing” – the problem of investment firms trying to repackage their wares under an ESG label. Some of the political and social controversies of the past few years have caused a certain level of “virtue signalling” fatigue. Soaring debt and pressure to hike taxes mean ESG investors will be as keen to generate strong returns as the more traditional kind. ESG cannot afford to be less lucrative.
Talk of tax means the wealth industry is bound to be busy advising clients on how to mitigate levies on wealth. This will be a delicate issue. Many HNW and ultra-HNW individuals have actually done well in the past year – quantitative easing inflates equity, real estate and other assets, and certain business sectors such as Big Tech and logistics have boomed. The wealth of the top “1 per cent” has increased, while many millions have lost jobs and seen businesses crushed. The issue of “wealth justification” becomes more urgent. While they are contentious, expect more noise around wealth taxes and other measures in coming months.
In the US, a new President is due to take office, and there are important run-off races for the US Senate that, depending on the result, could mean Joe Biden either has considerable leeway to push a more “liberal” agenda, or doesn’t. If the Senate remains in Republican hands, such “divided government” might ironically be positive for markets, since investors will conclude there is not much room for tax hikes.
But as historians of money know, there are other ways than tax to erode public debt. For some time, central banks the world over have sought to create low single-digit inflation to cut debt. This also, as I have also noted, tends to redistribute private wealth to borrowers who hold leveraged assets, and punishes savers. This pattern, which has fuelled political populism and pushback against the so-called “neo-liberal” policy mix for the past three decades, is unlikely to change soon.
But at some point a period of very low/negative interest rates is going to end, and with it the distortions to capital markets and bond yields that challenge asset allocators. There is a saying in economics that a trend that cannot go on forever, won’t. But in the meantime, it appears that much of the world is going to remain in a “Japan-style” period of modest growth and low rates.
Allow me to wish all readers of this news service a very happy holiday and a far more enjoyable and safe New Year.