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  1. Wealth
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September 14, 2009

Hedgehog Issue 13

By Spear's

Financial custody, Harrods incentives, art recesses and more.

Hedgehog is sponsored by Schroders Private Banking

Part of the reason for the existence of wealth managers was so that you did not have to be able to read your own balance sheet — you just trusted that the man in the pinstripe suit was going to give you the numbers.

Clearly, this is not a tenable strategy any longer. People want to know, and not just know but also be on top of their own affairs. Trust is not a quality which exists in abundance any more, and any wealth manager who says to their clients, ‘Let me handle the figures,’ is likely to be met with a cold shoulder and a demand for their money back.
This is why wealth managers such as Bank of New York Mellon have been upgrading their electronic reporting systems (Mellon’s is called Workbench) — so their clients can access their portfolios online and keep a beady eye on them.

Rupert Phelps, director of family office services (international) at Bank of New York Mellon, says that the credit crunch has led to a greater interest on the part of their clients: ‘Absolutely — there is an increasing questioning of how aligned wealth managers’ business models are with the interests of their clients. There is scepticism about
wealth managers, but from our view our function is to act as custodian, and Workbench allows clients to see this.
In the family office space, we do see a return to basic principles [of reporting clarity].’

Workbench allows Mellon to fulfil its dual roles as custodian and accountant for a family office’s assets by providing ‘a single-screen summary of everything, from a stock directly owned, funds, funds of funds, private equity, bloodstock, real estate, art, a shipping company. And they can drill down to great detail.’ Clients all want to know two things: where their assets are held and how secure they are.

But doesn’t that require the one accessing it to be financially literate, which not every beneficiary of a family office is? ‘Yes, but you can have a summary screen with coloured pie charts, at a basic level, and people can export these and include them in a board report or a strategy.’

It seems that by providing these platforms and acknowledging that clients may have lost faith in them, wealth managers may just win that faith back.

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Life runs on incentives, whether baldly bribing — most familiar to coffee-drinkers with their nine-st amps-and-get-one-free cards and to ministers with contracts to tender — or subtly enticing, such as the promise of free gift-wrapping or a limo from the airport to your hotel. In the face of your competitors, you need to start adding extras to draw in clients and customers.

In America (naturally), there is a whole industry devoted to incentivisation. (This is the country that invented an industry for giving swag-bags for awards presenters.) Where America leads, Britain is not far behind, and so we come to Harrods Corporate Service. This service provides bespoke solutions for corporate gifting, meaning that businesses looking for incentives to win new customers or retain the loyalty of existing ones can work with Harrods Corporate Service to devise the ideal programme.

They also offer gift cards loaded with anything from £10 to £10,000, redeemable at any of the 330 departments. Account managers are on hand to offer the card-bearer their expert advice.

‘We have one of the best selections of different brands, from wine and food to sports and TVs,’ says Tracy Finn, Corporate Service manager. ‘We have our spas and our men’s refinery downstairs, and we have restaurants and access to personal shopping as well.’

Incentive-buyers and card-bearers alike may be interested to know that the card can also be used against
bookings at the new Abercrombie and Kent Private Travel shop on the lower ground floor. Providing ‘off-the-menu’ travel options, such as exclusive hire of a twelve-bedroom camp in the Sabi Sands Reserve of South Africa, Abercrombie and Kent has moved into a wise partnership.

Usually gift cards indicate a lack of imagination, but if you receive a Harrods gift card, well, your imagination is the limit.

The art world has taken some bloody beatings over the past year, but it has been picking itself up and looking seriously at its place in the grand scheme. Hence, the July meeting of the great and the good of the arts and arts philanthropy world, as brought together by the Prince of Wales’ charity Arts & Business and EFG Private Bank. This inaugural discussion was based around the question of the role of wealth in shaping culture.

This was no touchy-feely seminar. Hosted by Culture House, the high-level philanthropy group run by Arts & Business, the debate opened around the wider issues. As the economy experiences dramatic changes, so too does the arts and cultural sector. The recent boom in the global art markets has now contracted; speculators known to ‘flip’ art at auctions are no longer so omnipresent; the art world claims it is back to basics — buying works in person rather than a jpeg. Authenticity is back. This is a good time to enter the market as dealers are keen to engage and negotiate and there are many, many talented artists out there.

It was a virtual G20 of the art world: individuals present included collector and patron Kay Saatchi, industrialist and philanthropist Satish Modi, sculpture park owner Wilfred Cass, collector, curator and author Kenny Schachter and Rohan Silva, economic adviser to David Cameron.

David Hawkins, a consultant to Arts & Business, says: ‘Culture House is an invitation-only high-level membership scheme for individuals who are passionate about the arts and in a position to support the arts through philanthropy. Culture House stimulates and celebrates arts philanthropy by offering members an exclusive programme of events covering the full spectrum of today’s leading artistic endeavour with opportunities to network with like-minded people, as well as key cultural figures.

‘This year we’ve taken our members to an evening at the Royal Opera House, held an early-evening private view at the home of collector Fatima Maleki, held a breakfast event at the home of curator, writer and designer Kenny Schachter, and most recently leading artist Martino Gamper treated Culture House members to dinner, where the meal, furniture and condiments were created from scratch.’

Those in attendance agreed that the motivations for collecting art and pursuing philanthropy can be similar — both are driven by a need to seek rewards over and above a financial return, be it the aesthetic value of painting or the social return. Importantly, both art and philanthropy are ways of creating a legacy for the next generation, and a means of accessing new networks of people, broadening horizons and social ties.

While there was some discussion about the benefits of the tax system in the US — particularly lifetime legacies — the tax system in the UK when (and only when) fully understood means there are plenty of opportunities for tax-efficient giving. Wealth management is key to unlocking philanthropy: the private banks have a responsibility to develop vehicles, support and incentives to give. A recent survey by wealth consultancy Scorpio Partnership revealed that 90 per cent of high-net-worth families in Europe believe their advisers give them insufficient guidance on philanthropy. Culture House and EFG are changing this.

Indeed, attention has been paid, says David Hawkins: ‘A follow-through from this event is that Culture House and STEP will be working to review policy for the wealth management system and feeding into the new Commission on Philanthropy to be established by David Cameron.’

One of the themes from Culture House emerged at Design Miami/Basel and Art Basel (held in Basel, as opposed to Design Miami and Art Basel Miami Beach, which are held in Miami). Patronage is a hot topic in a recession, and while the fairs attract their fair share of those who come to gawk at the spectacle of the art world on parade, they attract equal numbers of — if not more — patrons, who are serious about art.

And not serious in the ‘What sort of a return will this get me in two years’ time?’ way. Serious about how and what they collect. The recession has not dented their enthusiasm for patronage. From the stall and the VIP lounges, it was clear that deals were being done, although this was in the form of negotiation, rather than easy acceptance of the sticker price.

Claude Greilsamer, director of HSBC Private Bank (UK), which has sponsored Design Miami and Design Miami/Basel for several years now, elaborated on how patronage was holding up: ‘Patronage is surprisingly resilient in this recession so far. Art and design are pretty much part of our client culture and lifestyle. Our clients have taken advantage of more realistic prices and also know that a few thousand euros can still buy unique pieces. In the recession they have become more selective and more interested in very high-quality events.

‘The pleasure of acquiring a great piece of art or a great chair to sit on remains intact.’ Claude also stressed that the recession has not affected HSBC PB’s commitment to sponsoring Design Miami.

He elucidated how the rarum genus of art-world patron lives: ‘Our clients are keen to come to major art fairs in Europe and the US at least once if not twice a year — or more for the biggest collectors. Basel and Miami and surrounding exhibitions and events attract more and more couples. Some of our busiest clients will plan a two- or three-day break.’

As well as the engagement with dealers, HSBC PB’s clients like to engage with designers. Claude says: ‘Design Miami/Basel has grown over the years in quality and respectability and our clients find it a real pleasure to meet at HSBC Private Bank’s VIP lounge the designers in person [for example the Campana Brothers, Marc Newson or Tom Dixon among others].’

Don’t let your collection wither in the recession: it is the perfect time to start your patronage.

Has finance brought maths into disrepute? Time was a mathematician could walk into a room and not have bread rolls thrown at him. March’s Turner Review, as it was taking aim at capital adequacy and credit ratings agencies, slipped a slim knife into an impassive science, blaming banks’ ‘misplaced reliance on sophisticated maths’.

Still, July’s Walker Review into banking governance (we await a review of the reviews) may be a chance to put the maths back into money. One of its themes was that boards need to challenge the executive more, meaning non-executive directors should give more time and have ‘a combination of financial industry experience and independence of mind’ rather than ‘a combination of lesser experience and formal independence’. This is where mathematicians come in.

Dr Tim Johnson of Heriot-Watt University, a fellow in financial mathematics, says that if non-execs start taking advice from mathematicians, they may be able to restrain executive fervour: even if mathematicians are too risk-averse, ‘there’s a balance because a young gun is at the other end of the spectrum, and a manager sits in the middle of the seesaw’. They will give ‘moderately impartial, moderately trustworthy’ advice.

Dr Johnson (does that make Hedgehog Boswell?) says that it was ‘an abuse of mathematics’ which led to the credit crunch, that it was well-known that Basel II capital reserve levels would not suffice for banks which traded in complex new products. Nevertheless, maths took a hit — but now mathematicians are fighting back.

There may be a distressed property in your neighbourhood. In your street, even. Perhaps the house next door to your very own is distressed. While this may be a crisis for the owner, it is an opportunity for another, as the Chinese word connoting both reminds us.

Rumours are circulating that Gerald Ronson, the property investor, is planning to admit wealthy investors into a distressed-property club. A spokesman said it would not be a fund open to all, but rather would have an exclusive membership, attainable only by invitation. No launch date was given.

Liam Bailey, head of residential research at Knight Frank, has some words which may bring joy to Ronson’s ears. He says that despite a ‘hugely improved’ prime London market since January (prices up six per cent and sales volumes jumping), the market over the next six months will remain in the doldrums: ‘Price growth will not continue at this rate — in fact prices ought at best to remain flat during the latter part of the year.

‘Foreign buyers did have the benefit of a weak pound earlier in the year, but the pound has strengthened noticeably since March and this means the important overseas market will struggle to keep bidding prices higher.’

Still, Liam says, there are not as many opportunities for distressed buying as you might imagine: ‘Ultra-low interest rates have helped keep the distressed sellers out of the market. There have been a few sales to date, however depending on the outlook for higher inflation (and therefore higher borrowing costs) we might see more distressed sales next year.’

Hedgehog’s tactic for finding distressed properties is to read the financial pages and see who has been ousted from their board, but Liam would rather recommend ‘thinking about which parts of London are undervalued and which might benefit from the next upturn.

‘The banker territory of south-west London ironically has proved most resilient over the past 12 months. I would look north towards Bloomsbury, Fitzrovia and Bayswater.’

A travelogue from our correspondent, who has gone coastal:

‘Situated on the serene south coast of Hampshire, between the Solent and the New Forest, Chewton Glen has distinguished itself as a country house hotel, as a restaurant and as a spa. It almost has more awards than shelves to hold them, including this year’s Best Small Hotel in the World (as voted by Gallivanter’s Guide).

‘All the 58 rooms and suites have been decorated to provide luxury and comfort with a combination of antique furnishings, magnificent fabrics and countless knick-knacks, giving a sophisticated, elegant style.

‘The house has a literary link: Captain Frederick Marryat stayed for periods during the 1840s and gathered material for his novel The Children of the New Forest. Marryat’s brother George owned the property until 1855, when it was sold to the Elphinstone family. It is still in private ownership.

‘The Marryat Restaurant was commended by this year’s Harden’s as one of the finest in the UK with its emphasis on regional ingredients and a focus on contemporary cuisine, in the skilled hands of executive chef Luke Matthews. I am almost certain that I had seen my locally-sourced wood pigeon flitting about during my walk in the New Forest earlier that day.

‘The award-winning spa and hydrotherapy centre provided the ideal place to de-stress, and they offered a wide range of soothing services. I enjoyed a most relaxing massage and facial which left me rejuvenated. Come my departure, I was as rested as I had ever been.

‘The Solent allows sailing and powerboat trips, while you can shoot and ride in the New Forest, and all activities are easily arranged by Chewton Glen’s staff.’

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