Which asset classes are most popular with UHNWs? What are wealth managers’ most pressing priorities? And what are the biggest threats to the wealth of the super-rich? The 2021 Spear’s Wealth Management Survey has the answers
As the Spear’s Research Unit carries out the work that underpins each new edition of the Spear’s Wealth Management Index, it gathers insight from the members of a highly exclusive club: the leading wealth managers working with HNW and UHNW clients. This makes for interesting reading.
Unsurprisingly, this year, the wealth managers surveyed by Spear’s were almost unanimous in the view that global economic growth would improve over the coming 12 months. But beyond this high-level analysis, a more nuanced picture emerges.
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The industry’s view is consistent with that of the IMF, notes James Wilcox of private investment group Floreat. The IMF forecasts global growth of 6 per cent in 2021 and 4.4 per cent in 2022. ‘This is an upward revision from October 2020, reflecting the additional fiscal support in a few large economies.’
But the pandemic recovery will not treat all economies as equals. India and Brazil are likely to be worse affected than the countries with the most successful vaccine programmes, such as the UK and US.
The fortunes of certain sectors will vary too, says one wealth manager whose firm has placed its investments into three notional ‘buckets’ according to how severely they are likely to be hampered by the effects of the pandemic.
What’s more, this ‘multi-speed recovery’ could see the re-emergence of a practice that had begun to feel unfashionable, says Charles Sanford of LGT Vestra: ‘Stock selection will be more important – as opposed to just buying the index.’
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Indeed, equities are on the agenda of many leading wealth managers; some 65 per cent of those surveyed by Spear’s expect to advise their wealthiest clients to increase their exposure to public markets in the coming months. Private equity stands to be even more popular.
Meanwhile, fixed income seems to have fallen almost entirely out of favour; more than half (55 per cent) of Spear’s Wealth Management Survey respondents say they will advise clients to decrease their exposure.
‘Fixed income looks very expensive to us at the moment,’ says Charles Costa Duarte of Rothschild & Co. ‘With potential rises in interest rates coming it’s probably not a space where we will have much exposure.’ The spectre of inflation also looms.
In lieu of holding government bonds, Rothschild & Co may ‘try to find alternatives that are going to give us returns that are uncorrelated to equities,’ Says Costa Duarte. That could entail investing in certain hedge funds that stand to profit from particular trends. But not everyone in the industry is convinced. One wealth manager told Spear’s that hedge funds ‘have proved that they can’t outperform and most of them went bust’.
Questions regarding cryptocurrencies are complicated for UK-based wealth managers who are encumbered by regulation. (This is likely to account for the large proportion of respondents who answered ‘don’t know’ or ‘not applicable’ when questioned.) But many were less than enthusiastic in any case, saying the asset class was inherently volatile and almost impossible to value.
When it comes to investing in their own businesses, ESG (and/or impact investing) emerges as the clear number-one priority for wealth managers. There are caveats, however.
‘ESG can be done very easily… as a pure marketing play,’ says LGT Vestra’s Charles Sanford. ‘But I do think clients will see through that. What wealth managers should really be doing is getting proper ESG technical expertise and talent in – to deliver ESG as part of the DNA of the organisation.’
Enthusiasm for ESG is a ‘predictable outcome’, says Jamie Black of Sarasin & Partners, who notes that many in the industry ‘are trying to play a pretty rapid catch up on ESG capabilities’.
Wealth managers’ responses to this particular Spear’s Wealth Management Survey question are somewhat ‘curious’ adds Black: ‘If you ask the US or UK regulator where they think our industry should be prioritising their resources and investment, I think they would hope to see cybersecurity higher up the list.’
The wealth managers surveyed by Spear’s believe that, for many HNWs, the performance of their own business is the most important threat to their wealth. Just over half say this is either a ‘significant’ or ‘severe’ threat.
‘If you’re an entrepreneur and you still have your own business, then you are likely to have a very concentrated exposure to that business,’ says Sanford. ‘Not only that, but the exposure is likely to be much more volatile than your portfolio.’
That doesn’t mean being the steward of a fortune is easy by comparison, says Costa Duarte. ‘A lot of entrepreneurs who have created a business understand their business well; they built from the bottom up and they know it inside out. Often the challenge comes when they sell that business. How do you then navigate what comes next?’
‘One thing we think is important is really understanding what wealth preservation is. For us, that’s beating inflation. We’ve been in an environment of very benign inflation for the last few years, but it’s certainly a huge, huge risk, because just sitting there, doing nothing with your wealth, or keeping your cash under the mattress or in the bank, is going to mean you lose money in real terms. Even over a very short period of time that can have a material impact on your wealth.’
Trying to do too much with one’s money can be even more risky, adds Sanford: ‘A wealth manager is there to protect and grow wealth. As we know from Bill Hwang at Archegos, if you’re not careful, you can go from $20 billion to zero in wealth in the space of a week.’
Despite Joe Biden’s widely expected shakeup of capital gains tax and the wider system in the US, and similar noises coming out of Number 11 Downing Street, tax is only considered a mid-ranking threat.
In the words of one wealth manager: ‘Tax is tax. And you can’t avoid it unless you want to move offshore and live in Monaco or whatever. Some people choose to do that, but you can’t avoid taxes without making material changes to your lifestyle.’
Or, put another way, the ‘tax tail’ should not be allowed to wag the ‘lifestyle dog’, says Sanford. ‘That is a trap that some private clients could slip into over time. In reality, the best course of action is usually to live your life and make sure that you can provide for yourself and your family. That might mean building a buffer to make sure you can withstand the impact of any tax changes that might be on the horizon.’
What else can private clients and UHNWs do to help themselves?
Planning for succession more or sooner and having longer time horizons ranked as the top two responses among wealth managers.
Especially in the wake of the pandemic, succession is ‘the pre-eminent question’ for all clients, according to James Wilcox of Floreat. He also notes that combining succession planning with investment horizons of five, 10, or 20 years was desirable. ‘’While this has always been a consistent theme, in challenging times patience becomes increasingly important.’
The data presented here is from the 2021 Spear’s Wealth Management Survey and reflects responses from 73 leading wealth managers featured in the Spear’s Wealth Management Index, each of whom works directly with high-net-worth individuals.
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