Countries such as Greece and Spain have suffered most in recent years, €107bn exiting Greece alone. But this is creating, not eroding, demand for wealth management says Iain Tait.
The Global Financial Crisis and its aftermath brought challenges across the globe, but in those countries that saw the most severe and enduring down-turn, these challenges have been magnified. Wealthy Greek and Spanish citizens, among others, have seen not only a loss of wealth, but increasing complexity, just as advisers have been less inclined to operate in these countries.
Having spent a lot of time with the growing number of Greek clients I help manage, there are some stark similarities with the Spanish clients our Chief Investment Officer, Pau Morilla-Giner, has connections with.
At first, the wealthy had to contend with a savage fall in value across their assets. According to estimates around €107bn left the Greek banking system during the crisis. The Greek stock market plunged 90 per cent and has remained near its trough. The Spanish housing market paid the price for a vast, debt-fuelled, building boom, dropping around 30 per cent. For those people who had significant wealth bound up in the real estate market it was a profound shock.
From there, policymakers’ response to the crisis brought its own challenges. Sources of financing dried up as banks were forced to deleverage. The cost of debt cheapened, but credit was largely unavailable for businesses or individuals. Those keen to take advantage of sliding asset prices found it more difficult to do so, while corporate investment stalled. To some extent, these problems are still in place. Many European banks still have delinquent loans on their books, for example.
For Greeks, the problems went one step further: the Government introduced capital controls. Many citizens had already moved some wealth offshore to countries such as Switzerland, and estimates suggest that almost half a million Greeks left the country altogether, around 5 per cent of the population.
Life for those who remained was tougher. The Greek tax authorities came under increasing pressure from their Eurozone partners to ensure that taxes were being paid. Greek citizens increasingly felt a regulatory burden – more personal and corporate audits took place and punishment for non-compliance grew increasingly harsh.
For those with residual capital, managing that capital efficiently also became more difficult. Fears on the banking sector and low savings rates made cash relatively unattractive, but volatile stock markets, unstable property markets and low-yielding bond markets made for equally uninspiring options.
This problem persists: 45 per cent of Eurozone bonds now have a negative yield and banks are, in some cases, trying to pass on negative interest rates to consumers. For the management of pension assets for example, this is a thorny problem.
This has forced a change of approach from high net worth investors and their advisers on the best way to structure their wealth. Previously, they may have relied on real estate or conventional government bonds, but given the fragility and unpredictability of those markets, they are forced to be more open-minded about where they place their wealth. This might be selectively deploying capital across fixed income holdings, equities and perhaps a greater willingness to use alternatives.
One impact of the financial crisis has been that the Greek and Spanish wealthy have been broadly neglected by the wider wealth management sector. The complexity of the problems, and a more heavily regulated climate, has led many advisers to conclude that it is not worth serving these markets.
This has led to a dearth of advice just when investors have needed it most. Many higher net worth individuals in Greece and Spain have large amounts of legitimate offshore wealth, custodied in countries such as Switzerland. In many cases this has left them with wealth spread disparately and managed chaotically. We have found that many have a real need for a wealth manager to bring cohesion and discipline to the management of their assets, to ensure that their wealth is managed optimally for the longer-term.
That said, some will still conclude that they want to build a life outside Greece or Spain. Both countries still face significant economic problems and in Greece there remains the risk of an exit from the Eurozone.
This would bring its own complexity. The tax authorities have become increasingly unsympathetic to those wanting to leave Greece. There have been instances where they have sought to challenge the taxpayer’s residency and try to establish ties between the taxpayer and Greece. They have even tried to impose additional taxes for past financial years. The need for cross-border advisers who can navigate this type of problem has arguably never been greater.
There is a real need for solid, integrated financial advice in these areas. The temptation has been to write them off as ‘too complex’, but there are solutions for those still struggling with the aftermath of the financial crisis.
Iain Tait is a partner and the head of private investment office at London & Capital