THE WAY FORWARD
Volatile markets pose unexpected challenges to investors
Volatile markets pose unprecedented challenges to the relationship between private banks, wealth managers and their clients, says PETER GUY
Today’s volatile and uncertain markets mean that private banks and their clients have probably never faced stronger challenges to their portfolios and relationships. Besides the short-term exigencies and anxiety of witnessing irrational market turbulence, new forces are determining how clients are being serviced and educated.
Over the last 12 years, since the 2008 global financial crisis, volatility due to permanently low interest rates has spawned financial bubbles that have challenged the ability of wealth managers to maintain a consistent portfolio strategy. Jumping from asset class to asset class made it stressful to preach the benefits of a welldiversified portfolio. And the recent financial market and economic crises induced by the coronavirus pandemic only made it more difficult to discern and communicate sustainable long-term strategies.
As markets have fundamentally changed, local and global financial
regulators acting in concert through private banks and financial institutions are compelling investors to accept more personal responsibility for their investment decisions. This attempt to reduce legal liabilities in the event of a misunderstanding, especially when investments go bad, has the profound effect of changing risk versus return expectations.
Asia’s strong economic growth has created high expectations among business folk for both their investments and actual operating businesses. Yet competition for clients among local, regional and international private banks and wealth managers remains intense. The need to attract, develop and retain innovative and authoritative relationship managers who can serve the particular demands and needs of Asian entrepreneurs, executives and family offices will remain the cornerstone of successful, long-term service. Despite the current drama roiling global markets, wealth continues to grow and requires responsible and intelligent planning.
China has shifted the distribution of wealth across Asia Pacific and the world. According to the 2019 Global Wealth Report published by the Credit Suisse Research Institute, Asia Pacific’s total household wealth grew by 2.4 percent to reach US$141.2 trillion in mid-2019. This accounts for almost 39.1 percent of the total global wealth of $360.6 trillion.
Between 2016 and 2019, the number of Chinese adults in the $100,000 to $1 million wealth category expanded by more than 80.8 million, from 28.1 million to almost 109 million – an increase of 287 percent, which accounts for 46.7 percent of total personal wealth across the Asia-Pacific region.
Ultra-high-net-worth individuals (UHNWIs) with net assets of more than US$50 million in Asia-Pacific countries excluding India and China number 22,600 – or 14 percent of the world total. China holds 18,130 UHNW individuals, an increase of 370 from mid-2018.
Inheritances are also likely to influence greater wealth distribution outcomes in the future, particularly in +hina, where the effects of the one-child policy combined with vast new wealth creation will require preservation and transfer. High-networth individuals (HNWIs) from traditional industries and new-tech entrepreneurs will require customised plans.
Such a historical growth in wealth means that the western style of multi-generational portfolio management is gaining acceptance. According to private bankers, banks only manage about 20 percent of all HNW assets. And most Asian HNW clients use more than three wealthmanagement relationships.
The emergence of family-office services also means the relationship manager must understand more than portfolio requirements. The manager must understand how the client’s business is part of the family office. The future of wealth management and private banking will be determined by investors’ demands and behaviour, whether or not they are rational or irrational under market conditions.
Current markets and uncertainty make it challenging for Asian-based banks to move away from product sales to more advisory based services. Building and sustaining long-term client trust and confidence is complicated by the current market uncertainties. And it is further complicated by the tendency of Asian investors to invest small portions of their wealth with more than one adviser or their tendency to want to manage their own money and treat private bankers as stockbrokers.
Perhaps the best and most sustainable way forward for financial advisors and private banks is to focus on which type of wealth segment or investment style to operate in.
In the middle of a market downturn, it’s important that the private-banking industry retains the trust of clients, employees, regulators and the general public. Regulations and investor education and discipline remain the major forces shaping the entire investment relationship. Portfolio governance issues, risk and compliance over product suitability, disclosure policies and adviser competency standards will altogether raise the quality of the relationship.