EVERYTHING YOU WANTED TO KNOW ABOUT PRIVATE BANKING…

The dilemma of clients’ interests and self interests

… but were afraid to ask. peter guy writes that in spite of being incredibly client-focussed, this doesn’t mean that their customers’ interests necessarily come first

Everyone wants to go to heaven, but no one wants post-Covid period volatility, risk, returns, expectations and lofty financialmarket bubbles continue to defy each new high. Wealth advisors are increasingly forced to redefine their roles and find new ways to explain (or not) how they can help you navigate today’s markets. Expensive equity valuations since 2009 are a regular reason deterring investors from investing in equities. From its March 2020 low the S&P 500 jumped by 60 percent and the Nasdaq index by 75 percent. Both indices reached their record highs despite a Covid pandemic that continues to plague the global economy and impact corporate earnings. Global gross domestic product and corporate earnings aren’t expected to recover to prepandemic levels until late 2021 or even 2022. This perplexing divergence of economic and corporate fundamentals versus the performance of the equity markets creates doubts on valuations and the sustainability of this rally.

High- and ultra-high-net-worth individuals and family offices must continue to seek returns and yields in a market pressuring diminishing returns as global equity markets become overpriced and squeeze out less value by the month. They also must contend with their understanding of volatility versus risk. Markets are volatile in the way they change unpredictably. But investors must clearly understand their personal and family goals and how their entire strategy needs to protect their downside risk.

And while the pandemic has changed the way all of us communicate and socialise, it’s also forced a rethink about how bankers and clients mutually learn, understand and manage investment goals and relationships. The long client lunches and presentations have given way to teleconferencing apps on desktop and mobile devices as the means for building trust. Today’s video technology represents a vast improvement, but no one knows if it may only be a temporary or tolerable substitute for face-to-face meetings.

Private bankers are increasingly in the business of offering advice across a number of wealthrelated areas, such as trusts, succession and longterm portfolio planning. Online brokerages and chatrooms do a cheaper job at stock picking, speculation and other execution needs. Steering clients away from a short-term transaction and trading-oriented relationship with private banking – a particularly bad investment habit in Asia – has started to influence the new generation of wealth that’s studied finance and understands the importance of disciplined, long-term portfolio diversification.

Building a strategic concept of investment and the world takes years; it actually requires a reasonable knowledge and grasp of non-financial topics such as history, economics, culture and politics. You have to create and consume intellectual capital at the same time in order to learn from your investment successes and failures.

Wealth advisors dislike committing or discussing investment scenarios beyond basic lessons about the importance of diversification. Telling a client to sell everything leaves the bank’s relationship manager with a client with no reason to buy anything. Yet investors want to discuss doomsday outcomes these days.

For the first time outside of a world war, a macro shock outside of our ecosystem could be the driver of change. It could lead to more geopolitical conflict, something we couldn’t anticipate. When the public markets force a correction, the hedge funds and mutual funds will see their overall portfolios decline, causing their illiquid investments in tech companies instantly to become a larger percentage of their overall portfolio than originally targeted.

At that point, expect many of them to withdraw from markets, focus on shoring up their public stock positions and perhaps even seek liquidity for their illiquid private equity and venture capital investments.

The flight of public market investors would kill the billion-dollar late-stage funding rounds for “unicorn” tech companies, but could also affect earlier funding rounds that are critical to smaller tech start-ups. Start-up companies face the greatest risks, as well as high-burn-rate companies that assume there’s a lot of cash available for high-spending, high-growth enterprises. This ominous environment means crypto or virtual currencies haven’t lost their speculative and conspiratorial appeal. The dystopian prospect of some “great reset” is like an eery trumpet call over a lost battlefield. Financial apocalypse usually involves the collapse of fiat currencies and the emergence of some form of cryptocurrency.

Yet government agencies regulate them as assets or securities because, legally speaking, only countries and governments can issue currencies. While cryptocurrencies provide speculative opportunities, they’re too volatile to fulfil the two key roles of a currency: acting as a store of value and medium of transfer to buy and sell goods and services.

Today’s particularly hazardous and distended market demands an investor who can assimilate contradictory points of view in finance, economics and geopolitics and synthesise them into a clear but flexible decision.

Private bankers claim they’re incredibly client-focussed, but what this usually means is that their employees are top-notch professionals and deliver competent client service. This doesn’t mean that the clients’ interests necessarily come first. And that is where establishing a close, communicative and transparent relationship with your financial advisor helps both parties fully understand what constitutes your best interests.

The pandemic has forced a rethink about how bankers and clients mutually learn