The past year saw equities rise strongly, Bitcoin go into hyperspace, more "leaks" from offshore centres, impact investing gain more noises and regulations such as MiFID II take up a lot of time and budget. Now on to 2018.

When 2017 began and people fretted about the new US president, geopolitical concerns and Brexit, the financial weather looked gloomy. Well, it shows how predictions can be hard.

First of all, last year was a barnburner if one held equities or digital currencies.

The past 12 months saw the bull market in equities continue, almost a decade in length. On a cyclically-adjusted basis, price-earnings ratios for developed countries’ equities, about 23 times earnings, are now expensive, but not “sensationally so” in the words of Rothschild Private Wealth and below 42 at the height of the late 1990s dotcom bubble. Based on figures as of 21 December, 2017, total returns for the MSCI World Index of developed countries’ equities are, in dollars, 22.7 per cent (returns composed of capital growth plus reinvested dividends.) The MSCI EM benchmark of emerging markets shows total returns of over 34.2 per cent. 

The gradual normalisation of interest rates is slowly starting in the US and UK, although older readers will remind themselves that the wafer-thin increases by the Federal Reserve and Bank of England are light-years away from the hefty rate changes seen during the 70s, 80s or indeed the 90s. Sovereign bond markets are expensive. The yield on the US 10-year Treasury bond is 2.4 per cent, while that of the 10-year German bund is 0.4 per cent. Taking price-earnings ratios and inverting them to obtain the dividend yield on stocks, it shows that, for example, that US dividend yields are lower than for a 10-year US government bond, at 1.9 per cent. Eurozone equities’ dividend yields are 2.8 per cent; in the UK, they are 3.9 per cent (yields on 10-year UK gilts, for comparison, are 1.3 per cent). That some equity yields are trading close to, or even below, certain bond markets might suggest valuations are getting cooked. (Source for figures: DataStream, Rothschild & Co, Bloomberg.)

But, with a US tax cut over 10 years of $1.5 trillion being signed into law late in December, including the headline-grabbing corporate tax cut from 35 per cent to 21 per cent, US corporate earnings might continue to justify some, if not all, of the gains. Wealth managers have issued several calls for caution in recent months, but most aren’t underweighting equities yet and with bond yields where they are, opportunities aren’t always easy to find. 

Going private and direct
Another clear trend last year was the continued interest in, and action around private debt, equity and real estate, particularly in the case of family offices, ultra-high net worth investors and certain clients unhappy with low yields. There being no free lunches in capitalism, investors have had to tolerate lesser liquidity and longer time-frames to get a piece of the action. The push into these “alternatives” has not come without concerns about an accumulation of unspent “dry powder” in private equity and whether valuations have become stretched. Interestingly, the hedge fund sector, which hasn’t always had an easy time of it in this era of negative interest rates and rises for long-only investors, continues to provide risk-management tools for those willing to shell out those 2 and 20 fees, and the sector may prove some points to doubters next year. 

Commodities haven’t garnered much attention by way of noise from the wealth sector this year – oil prices have been fairly steady, for example - although as always, gold and other specialist areas have their devotees. Another trend has been talk/action around direct investing. In the US, and select regions of the world, we have seen family offices, for example, talk about taking direct stakes in companies, either alone or in partnership with other FOs. This soaks up a lot of labour and not possible for all, even the richer, investors. Again, this appears to be a yield-driven play and also motivated by a desire to stick close to areas where families made their original wealth.

Any talk of investments and bubbles has to mention the “B-word” – Bitcoin. (There are a growing number of other digital currencies to track as well.) To say that Bitcoin’s ascent from below $1,000 per Bitcoin in late December 2016 to over $18,000 recently is astonishing doesn’t do justice to language (prices move so fast that this is likely to be out of date by the time this appears in print). Bitcoin is standard fodder for conversations in the bar and dinner table. Opinions vary widely: some firms such as Goldman Sachs are setting up desks to trade it; the CME exchange in Chicago enables futures in the coins. On the flipside, JP Morgan’s Jamie Dimon has denounced Bitcoin as a scam and has said he’ll fire employees who trade it. And an occasional commentator for our publications, and speaker at conferences, Christopher Whalen, has branded Bitcoin as a fraud. Whatever one’s view, the rise of crypto-currencies has encouraged people to think radically about what money actually is and whether the old model of states issuing fiat currencies backed only by the power to tax can persist. Such debate can’t be a bad thing.

Technology
Talk of Bitcoin reminds us that the distributed digital ledger underpinning it, called blockchain, has become a darling of IT commentators; it is being invested in by a range of banks, seen as a potentially game-changer in areas such as custody and settlement, disintermediating traditional players, perhaps. Blockchain is also seen as having uses for transferring legal information, and data around medicine and other fields, such as intellectual property. So whatever happens to digital money, the underlying infrastructure could be the winner, rather as happened in the 1840s Gold Rush.

The past 12 months saw the launch and development around digital wealth platforms. Notable examples include the rollout in the UK of the SmartWealth platform by UBS; the Swiss bank wishes to, it tells us, to democratise part of the wealth space. And such a move shows how digital tech, whatever its other merits, is regarded as a way to draw business from younger parts of the adult population. For with inter-generational wealth transfer taking off, as Baby-Boomers retire, such channels are seen as playing an increasing role. For rising regulatory costs and demands mean that tech is seen as a force multiplier for RMs. Indeed one conclusion arrived at in a number of reports this year was that hybrid models of digital advice, using tech to enhance advisors’ services, rather than replace them, were a likely general trend.

As shown by this website, artificial intelligence is gaining ground and firms around the world are investing in forms of machine learning and other areas to power asset allocation decisions, give clients timely data, or indeed find clients in the first place. Meanwhile, the sector continues to figure out what sort of place social media platforms could and should play in their work, given regulatory constraints.

A related issue with tech is that of cyber-crime. 2017 saw massive hacking attacks on Equifax, the credit reporting firm, and other incidents. Surveys shows that financial firms are still not fully primed to deal with hackers, but given the obvious desire of crooks to go where the money is, wealth management firms clearly will need to devote resources in this area. And such spending inevitably competes with expansion and growth-related spending – part of a constant tug of war. How to beat the hackers is likely to be a prominent business area in wealth management, and beyond.

Regulation
Talk of spending on regulation reminds us that regulation remains a big feature, or indeed bane, of the industry’s life. In the words of one wealth manager, 2017 was the “year of the MiFID”. The big regulatory changes brought by the European Union’s MiFID II directive, requiring firms to log more data about clients and give more information relating to costs, take effect from the start of January; there remain concerns about whether all firms area ready. And another concern perhaps is whether the data-gathering pressures of MiFID II clash with the need to show need for storing data under the GDPR data protection directive that takes force in May. We are told that no clash needs to occur, but veteran watchers of European legislation may be wary.

Separately, the US has seen the arrival in its early stages of the Department of Labor Fiduciary rule, which accelerates a trend in the country towards use of fee-based advice. Some aspects of the US Dodd-Frank banking legislation have been eased by the Trump administration. 

The Swiss regulator, FINMA, is probing a clutch of banks over AML issues and the Alpine state has been overhauling financial regulation, often with little coverage at a time when MiFID and the UK’s departure from the EU seems to have sucked much oxygen from the room. And in Asia, regulators such as the Monetary Authority of Singapore  are pushing fintech, clamping down on dirty money and tracking the evolution of a banking market as second- and third-generation wealth holders rise to prominence.

M&A
The regulatory climate, by pushing up costs, has also seen continued consolidation and restructuring in the US and other wealth management space. A few weeks ago, Ray Soudah, founder and head of MilleniumAssociates, an advisory firm to wealth managers, predicted that one major private banking house could disappear amid M&A in the next year or so, given the tough competitive landscape. For years, there have been predictions of big consolidation in a famously fractured industry, but that hasn’t quite yet been the outcome. 

True, there have been a raft of deals in certain countries, such as Tiedemann’s purchase of Seattle-based Threshold Group in the US (buying an expertise in impact investing), while Europe has seen some middle-sized purchases involving outfits such as Indosuez Wealth Management and Liechtensteinische Landesbank. 

Switzerland, with its negative interest rates, isn’t an easy market but there haven’t been big deals to shout about this year. UBS powers ahead as the world’s biggest wealth firm, with its woes of the 2008 financial crisis well behind it. Credit Suisse’s repositioning, such as its push into Asia, appears at the time of writing to be bearing fruit, and rival Swiss bank Julius Baer is rolling out a regional presence in the UK and continuing to work on its Asian “second home market”. Julius Baer was jolted in recent weeks when its CEO since 2009, Boris Collardi, left for Geneva-based private bank Pictet, a move that wasn’t well-received by Julius Baer shareholders.

As this publication’s research team has chronicled, Asia has seen the rise in recent years of external asset managers, challenging some of the dominance of big banks; the family offices sector in the region remains potentially large, given how many of the fast-growing area’s business owners are families. It will be interesting to see how much profitable business firms make in advising creators of family offices there. A cautionary note should be that for some non-domestic private banks, Asia hasn’t been a bed of roses. A failure to develop critical mass in scale and profitability has seen firms such as Barclays, Societe Generale, ABN AMRO, ANZ and Banque Internationale à Luxembourg pull the plugs on Asian wealth management to some degree.  

A continuing trend in several regions, particularly the US and in Europe, and to a certain degree elsewhere, is the intergenerational wealth transfer issue. In the US alone, there is an expected $30 trillion shift from the Baby Boom generation to the younger one; such a shift is thrown into sharp relief by how, at the end of December, US President Donald Trump won his plan to slash certain taxes, such as estate taxes. With parts of wealth management increasingly commoditised, the advisory and goal-setting aspect of the sector becomes more important. We have written this year not just about the younger adult generation and what they want – those “Millennials” – but also about older people and sensitive issues such as cognitive decline and managers’ duty of care. Expect to read more on this in 2018.

On and offshore
The start of 2018 sees more countries come under the net of the Common Reporting Standard, a cross-border set of agreements by countries to prevent tax evasion. International financial centres dislike the term “offshore” but however one describes them, there is continued pressure by large governments, with varying levels of honesty, to demand access to beneficial ownership information on companies, trusts, and others structures. Financial privacy remains a worry; industry practitioners in different parts of the world tell this publication they fear that criminals and corrupt governments (often one and the same) could target the wealthy no longer able to keep their finances private. The effort to balance legitimate privacy against secrecy continues to be a delicate one. But it does appear that offshore financial centres aren’t dying off, perhaps because the benefits of tax neutrality, and the value of international hubs for expat, mobile professionals, far exceeds older tax haven benefits. 

Certainly, this year’s Paradise Papers “leak”, following a similar Panama Papers haul of 2016, highlights the boundaries between privacy and the need to avoid public figures stashing money away in secret. With law firm Appleby reportedly suing some UK media outlets over use of information from the Paradise Papers, it appears some in the IFC industry have lost patience and are fighting back.

As an aside, since Brexit hasn't been mentioned yet, debate continues on whether the UK goes for a "soft" departure from the EU while retaining much of the infrastructure, for good and bad, of the Single Market, or takes a "cleaner" exit and reinvents itself as a sort of offshore centre in Western Europe. (Some claim that the UK already deserves that tag, given its non-dom tax system and other features.) Brexit dominates much of the political debate in the UK. The wealth sector certainly craves as much clarity as possible.

Back to the subject of investment, a prominent sub-theme here has been impact investing: putting money to work to achieve non-financial as well as financial objectives. A number of asset managers and wealth players are keen to talk about their efforts in this area. As time goes by more data will emerg on how well such investments perform and what the actual effects on the ground are. One cause for caution is the "mission drift" that might arise if too much money flows in without there being enough geninue impact investments to go around. And this is an area that hasn't yet been seriously tested by a downturn. 

Finally, with all the talk of robots, Bitcoins and the rest, one trend that seems constant is the need for talented individuals in the industry, such as in the rapidly growing areas such as Asia. Wealth management remains, to use a corny phrase, a “people business” and it seems unlikely that is going to change.