Banking Crisis
EDITORIAL COMMENT: How The Wealth Sector Fared During Pandemic Year
As we sign off ahead of the holiday, group editor Tom Burroughes looks back at an extraordinary 12 months for the wealth management industry and wider world.
At the end of most years I have to consider what was the dominant
theme for wealth management. There is no doubt what the big story
was in 2020, though. The pandemic (now even affecting the South
Pole) dominates conversation like a drunken pub bore.
Wealth managers have, along with so many other sectors, had to
adapt to lockdowns and restrictions, embracing tech in weeks
rather than years. Working from home – already a reality for some
advisors – is now the norm. We’ve all got to know Zoom and
similar platforms. We know how our colleagues decorate their
rooms. Digital workflow tools such as Slack and Basecamp are
equally common now. Advisors have shifted in-person presentations
and meetings to online forums. This news service has moved events
to the virtual world, with success. And even after the pandemic
is past, these tools are here to stay.
People are social creatures and many advisors and clients will be
keen to get out and meet up, although they might avoid shaking
hands for a while. Business trips will take a while to resume. It
is hard to imagine, however, that they will not come back to the
same extent. The due diligence checks that can only be done via
on-site meetings and so on, need to be made. And this is, after
all, a “people business.”
Based on my conversations with executive search figures, many
firms acted rapidly, with RMs calling clients more frequently
than usual during the gut-wrenching early spring when markets
swung violently. That heightened engagement appears to have
continued. With family offices and their advisors, a challenge
has been to make sure family members regularly communicate,
particularly when they fret about older family figures’ health. I
have noticed how the boundaries between wealth and health have
become blurred. It may be a bit over-used as a term, but wealth
management has had to become more truly “holistic”. And it has
also had to remind itself that good wealth management is about
risk management.
As we recounted earlier this year, the evolving discipline of
behavioural finance had another chance to show its benefits
when markets became volatile. Keeping clients poised became an
essential task; the behavioural finance approach, drawing on
evolutionary psychology and analysis of human behaviour over the
ages, is becoming more practical. This will be a field to watch
next year.
So far, the wealth sector has held up relatively well, as far as
it can be judged. Financial results from earlier this year showed
that banks had to set aside provision for bad loans and a number
of lenders’ results took a knock. As 2020 wore on, and equities
rebounded – helped by a lot of cheap central bank money – so did
some of the financial metrics. What will be closely watched over
the next year, however, are the net inflows of money, margins and
revenues, not simply AuM. If the underlying real economy remains
tough in 2021 in certain sectors, as seems likely, until a
vaccine really makes a difference, the pipeline of the next HNW
clients could be squeezed. In the end, a vibrant wealth industry
needs prosperity to replenish the soil in which it grows. A more
slow-growing market is also likely to produce some M&A as
firms try for economies of scale. 2020 saw a number of deals go
through. There was a
flurry of speculation in the summer/autumn that UBS and
Credit Suisse might tie the knot. It remains to be seen whether
that is soundly based.
Cost pressures remain. While there has been some deceleration of
regulatory activity this year (we have been through GDPR, MiFID
II, for example), red tape and rising client expectations still
create costs. US wealth managers have had to wrestle with
Regulation Best Interest rules (to some criticism) that are
designed, framers say, to protect investors. Regulators continue
to keep a beady eye on money laundering and there have been
plenty of cases, such as in Malaysia and the Baltic states,
to remind firms of the costs of being careless. Ensuring that
rules are followed will continue to drive compliance-related tech
spending.
With working from home, technology really has proven its value
spectacularly. The businesses based in Silicon Valley and other
tech hubs have been among the heroes of this year, even though it
is fashionable in certain quarters to throw rocks at Big Tech. Of
course, there was also more commentary in 2020 about
cybersecurity risks with so many people working from home.
Those risks will extend into 2021. Like viruses, digital viruses
and bad actors are constantly evolving.
International financial centres
It has been a strange year for IFCs. Restrictions on foreign
travel have curbed the ability of these places to attract
visitors and potential residents. But their attractions in terms
of stability, given international worries, have not faded.
Switzerland, the world’s largest single IFC, is certainly
challenged by forces such as negative official interest rates and
partial loss of bank secrecy, but it remains a magnet for foreign
clients. Its introduction of a
new regulatory regime for external asset managers has caught
attention. And other IFCs are upgrading and bringing out new
offerings. In January 2020, Singapore introduced its Variable
Capital Company (VCC) structure, which gives it competitive edge
as a domicile for funds and family offices. (Singapore also
benefits to some extent from mainland China’s national security
law imposed on Hong Kong this year.) The various IFCs linked to
the UK, such as the British Virgin Islands, the Cayman Islands,
Jersey, Guernsey and the Isle of Man, are moving towards having
public registers of beneficial ownership of companies (but not
trusts). There is a
legal fight going on over beneficial ownership, and a story
to watch. The devil is in the detail here, but it is increasingly
difficult for critics not to concede that the offshore world is
greatly different from how it was two decades ago. Dubai and Abu
Dhabi in the Gulf are also important, and growing. A cluster
of international banks now call it their home.
The UK is already an “offshore centre” by some measures, and as
it moves out of the European Union’s orbit, it is likely to
become more so. A few days ago, New City Initiative, a UK-based
industry think tank, called for the UK to develop new forms of
cross-border funds, and to deepen financial links with Asia,
among other places. In talking to the Luxembourg funds industry,
I was struck by how some Continental European financial industry
figures want to reduce the frictional costs of Brexit as much as
possible. The supposed demise of London as a financial hub may be
much exaggerated, but it will have to adapt. It will be
interesting to see how cities such as Paris, Amsterdam, Frankfurt
and Milan, to give just four, adapt. Luxembourg and Dublin were
already important fund-registration hubs prior to Brexit; it is
hard to see that changing greatly.
As far as the US is concerned, its own “mini-IFCs” of Delaware,
South Dakota, New Hampshire, Nevada and Alaska are important
domestically, and possible tax hikes under a new President will
keep the tax-mitigation industry busy. Two weeks ago,
the US Senate voted by a veto-proof margin to outlaw
anonymous shell corporations – this could force some changes in
Delaware, for example. I intend to watch developments here
closely.
Sustainability
Another big theme of 2020 – in some ways magnified by the virus –
is that of
environmental, social and governance-themed investing. I have
been bombarded by ESG media press releases this year. An issue is
whether supply of genuine ESG investment opportunities can match
demand. Expect more alerts about “greenwashing” – the problem of
investment firms trying to repackage their wares under an ESG
label. Some of the political and social controversies of the past
few years have caused a certain level of “virtue signalling”
fatigue. Soaring debt and pressure to hike taxes mean that ESG
investors will be as keen to generate strong returns as the more
traditional kind. ESG cannot afford to be less lucrative.
Talk of tax means that the wealth industry is bound to be busy
advising clients on how to mitigate levies on wealth. This will
be a delicate balancing act. Many HNW and ultra-HNW individuals
have actually done well in the past year – quantitative easing
inflates equity, real estate and other assets, and certain
business sectors such as Big Tech and logistics have boomed. The
wealth of the top “1 per cent” has increased, while many millions
have lost jobs and seen businesses crushed. The issue of
“wealth justification” becomes more urgent. While they are
contentious, expect more noise around wealth taxes and other
measures in the coming months.
In the US, a new President is due to take office, and there are
important run-off races for the US Senate that, depending on the
result, could mean that Joe Biden either has considerable leeway
to push a more “liberal” agenda, or doesn’t. If the Senate
remains in Republican hands, such a “divided government” might
ironically be positive for markets, since investors will conclude
that there is not much room for tax hikes.
But as historians of money know, there are other ways than tax to
erode public debt. For some time, central banks the world over
have sought to create low single-digit inflation to cut debt.
This, as I have also noted, tends to redistribute private wealth
to borrowers who hold leveraged assets, and punishes savers. This
pattern, which has fuelled political populism and pushback
against the so-called “neo-liberal” policy mix for the past three
decades, is unlikely to change soon.
But at some point, a period of very low/negative interest rates
is going to end, and with it the distortions to capital markets
and bond yields that challenge asset allocators. There is a
saying in economics that a trend that cannot go on forever,
won’t. But in the meantime, it appears that much of the world is
going to remain in a “Japan-style” period of modest growth and
low rates.
Allow me to wish all loyal readers and supporters of this news
service a very happy holiday and a far more enjoyable and
safe New Year.