A period of central bank money printing, upheavals in work patterns and the forces unleashed by globalization have made some people immensely rich. Amidst rising populism, the wealth management industry must think harder about how it defends legitimate wealth.
(Stephen Harris, publisher of this news site, sets out his views about arguably one of the most serious challenges that the wealth management industry faces - the perception that great wealth itself is often hard to defend ethically and that current approaches are inadequate.)
In a week which has seen American billionaires calling for a wealth tax, I feel the time is right for me to express a long-held opinion about the structure of wealth and indeed wealth management.
In an open letter citing their drivers as climate change and the desire to improve outcomes for all, the well-known billionaires - some inheritors, some self-made – said: “America has a moral, ethical and economic responsibility to tax our wealth more”.
The emphasis in wealth management has long been transitioning from wealth creation to wealth preservation but I’m sensing a new and growing trend. I call it Wealth Justification. And I think this is a great opportunity for wealth managers to extend their range of services for clients.
We live in a world of dramatic contrasts. Most obviously in absolute wealth - very few people have mega-yachts and private jets - but also in terms of life chances that are manifest in elite education, exclusive healthcare and privileged access to lucrative careers and business opportunities.
Technology and the freeing of markets in the post-communist era has vastly inflated these contrasts. And the same technology has allowed those who have not benefited financially from these trends to have a blow-by-blow account of the lives of those who have.
I bet they’re not very happy about it. Because the rich are not perceived as being particularly deserving of their financial success. They’re the people who’ve been in the right place at the right time – either in the former Eastern Bloc states, or being “long” property just before quantitative easing, getting in to cryptos before the herd – or even just having a job in a bank and managing to keep their heads down for 20 years.
And more than this – for every buy-to-let mortgage there’s a renting family, couple or individual who are not only financing it but being denied the opportunity to own their own property with the social cohesive and financial benefits that accrue to this happy state.
This aside, for whatever reason there’s a growing groundswell of opinion amongst the “have nots” that the “haves” shouldn’t!
Why should we care? Pushing away the moral and ethical questions about concern for our fellow beings, we should worry too that our established social and economic order may at some point come under threat from mass action – or the non-privileged becoming “woke”. They now have the means to act on their dissatisfaction through social media. And let’s not forget that populism and nationalism could easily be harnessed to turn further against the established order – for “liberal elite” read “rich people”.
In their letter, the American billionaires said taxing their wealth “would slow the growing concentration of wealth that undermines the stability and integrity of our republic… Division and dissatisfaction are exacerbated by inequality, leading to higher levels of distrust in democratic institutions - and worse”.
The super-rich have known this for some time of course. Our events for the family office community have always had a focus on philanthropy, SRI, giving back and environmental issues. Investment management and wealth preservation strategies are always seen as a necessary evil to be passed over quickly.
More interestingly, they’re becoming increasingly concerned about their precarious position and worry how future generations of their families might fare in a new world order.
I’m sensing that justifying extreme wealth and social inequality by pointing to philanthropic activity and some well-intentioned investing isn’t going to cut it anymore. “Virtue signalling” will be called out and people may wonder why society’s scarce resources are being directed by one person or a family rather than following collective opinion on what is a good idea.
If the rich are going to hang onto their wealth through the generations they’re going to have to explain how and why they got it – and not just to their banks. And after explaining they’ll have to justify it.
We can bet that wealth justification will filter down to the high net worth community soon enough. Let’s get onto the front foot with explaining that we’re working with people who, in the main, create wealth in a responsible and worthwhile way and we’re not ashamed about it.
So this issue doesn’t need to be addressed on an individual level. Isn’t there a role for advisors here? It’s deeply unfashionable to extol the virtues of inequality at the political level but perhaps part of the wealth management client service should be to do exactly that. Should industry-wide professional and trade bodies pick up the cudgels too? They perhaps should develop a toolbox of concepts and metrics to justify wealth and a means of justification that goes beyond the simplistic or patronising.
At the individual client level it makes perfect sense too – and this is the opportunity that individual wealth managers may be foolish to ignore.
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