THE CHANGING LANDSCAPE
The COVID-19 pandemic and its consequences continue to dominate headlines, altering daily life around the world. Even as the initial waves of the virus appear to be receding in many countries outside of the United States, the economic impacts caused by the pandemic will impact growth trajectories for years to come. Furthermore, many countries that have managed to suppress the outbreak are still implementing stricter protocols for travel, school, and office interactions, perpetuating the shift to a “new normal.”
Estimates of the impact on the UHNW and HNW populations vary by region and sector, but collective global wealth at these tiers will likely decline by over $3 trillion this year – a stark reversal of the rising tide that has lifted fortunes for well over a decade. Longer-term forecasts suggest that this wealth is unlikely to be recovered for 3-4 years. Thus, short term investing and financial priorities have been dramatically impacted. After making a sudden shift from playing offence to protecting assets, HNW clients have been re-evaluating their needs and options in the midst of significant market turmoil. Across all wealth levels, financial trading has increased significantly during the pandemic, and HNW investors are looking for opportunities created by the changing economic landscape and government responses.
Client-advisor relationships have been in the eye of the storm throughout the pandemic. While COVID-19 has changed the macroeconomic outlook for all investors, it has also impacted nearly every aspect of the way wealth is managed at a practical level. Investor goals and objectives have changed, as have the ways advisors communicate and manage relationships.
Adjusting to the new environment
Normalizing digital interaction.
HNW and UHNW investors have historically opted for higher-touch and in person interactions, as compared to mass affluent clients (those with $250K-$999K in liquid assets). However, as the coronavirus has forced wealth advisors and clients into new modes of interaction, it has accelerated changes in the platforms on which advice is provided. According to a recent Morgan Stanley study, digital engagement across all channels between HNW clients and advisors has grown over sevenfold from before the virus. Zoom chats and a range of digital apps have become essential tools.
While person-to-person interactions are very likely to remain at the core of client interactions for this wealth tier, the ability to interact over these new digital platforms will likely be regarded as an essential convenience by clients. Consequently, wealth advisors need to move beyond treating these tools as a triage option during a period of disruption, and rather focus on integrating best in class digital capabilities into their relationships.
According to Edward V. Marshall, Managing Director at Boston Private, and firsthand observer to the changing trends in this space:
“Remote services won’t dominate in the future, because having a community of family offices where clients can collaborate, commiserate, and interact [is crucial] – some things can’t be recreated in a webinar. However, now that everyone has grown used to these tools, they will be used to using them to augment relationships. Jumping on a Zoom call won’t be as jarring as it was in 2019.”
Altering hedging strategies.
HNW wealth advisors have watched their clients suffer significant losses due to the market downturn. Even now that global equities markets have seen significant rebounds, and client risk appetite is beginning to return, investors are focusing on the long-term, looking for strategies to hedge against the unique challenges posed by the pandemic, and wealth advisors are developing strategies to ensure against the future downside risk.
Some of these hedging strategies are traditional – including adjustments of securities mix and exposure to different regions and sectors. Marshall observes that the market correction led many family offices to bulk up on liquidity, given the uncertainty caused by the crisis. Fast forward to today, many are re-evaluating their risk positions and while they have been putting money back to work, there is an increased emphasis on due diligence and actively managed strategies, as expectations of increased volatility and dispersion rise. There has also been a great deal of interest in life sciences, health care, and biotech, as well as other growth-oriented companies – particularly technology firms – that can adapt to and prosper from the new economic reality resulting from the pandemic.
Other offices are pursuing more unique strategies, tailored to the lifestyle needs and interests of their wealthiest clients. One such option involves increasing global residency flexibility in the face of government response to the ongoing uncertainty of the virus. Citizenship by Investment (CIP) programs provide an opportunity to do just that and are growing in popularity as a result. CIP programs, offered by a growing number of countries, provide passports and legal status to investors willing to make certain financial commitments to the local economy. They are one example of the kinds of risk mitigation that wealth advisors should be prepared to help investors within the current climate.
Finding opportunities in private markets.
HNW investors have shown increased interest in private market opportunities (the same Morgan Stanley study projects that over the next 5 years illiquid/alternative UHNW investments will grow by 8 per cent annually to $24 trillion by 2024). Given the capital requirements, illiquidity timeframes and regulatory infrastructure, these opportunities will most likely be relevant to UHNW clients. These obvious hurdles notwithstanding, many large structural changes across a range of global sectors will likely lead to an expedited pace of disruption of existing incumbents, and private investments in smaller new entrants to these markets may provide interesting opportunities for investors. Wealth advisors should be well-positioned to provide a guide to the landscape for private investment during and after the pandemic, as thorough and thoughtful due diligence will be increasingly important as assets continue to pour into the private markets, increasing the competition for quality investment opportunities in the space.
Addressing personal changes.
There are several additional concerns that have taken on added salience during the past several quarters. For those directly affected by the virus, updates to legacy and estate planning have been a central concern. For nearly all investors, adjustments to giving plans and management of giving vehicles have also been an area of focus for investors whose net wealth or liquid assets have seen significant change.
What is the new normal?
In the early months of the virus, wealth managers were right to focus on preservation – minimizing risk, protecting assets. However, as clients and managers move on from the early stages of the virus – this approach will not be sufficient. Especially in light of the findings from the Wealth-X Family Wealth Transfer Report, which forecasts that individuals with a net worth of $5 million will collectively transfer over $15 trillion to the next generation by 2030.
In addition to recalibrating hedging strategies and identifying new growth opportunities, they also need to consider how relationship management will be different going forward and integrate the best of the new way of working to help existing relationships grow and attract new clients.
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