Downturn created "crisis of trust" among ultra wealthy

A Societe Generale Private Banking survey finds that ultra-HNWI have increased their due diligence following the financial crisis and are putting more emphasis on trust and transparency than on high returns.
Vincent Magnenat
Vincent Magnenat

Vincent Magnenat, deputy to the CEO of marketing in Singapore and South Asia at Societe Generale Private Banking, talks to FinanceAsia about the results of a qualitative survey entitled “Seven key trends for investing, giving and spending among the very rich”, which was sponsored by his firm.

Why are the very rich no longer feeling secure about their wealth?
The key reason is because of the 18 months of nail-biting volatility in financial markets and the wealth destruction on a massive scale.

In fact, this year we conducted a timely survey on the topic of ultra-high-net-worth individuals (ultra-HNWI) and their behaviour in terms of investment, philanthropy and consumption post the downturn. The qualitative survey, sponsored by Societe Generale Private Banking, was conducted by The Economist Intelligence Unit on the basis of interviews with ultra-HNWI and experts around the world.

Although the turmoil in financial markets affected almost everyone, those at the upper end of the wealth scale by definition lost more. The very wealthy were also more likely to be exposed to some of the most badly affected asset classes, such as commercial property, and to have investments locked up in illiquid products.

Even highly diversified portfolios turned out to offer little protection. Asset classes that were supposed to be uncorrelated ended up having a high degree of correlation, and many so-called absolute return strategies, which were designed to offer protection against falling markets, proved unable to offset the overall downward trend.

According to the findings, the economic crisis has, as a matter of fact, had a life-changing impact on many of the world’s ultra-HNWI (those with investable assets in excess of $30 million). Especially since many have lost their “ultra” tag altogether and have been downgraded to the rank of mere HNWI (someone with wealth in excess of $1 million).

How has the element of trust changed between ultra-high-net-worth individuals and investment experts?
According to the survey, the financial crisis has led to a “crisis of trust” between ultra-HNWI and investment experts. This is likely to have resulted from the fact that the very wealthy were more likely to have been exposed to asset classes that performed terribly in the downturn, such as commercial property, and complex, illiquid investments.

In the medium term, the findings predict that ultra-HNWI will be more vigilant, with increased due diligence and hands-on involvement and will thrust more emphasis on trust and transparency rather than high returns. They will be asking more questions and in some cases taking more of an active role in managing the investments themselves.

However, at Societe Generale Private Banking in Asia, we also noticed that many ultra-HNW clients were working even more closely with our bankers during and after crisis. They were more dependent on us for frequent market and investment view updates.

How can investment experts regain the trust of ultra-HNWI if trust has already been jeopardised?
The past 18 months has prompted managers and advisers from across the wealth management spectrum to re-evaluate their approach to dealing with clients, whether trust has been lost or not. Broadly classified, investment experts should rethink three main areas: reporting, research, and the structure of the advisory relationship itself.

  • Quality of reporting has emerged as an important issue in our interviews and was also identified as one of four drivers of client retention in the 2009 World Wealth Report. Clients want links between the objectives, asset allocation and performance.
  • Requests for detailed client research, so that the needs and preferences of wealthy individuals are better understood, has also gained substantial ground. A common problem with the relationship-driven model, which relies on one-to-one dialogue, is that it can be difficult to draw broader conclusions about the customer base as a whole. The industry must start asking clients systematically what they want to know – essentially to gain insights which can be used to work out product priority for clients.
  • On the relationship aspect, this may mean taking a more holistic view of the wealthy client’s finances, and drawing on the resources and capabilities of other specialists, without sacrificing the personal touch of the relationship manager model.

More broadly, there is recognition that clients need access to a whole range of experts outside the world of investment. These may include tax, succession planning, philanthropy and investment banking services, as the very wealthy are likely to earn money in multiple jurisdictions, spend time in several different countries each year and have complex offshore and onshore ownership structures for different assets.

How have ultra-HNWI investment trends changed since the beginning of the global financial crisis, and why?

The investment trends of ultra-HNWI investment trends have substantially changed since the beginning of the global financial crisis. A case in point is that the survey indicated that the very wealthy wish to better control their investments by playing a more active role in the management of their portfolios.

In addition to where the very wealthy are investing their money, the pendulum has swung from extreme complexity, such as hedge funds and derivatives, to extreme simplicity such as cash, [although] a desire for better returns will gradually encourage them to return to more complex investments. Here we have also witnessed that the interest for more sophisticated products is returning, but these will need to be fully transparent to counter entrenched conservatism. From their advisers, the very wealthy are asking for more streamlined reporting, clearer research and a more holistic view of their needs.

Although the wealth of the ultra-HNWI segment as a whole has declined since the global financial crisis, the number of HNWI around the world -- particularly in Asia, China and India -- continued to grow throughout the crisis. What are the reasons for this phenomenon?

The reasons for the phenomenon in China and India are their economic expansion and growth, which is likely to keep outpacing more developed economies. In fact, the World Wealth Report 2010 predicts that Asia-Pacific will be the powerhouse of HNWI growth in the coming years, thanks to the solid performance from both these countries.

In India, the HNWI population grew 50.9% in 2009. India also has a relatively high market cap-to-GDP ratio (at two times GDP) and its stock-market capitalisation more than doubled in 2009, after dropping 64.1% in 2008. The recovery was also underpinned, however, by the strong outlook for India’s underlying economy.

China remains the world’s fourth largest HNWI base, with 477,000 HNWI, up 31.0%. Stock market capitalization in China soared more than 100% in 2009, as the economy grew at a rapid 8.7% pace.

What are some behavioural trends of ultra-HNWI before and after the recession?

The survey highlighted seven major behavioural trends in terms of investment, philanthropy and consumption. We have already discussed investment trends in the above questions.

Philanthropy has also suffered at a time when demand for donations has increased. Understandably, endowment funds have taken a substantial hit from the turmoil in financial markets, with some large universities having seen returns decline by 20% or more. Discretionary giving has also decreased, with the Chronicle of Philanthropy expecting a 9% drop in donations to the 400 largest US non-profits in 2009.

There is evidence that the downturn has led to a reduction in philanthropy across most income levels in society. At the top of the pyramid, however, those who remain very wealthy following the recession say they intend to maintain or increase giving levels. In some cases this is because they have set up foundations, whose output is not dependent on economic cycles. Most of all, the very wealthy interviewed for this report say that giving is a “state of mind” rather than a result of whether a percentage of their vast overall net worth has been gained or lost.

Interestingly, the very wealthy have continued to adopt a more business-like approach to philanthropy that is focused on verifying positive societal outcomes and improving accountability in the charitable sector. This trend was present before the crisis, but our research suggests it has been accelerated by the recession.

On consumption patterns, buying behaviour among the very wealthy is continuing to shift following the global downturn. They want better, longer-lasting and more environmentally-sensitive products. They will pay for experiences and service rather than strictly for products. Opinion is divided as to how long these trends will last, but many expect the desire for visible luxury items to return with the next upturn in the business cycle.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media