Speaking at the Wealth Adviser awards earlier this month in the glorious elegance of Sketch in Mayfair, Sunil Gopalan, Chairman of Wealth Adviser’s parent company, GFM Limited, said that chief concerns for the wealthy and their advisers were the low interest rate environment, the increasing cross border nature of regulation and the need for growth in investment technology. The wealthy need old fashioned merchant banking services, Gopalan said.
Key note speaker at the awards was Daniel Pinto, chief executive and founding partner of Stanhope Capital, who commented that wealth managers are survivors, surviving the tidal wave of regulation which has occurred since 2008 which had forced some of them back to school. “We have endured a compliance blitz which means that we spend more time with our compliance officers than clients,” he said.
He commented on the slight fall from grace of hedge funds which have faced more questions over their performance in recent years, but have left their challenging legacy of clients expecting to make money in good times and not lose money in bad times. Fund managers have also experienced a carpet bombing of criticism from politicians and others who have blamed them for all the ills of the economy, he said.
“Why are we so resilient?” he asked. “We are alive and kicking and thriving because at the end of the day we give a good service to clients which means most investment firms have grown. We have taken the blows silently and now it’s time to speak out that what we do is positive.”
And there is a lot to do. The rich are getting richer; they like buying property and they like collecting things. These were just some of the results in Knight Frank’s wealth survey published earlier this year.
Their survey of global wealth managers and private banks found that 2014 had proved to be a more profitable one for the world’s ultra-high net worth individuals than had been expected. In 2013, just 63 per cent of the survey’s respondents had expected their clients’ wealth to increase but a year later, 82 per cent said it had actually increased during 2014.
Things may have been looking rosy in the ultra-high net worth individual’s garden over 2014 but even the super-rich share concerns with those with smaller fortunes. The Knight Frank report found that according to the wealth managers and bankers surveyed, family and business succession issues most concerned them – beating even worries of potential hikes in wealth taxes.
The wealth management survey from Ernst & Young in 2014 equally found that the wealthy are principally concerned with holistic goal planning and wealth transfer. “Holistic goal planning has a fairly limited impact on client acquisition and retention, yet it’s the most important trend influencing clients’ decisions to seek out wealth management firms” the report said. “This suggests that clients see little differentiation across firms’ planning approaches and are not fully aware of the benefits of their current firm’s planning offering. Capitalising on the client desire for goal planning requires not just a differentiated offering that attracts clients but one that communicates the value proposition to clients.”
And in the UK, goal planning and wealth transfer became even more important in 2015 when post 6 April, one of the biggest changes in pension regulation came into force. Whatever the wealth of the individual, April’s new pension freedoms spelt out a wealth of opportunity and potential new business for sophisticated investment advisers.
Don’t buy the Lamborghini
It was Chancellor George Osborne’s changes in the 2014 Budget that meant that clients aged over 55 – who represent an age group that is often the most affluent in the UK – would no longer be forced to buy an annuity, designed to provide rest of life income, and would now be able to dip into their pension pots, taking as many withdrawals as they wished, each time getting 25 per cent tax free with the balance taxed as income.
The Chancellor also got rid of the 55 per cent 'death tax' on pension pots left invested, a change that again chimed with client concerns about the succession of wealth through the family.
Building up to the pension freedom date, there were estimates that these changes could result in some GBP6 billion in cash being pulled out of previously locked-up pension pots in the first four months of the new regime.
A Channel 4 Dispatches programme found that almost half of the over 55s, roughly two million people, were planning to take some or all of their money out of their pensions after the April 6th deadline and identified a rising worry that it would all be spent by the following April.
Roadshows were planned, training was conducted, new products were created but in fact, not so many newly liberated young pensioners did buy the Lamborghini.
April 2015 research from PwC found that just 1 per cent of 50-75 year olds said they would use the entirety of their pot to treat themselves, while just over a quarter (27 per cent) of those surveyed intended to spend some of their money on general expenditure, treating themselves or on home improvements, unsecured debt and mortgages.
The report found that those approaching retirement were well aware of the need for their money to be used to fund an income, with 67 per cent of respondents factoring certainty of income into their retirement decisions. Annuities, however, were not the preferred option for those looking to do so, with only 28 per cent of respondents planning to purchase one.
Commenting on the pension changes, Andrew Humphries, marketing director, St James’s Place, winner of Best Private Client Investment Manager in the Wealth Adviser awards, says: “First of all there is no doubt that we are living in the age of responsibility. The recent pension changes are another perfect example that people have to take greater responsibility for their own financial wellbeing.”
And while it is true that changes in pension legislation don’t have quite the same effect on the portfolios of the truly wealthy, everyone has to be individually responsible in the new world.
Humphries says: “While guidance is a good starting point, people want to be advised on what they should be doing – the changes re-emphasise the need for good quality advice in the UK.” The St. James’s Place annual survey of their clients asked what their key concerns are and number one at 75 per cent was ensuring they had enough to live on in retirement.
“In a low yield low interest rate environment that search for income has been with us for four to five years and investors expected interest rates to turn around from 2009 lows, but the fact they haven’t has emphasised to people that they can’t expect rates to rise significantly anytime soon” Humphries says.
With rates the way they are, Humphries feels that investors cannot expect a greater than 4 per cent income from a well-diversified portfolio.
Humphries believes that the pension changes have brought the issue forward in many investors’ minds.
“It is dominating peoples’ thoughts and highlighted by the change in pension legislation that investors want to manage their own retirement funds and not just buy an annuity,” he says. “There is no panacea that combines the best bits of annuities and with-profits, people need a well-diversified portfolio across a range of different asset classes.”
Matt Philips of Thomas Miller Wealth Management, interviewed in Wealth Adviser in March, says: “For the wealthy, pension reform does not have the same impact in that they might not have the same need for income in retirement.”
In these cases, Philips believes that the pension can become an inheritance tax vehicle, allowing a tax efficient handing down of a pot of money to the next generation.
Best Multi-Family Office winner Smith & Williamson’s tax partner Frank Akers-Douglas says: “The pension changes caused a huge amount of lead activity up to 6th April. However the ability to withdraw from a pension arrangement is less attractive in the context of our client base who are likely to have assets in their own hands anyway. The fact that you hand on your pension now is very useful and for people with fewer assets and smaller pension pots it is an attractive option.”
Principles of good governance for family wealth
Smith & Williamson recently conducted a survey of high net worth individuals, seeking to establish what makes good governance of the family wealth. Their central theme was the need to manage family dynamics, both in the relationships within the family and in dealings with professional advisers.
They found that those surveyed felt that good communication, trust and the ability to take the long view were crucial to the protection and enhancement of wealth. David Cobb, Head of Investment Management & Banking at Smith & Williamson says: “Looking after the family’s financial affairs was widely viewed as a responsibility that cannot be dispensed with until the next generation has been fully prepared to take up the reins – a process that often takes many years. Some of our respondents were in their seventies and were still managing the family finances while their children completed their university education or established their careers.”
While the exact moment when the next younger generation might take up the mantel of looking after the cash was not clear, most thought it would be earlier than was accorded to the last generation, but still probably not until they were in their thirties.
The survey found that members of the younger generation typically want to build relationships with advisers who are close to them in age and outlook, and who are prepared to entertain fresh ideas. Cobb writes that several interviewees warned that professional services firms risk losing their clients if they fail to bring in younger assistants or partners to keep step with evolving family needs.
Those surveyed for the Smith & Williamson report recognised that sustaining their wealth is something that requires their focus, their time and a good deal of management.
Cobb writes: “Not all wanted formal family meetings, but for some they were a necessity. What everybody did want was a set of professionals they could rely on and whom they got on with or even liked. There was no clear preference for one professional service over another; however, getting ‘the right people on the bus and in the right seats’ was seen as a prerequisite for success and making life as easy as possible.”
Along with the findings from the Knight Frank report, those surveyed by Smith & Williamson were aware of threats to their wealth, but saw no reason to change course provided they had surrounded themselves with a team in which they had complete confidence.
The importance of professional advisers and the rise of the digital age
Having the right professional advisers in place is crucial for the Smith & Williamson respondents. The overwhelming majority prefers to deal with a small team and values long-term relationships built on trust and personal chemistry.
Frank Akers-Douglas quotes a representative view as: “Financial services come down to personal relationships – do you trust them, are you pleased to see them, do you like them, are they doing a good job and are they charging a reasonable amount for those services?”
Iain Tait, partner and head of the Private Investment Office at London & Capital who won the Best Ultra High Net Worth team award with Wealth Adviser comments in his profile on the impact of the digital age on their business. Their clients, he says, increasingly don’t switch off for large chunks of the year but want a constant access to information. The challenge for him is providing a constant reporting stream but maintaining cyber security.
Stewart Foster, chief executive of Third Financial, winner of Best Technology Provider, agrees that clients want more digital facilities. Foster says: “It’s an opportunity for my clients and quite exciting.”