Private banks are rethinking their client strategies to weather the impact of COVID-19. Four trends are emerging as managers strive to preserve and grow the wealth of their clients
By Holly Huang
Last week, an acquaintance of ours at a global private bank called to see how we were coping with the ongoing crisis. Like many businesses, we have experienced significant disruption, particularly with our work in the events space.
That said, our outreach, crisis and strategic advisory work has never been busier. While expressing gladness at this, our acquaintance bemoaned how the pandemic is severely disrupting not just their business, but the entire private banking industry — a service built on in-person meetings and other conventional practices that have been in use for centuries.
How might they reinvent themselves, they asked, and ensure they best service their clients during the current pandemic?
Here are a few ways leading private banks are shielding the wealth of their clients while ensuring it will thrive in the coming months and years.
Increased investment in alternatives
When markets plummeted earlier this year, news outlets reported how many high-net-worth-individuals (HNWIs) had become ‘poorer’ — Sir James Dyson and Sir Richard Branson had lost one billion each, for instance, but they were still worth US$16 billion and US$4.2 billion respectively. Hardly small change.
Plus, while stock markets globally dropped by 27%, they quickly recovered and are now priced anywhere between 10% and 20% lower year-to-date. Will they rise further or collapse again? Probably both, given the nature of stock markets.
This is an important point. HNWIs typically hold a diverse portfolio incorporating stocks, bonds, cash and alternatives. But given the volatility of stocks, and the current ultra-low returns of bonds (excluding high-yield), more savvy wealth managers are expanding their alternatives portfolios — particularly into private equity and real estate, which are far less volatile and can yield double-digit returns annually. Not that interest in alternatives is new. Enthusiasm surged several years ago when portfolio managers realised that in a low-return environment, conventional stocks and bonds just don’t cut it when compared to hedge funds, private credit and so forth.
Furthermore, with the application of artificial intelligence to the portfolio construction process, wealth managers can acquire assets that on one hand accurately suit the investment style of clients, while on the other hand generate alpha. (Read my earlier post on how artificial intelligence and machine learning are democratising wealth management.)
Investors are currently flocking to alternatives. Expect this trend to continue.
Succession planning revisited
With the vast proportion of global wealth held by family businesses, the importance of having a robust succession plan cannot be overstated. Families that don’t have such a plan typically lose their wealth — a study by the Family Business Alliance found that globally only 30% of family wealth survives into the second generation, with just 12% of it being passed to the third generation. 70% of family businesses don’t have a succession plan.
Typically, the succession process takes 10 years to successfully execute. The COVID-19 pandemic has severely disrupted this. Many elderly family business leaders have fallen victim to the virus, leaving ill-prepared children to run their respective entities. History, sadly, is against them.
Families who are currently weathering the pandemic are frantically making plans. The advice they have been receiving for decades is finally sinking in. Expect to see a dip in these statistics in the coming years — and witness a flurry of succession planning activities carried out by private bankers, lawyers and other advisors.
During 2019, total assets under management for the foundation sector topped US$1.5 trillion. This vast sum of money underscores the importance of philanthropy in tackling the world’s myriad of social and environmental issues.
Foundations aren’t without their challenges. Critics claim they are too slow to react to global crises when they arise, and that by the time funds arrive, it’s too late. That’s because the majority of foundations focus on building new institutions rather than on supporting existing and vastly underfunded entities like the UK’s National Health Service. COVID-19 acutely highlighted this fact. Furthermore, carrying out due diligence on recently established entities is notoriously challenging and time consuming, as too is forming a new project.
Fortunately, there are numerous foundations that support established institutions. One example is the Singapore-based Khoo Teck Puat Foundation, which partners various private and public sector institutions, having previously given S$100 million to build Khoo Teck Puat Hospital and S$80 million to fund medical research at the Duke-NUS Medical School. Another example is the Hong Kong-based Woo Wheelock Green Fund, which helps the Hong Kong Environment and Conservation Fund maintain the territory’s forests and wildlife.
With healthcare capacity having been a key weakness in many countries during the run up to the COVID-19 crisis, expect philanthropists to invest more in building capacity within established institutions.
Virtual family offices
Family offices are on the rise. In Asia, their number increased 44% between 2017 and 2019, with the majority of these based in Singapore and Hong Kong. The benefits they bring to HNWIs are noteworthy: Not only do they drive growth through greater control and oversight of all interests, they make significant cost and resource efficiencies, increase accountability and confidentiality, and greater align business, family and philanthropic affairs.
Traditionally the family office is a physical office where a number of activities are conducted. This ranges from managing wealth to arranging travel plans — for both business and pleasure. Given that in many jurisdictions employees are discouraged or simply not allowed work in an office environment, family offices are operating virtually, excluding activities such as trading, which must be carried out in a registered office.
Like so many other industries, family offices are making yet further savings by operating remotely. Expect this to continue once the pandemic passes.