Life used to be so simple if you were wealthy: you picked a bank, signed the mandate, and then sat back and waited for the dividend cheques.
It is no longer so straightforward. The evolving face of investment combined with changing sources of wealth means the options for managing money have mushroomed in the past decade. Demands from clients have met a maturing retail investment environment to create a plethora of options that can be difficult to negotiate.
“The range of possibilities is much wider than 10 years ago,” says Duncan MacIntyre, head of the private office at Coutts, the bank. “You can now take a ‘Mrs Beeton’ approach, and have lots of eggs in lots of baskets.”
On the demand side, change has come about as a result of the enormous increase in entrepreneurial wealth. About two-thirds of new clients at private banks represent first-generation money. “The sheer scale of wealth that’s growing in the UK based on M&A activity is huge,” says Mr MacIntyre.
Such clients may require different services to the traditionally wealthy. Individuals that have focused on building a business may not have learned the skills needed to manage wealth, and may demand much more in the way of education from their advisers. They may also want financial education services for their children or family. Entrepreneurs may be less risk-averse by nature – but they may also demand a high level of protection for money that has been painstakingly built up through enormous hard work. Their assets may be highly liquid, if they have just sold a business; if not, their personal and business wealth may be inextricably entangled.
“For our clients, it’s about wealth preservation, but risks that may be obvious to us may not be so obvious to them,” says Simon Wise, head of investors and investment solutions at JP Morgan.
On the supply side, retail investment has matured way beyond the simple combination of equities, bonds and cash that used to be the norm. Now, there are not only more asset classes – with alternative investments such as art and commercial property forming a larger part of the average portfolio – but the wealth can also employ a wider range of strategies, using hedge funds and derivatives to micro-manage their money.
“The desire to preserve wealth and diversify risk has led to much greater complexity,” says Mr MacIntyre. “A lot of what we are seeing is the institutionalisation of derivatives.”
There has also been a change in the attitude to investment. “Some of the big family legacies that were set up in the 20th century were focused on relative return,” says Mr Wise. “The aim was to create exposure to specific asset classes. Now, the focus is more likely to be on absolute return – and that represents a gigantic Pandora’s Box of opportunities. The wealthy have a whole range of options that they need to be able to competently assess.”
Added to this is the rise in the “global family”, as both people and businesses are no longer limited by geography. This cultural change has brought about the need for a whole new range of tax and advisory services. “The regulatory and fiscal environment has become much more complicated,” explains Mr Wise. “Wealthy families in the past may only have been used to be focusing locally; they are now much more exposed globally and, therefore, need to be concerned with managing those types of investment-related risks.”
So what are the options? The basics remain: wealth can still be managed on an advisory or a discretionary basis, or some combination of the two (many clients like to take personal control of part of their asset base). Private banks remain the staple provider of services but, says Mr Wise, “There has been an interesting rise in the last few years of multi-family offices”.
Family offices were originally a full-time team of professionals exclusively dedicated to managing a single family’s wealth down through the generations, and required exceptional levels of wealth to establish (estimates vary, but anything from £100m is required to set up a small single family office). But some have now opened their doors to serve more than one family.
The reasons for this move are varied, according to Family Office Exchange, an independent adviser to ultra-high-net-worth families. Long established single-family offices may believe the best way to attract high quality talent is to increase the assets under management. The office may have “outgrown” its original family, which then turns over ownership to the management (but may remain a client of the organisation). Or a group of financial professionals may establish an independent family office that serves many families from the outset.
“They might be seen as a panacea in wealth management,” says Mr Wise, “especially now that there are a whole lot more financial professionals around now than 20 years ago – and it’s not necessarily the case that hiring someone from the institutional side means you automatically get the outcome needed. Such people can be very specialist, focusing on a particular asset class or product subset only.”
Institutional and private clients have very different requirements, he argues: “The institutional client is like a shark, he needs to keep moving or he will drown. But the private client is typically implementing a series of transactions that are a solution to some balance sheet issue and involve more than just the return; there could be tax issues, liquidity issues, generational issues. A wealth structuring transaction may be in place for many, many years – it’s a very different kind of discipline.
“Large wealth nowadays is multinational, multigenerational, multilingual and multidimensional; it involves a level of complexity that makes institutional clients seem very simple by comparison.”
Services needed are beyond simple asset and trust management, and may well involve corporate finance advice that has more traditionally been the preserve of the big investment houses.
“We are seeing a class of client that represents a new frontier in wealth management, with fortunes accumulating at rates not previously seen,” says Mr Wise.
It seems the perfect way to manage money has not yet been found.