It has been a challenging few years for wealth managers. Not only has there been a widespread destruction of wealth as a result of the global financial crisis and the subsequent collapse of bubbles such as the Irish property market, but scandals throughout the financial services sector have also hit. As such, retaining and regaining trust, while sticking to the core of wealth management – capital preservation rather than speculative investment strategies – are likely to be the focus going forward.
Having been hurt in the downturn, advisers are now finding clients are more engaged. “It’s fair to say that clients are much more discerning, having learned some very hard lessons about risk,” says Pat McCormack, head of Barclays Wealth in Ireland.
Today, wealth management clients want to be more involved, they ask more questions, and spend more time trying to understand things. They are also much better informed.
“There is no question that there are those who would have experienced wealth destruction, who have very volatile portfolios are now very interested in getting the specifics on staying on top of what’s going on,” says Edward Yusko, a director with Key Capital.
This means that when it comes to returns, investors are willing to forgo the heady returns of the boom years.
“Double digit returns would have been an expectation – but now people are more willing to focus on capital preservation,” says Yusko.
This means a return to a diversified, well-balanced portfolio. Indeed, while advice on diversification might have been taken "with a grain of salt" in times gone by, Yusko now sees a "huge maturity" on the part of investors, with more people realising how relevant those principles actually are.
Post-Madoff world
And leverage, so popular in vehicles such as contracts for difference and property syndicates, is now out of fashion.
“People are more willing to look at lower leverage portfolios – in the past there was a view that leverage was a primary part of the whole investment. Now people feel it’s not necessary any more,” says Yusko, adding that where investors are willing to take on risk, it’s often in a “satellite” part of their portfolio.
Another consideration in the post-Madoff world is a greater focus on the quality of institutions investors deal with.
“They are far more aware of counter-party risk,” says McCormack, adding, “clients want to know that their capital is secure.”
In this regard Yusko notes that there is “still a bit of nervousness” on the part of clients when it comes to alternative investments such as hedge funds, but that this has “dissipated a bit over time, as they see the value in having an exposure to hedge funds”.
Indeed with the threat of inflation on the horizon, and deposit rates on a downward spiral, for some, their risk appetite is returning. “Clients have to take on a little bit more risk. Their capital is not protected in the sense that it’s being eroded by inflation. Hence, some are beginning their journey as regards getting their money to work for them,” notes McCormack.
But how much risk should investors be willing to take on?
For McCormack, clients need to reappraise their attitude to risk and understand just what their own capacity is.
“One of the first things I ask is what do you want to achieve? If you say ‘I want to get 5 per cent return’, I’ll tell you what risk you’d need to take on for that return – and that in order to get a return of 6 or 7 per cent you’ll have to move up the risk curve”.
“Clients can accept lower returns when they understand why that is, and it meets their circumstances,” he says.
Once investors are comfortable with the level of risk they are willing to assume, this can then guide product selection.
“Product is very much second order – clients are much more sceptical of advice. You have to get the asset allocation right, plan right, structure it right . . . and then look at the product,” says McCormack.
Tax, of course, is another very important consideration, particularly in an era of high tax rates.
For John Heffernan, a tax partner with EY, one issue is inheritance planning, given the reduction in Capital Acquisitions Tax (CAT) exemption to €225,000 per child, down from €500,000 previously, combined with the increase in the rate, from 20 per cent to 33 per cent.
“People are making investments and setting money aside but they’re not thinking of the tax implications of it. Tax will bite at a level they may not have anticipated,” he warns.
While a decline in asset values will offset some of the reduction in the exemption, for Heffernan, appropriate tax planning – such as availing of the annual €3,000 gift allowance – can pay dividends.
Given the decline in values, it might also make sense to transfer business interests and other assets to children, but as Heffernan notes, doing so doesn't always mean that you have to also transfer control.
Pension fund value
“There are mechanisms that allow wealth to transfer efficiently to children, but allow control to stay with the parents.”
On a similar issue, Heffernan warns that business property relief, which allows for a 90 per cent abatement in taxable value for the transfer of a family business or farm, “ hasn’t yet been touched in budgets” so could be primed for a change.
And even those in the high net-worth category will be eagerly awaiting the outcome of the Budget next month, with the expectation that a move will be made on the maximum value of a pension fund. At present, the maximum allowable for tax purposes is €2.3 million – down from €5.4 million in 2011 – but Heffernan says it’s now likely to come down to between €1.2 million and €1.5 million, something which is causing a stir for those hoping to have a six-figure pension in retirement.
“So what we’re saying is, if you have the opportunity to top up your investment fund do so before Budget day.”
