Keep Calm And Invest On

Sometimes jittery markets can make wealthy clients panic. Those are the times when private bankers really earn their fees.

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Many deep breaths are being taken in private bank offices across the world these days.

Several years of no-brainer investment returns, with most securities around the globe rising in tandem, had many clients wondering why they needed a wealth adviser anyway. To keep customers, banks emphasized their razzle-dazzle, accessing far-flung investments beyond public markets, and financing clients into the bargain. The calamitous end to 2018—and dawn of 2019, amid economic question marks from Brazil to China—is changing the mood, pushing private bankers back toward their traditional role of preserving fortunes for old age and future generations.

Their principal advice seems to be: Don’t panic. Stick with your plan. Take a deep breath. “Clients need to be on a framework,” says Michael Crook, head of Americas ultrahigh net worth strategy at UBS, the world’s biggest private wealth manager. “Reacting negatively to falls in the market is almost always the wrong thing.”

Staying the course is easier said than done, though. Crook and his colleagues elsewhere are deploying a few core arguments in an effort to induce financial zen. First, the customer’s situation is far more important than the market situation in driving an investment strategy. High net worth individuals (HNWIs) need to consider their age, resources, lifestyles, and intentions toward their descendants first; the Dow Jones or Hang Seng Index second, if at all.

At one end of the spectrum, you might have a newly retired couple of relatively modest means—$1 million to $3 million in assets—anticipating decades without their generous working income. That describes masses of people around the world, as baby boomers, born from 1946-1962, flood toward pensioner territory. Their priority is to be realistic about their income needs and ensure sufficient interest and dividends to cover them. “How will you get through the next 30 years if there’s a significant bear market after retirement?” Crook asks rhetorically. “The worst case is being forced to sell equities when they’re down.”

At the other end are the super-rich, whose major concern is storing up wealth for grandchildren, foundations or favorite charities. They can comfortably be guided by a long-term calculus in favor of stocks and pay as little attention as possible to shorter-term fluctuations. “Some families frankly shouldn’t care what the equity market does, but it’s hard for all of us not to be sucked in,” Crook comments.

A second argument is that politics matter much less than it seems to markets over any duration. That’s a still-harder premise for clients to internalize when indexes career with every leak from US-China trade talks, and the monied class is itself newly polarized over Donald Trump, Brexit and other emotional issues. “Our rule was always: Never discuss religion or politics,” says Carol Schleif, deputy chief investment officer at Abbot Downing, the ultrahigh-wealth division of Wells Fargo. “But since 2016, politics is the first thing people do want to talk about.”

Schleif’s goal is to keep discussions of public policy and private wealth as separate as possible. “In the US, political realities last at most eight years before the next one comes in,” she notes. Strong political views can actually spur weak investment returns, UBS’s Crook asserts: “There’s no clear correlation over time between the party in power and the market,” he says. “We saw Republican-leaning fund managers underperforming under Obama, and now the opposite is happening.”

A third argument for turbulent times is that clients’ gut instincts may be wrong, and not only when they say sell. A critical issue for many rich individuals is how much wealth to transfer into trusts that benefit descendants or charities, and when. “Market volatility makes people less prone to give away money,” says Alvina Lo, chief wealth strategist at Wilmington Trust.

That’s understandable: They worry about not having enough left if their securities keep tanking. But corrections also spell an opportunity for giving, as transferring wealth when markets are lower gives a trust more chance to appreciate. “Really steady hands will see volatility as a friend and fund the trust when there’s a big drop,” Lo says. “But there are not many of them.” The US tax reform passed in late 2017 also incentivizes wealth transfer by more than doubling the lifetime threshold for tax-exempt gifts to $11.2 million, Lo explains. But that provision expires in 2025.

One more counterintuitive strategy many US wealth managers are pushing is international diversification, even as a downturn may induce clients to cling to the perceived stability of home. “Bias toward the US is entirely a hindsight bias,” Crook argues. Schleif sees emerging markets becoming more attractive as a client’s investment horizon lengthens. “The US has 4% of global population, 15% of GDP and 55% of global stock indexes,” she points out. “That has to moderate over the next 10 to 20 years.”

Rather than try to fight one’s instincts or ignore the news, investors looking to keep portfolios steady might steer more assets into illiquid investments, such as private equity and real estate. “You can’t time the market with private equity,” Crook says, “and when you get the statement, you don’t see the volatility. For some families that’s an attractive feature.”

Private equity (PE), which traditionally taps institutional funding, was hot with rich individuals before the recent market downturn. So says Gary Anetsberger, chief executive of New York–based Millennium Trust, an alt investments specialist. Millennium’s 2018 annual investor survey showed purchases of individual stocks dropping by 10% to 47%, while PE ownership rose to 20%. “Private equity captured most of the asset flows into alternatives last year,” he says. “But there’s still a tremendous need to educate.”

Part of that education might be the difficulty of making apples-to-apples performance comparisons between private and public equity. But the bulk of the evidence is that the former will at least match the latter’s returns, provided investors don’t mind having their money locked up for five or seven years—and that may be the most important advantage going into a choppier market cycle.

Private banks have long experience and sophisticated methods for managing clients’ portfolios through all sorts of markets. Where they and their customers glaringly lack capacity is in managing life as a rich person or family. Wealth creation these days typically comes from selling a business that has dominated the owners’ time and emotions for decades, an event both transformative and traumatic. “Selling can be like a death in the family,” Abbot Downing’s Schleif says. “The client’s identity has been all tied up in that business.” Many of the suddenly liquid literally don’t know what to do with their money. “Some are serial entrepreneurs,” Schleif says. “Others love giving it away and want to join non-profit boards.”

Anecdotal and survey data point to a huge opportunity for wealth managers to go beyond traditional financial advice into this existential thicket. Just 47% of HNWIs “have clearly identified a purpose for the use of their wealth,” while 53% are “satisfied with what they spend most of their money on,” according to the latest annual wealth study by U.S. Trust. Responses on financial advisers are more telling still: Fully 87% of respondents have one, but just 16% have discussed a wide range of goals with them.

Expanding that tiny number may require rethinking some traditions, and retraining or rebalancing the specialties of private-bank personnel. A market downturn, when clients lose some confidence in their own genius and are more inclined toward consultation, could offer a good chance to get started.