ASSET ALLOCATION

For world’s wealthy, years after financial crisis cash is still king

PUBLISHED : Wednesday, 18 June, 2014, 3:21pm
UPDATED : Monday, 23 June, 2014, 9:26pm

The world’s richest people are clinging to stockpiles of zero-yielding cash despite a surge in financial markets and increasingly sophisticated attempts by private banks to entice them into investing.

Private banks have had to repair trust following the financial crisis of 2008-09, which sent their wealthy clients scurrying for cover and taking on ever larger positions of cash.

Nearly six years on, wealthy investors have a preference for cash rather than risk big bets on stock and bond markets.

“The cosy and safe world we thought to live in before the financial crisis not just from a financial point of view but also from a geopolitical point of view has proven to be not that cosy and safe,” Georg Schubiger, the head of private banking at Swiss bank Vontobel, said at the Reuters Global Wealth Management Summit on Tuesday.

Cyprus’s seizing of deposits above 100,000 euros (HK$1.05 million) last year and political tensions between Russia and Ukraine are two of the major factors keeping wealthy clients from putting their money into play.

The super-wealthy retained huge stockpiles of zero-yielding cash throughout the recent surge in financial asset prices, including a roughly 30 per cent rise in the MSCI all-country index over the past 18 months.

Investment advisers estimate up to 40 per cent of their money remains uninvested and is still parked in deposits.

A benchmark survey by CapGemini and RBC Wealth Management had average cash or deposit holdings among global wealth investors at almost 28 per cent – more than the 26 per cent held in equities or some 20 per cent in real estate.

Private banks rely on transaction fees and commissions to finance their spending, so their profit suffers when clients shun securities markets.

Although periods of client inertia are not unheard of, it is worse for private banks now, because the inactivity coincides with a sharp rise in spending to comply with tougher regulation.

Many larger players, such as UBS and Credit Suisse, have spent years building up centres of investment expertise in an attempt to better inform and advise their clients, and to do so more quickly and effectively than in the past. These so-called “machine rooms” are aimed at winning back trust but also coaxing clients back into investing.

“It is true we have disappointed many, that we have caused an economic crisis, and we all have to bear the consequences of it,” Juerg Zeltner, head of UBS’ private bank, said.

“But what is also true is that these clients … need our help, they need our advice.”

UBS has cautioned investors for nearly three years that it is vulnerable to the lack of client activity, amid worries about a host of issues from European and US debt woes to Middle East political tension.

While large cash piles are a concern for private bankers, they are also costly for the wealthy: between bank fees, inflation and near-zero interest rates, cash is effectively loss-making.

Even if the wealthy begin making larger bets in securities markets again, this can pose a risk to private banks if trust has been dented, according to experts.

“What is interesting is that we do see when a client has lost with one firm and has rebalanced into cash, once they feel the need to get back in the market, they often move the cash out of the bank and into a new relationship,” Seb Dovey of London-based wealth consultancy Scorpio Partnership said.

The wealthy have dipped their toes back into equities but won’t return in force until an “official thumbs-up” for Europe’s banks from the European Central Bank, Coutts investment officer Norman Villamin said.