Scepticism a key commodity for high-end market players

Private banks and wealth managers have seen their asset values and those of their high-net-worth clients plummet because of the global financial turmoil. It has forced them to change the way they invest and make them more risk averse. Investors and private banks are now working closely to preserve capital rather than maximise returns.

According to Nitin Dialdas, senior investment analyst with ING Financial Planning, it is hard to relate to the damage done to portfolios with the Hang Seng Index, for example, registering a 100 per cent-plus rise since March this year.

'Financial stocks are up roughly 250-300 per cent,' he said 'The property market in Hong Kong has risen about 30 per cent this year alone. Across the board we are starting to see gains again. It doesn't matter what assets clients are invested in, it seems that they are managing to make money once more.'

This welcome rebound follows months of downside. High-net-worth investors in Hong Kong were particularly badly hit by the crisis because they invested in more sophisticated types of high-risk products such as accumulators. Accumulators are normally short-term trades - an investor buys equities at a discount and offloads them as soon as they hit target price. But even as the equities were not hitting the target price the accumulator contracts mandated the investors purchase a certain amount of equities.

'Generally, high-net-worth investors are now behaving more cautiously because they have been hit badly. But after every downturn they are cautious for a while, then they forget about the bad times because they start making returns on their portfolios,' Dialdas said.

David Cripps, senior strategic asset adviser for HSBC Family Office Services, agreed that the lessons learned last year were having a positive impact on high-net-worth investors' behaviour.

He said that investors' appetite for leveraged positions, liquidity restrictions, high volatility, or obscure terms and conditions had diminished.

'In most cases, such caution amounts to a more realistic assessment of risk, and this is a major positive for private banks,' he said. 'In this sense, clients are less demanding on the return side, but more so in terms of risk. There is less reaching for return in favour of capital preservation. Most clients have come to realise how important wealth preservation is for them and their families.'

Because of the financial crisis, Cripps said that more attention was being paid to portfolio modelling, testing asset mixes, examining potential downsides, worst-case scenarios and redemption conditions, all with an eye to capital preservation rather than return maximisation.

'High-risk investments are acceptable but in typically smaller proportion,' he said. 'Lock-ups are carefully evaluated against the perceived return and portfolio benefits, and the focus is always on quality. Private banks can offer substantial value in identifying and assessing these factors and in guiding clients towards appropriate solutions. Private banks with robust global research capabilities are at an advantage, as less is taken for granted.'

For the private banks, this back to basics move means a more intensive examination of risks relative to return potentials, less reliance on structured products with imbedded options and unlimited downside, less use of leverage, and more sensitivity to option-related maturity dates, which can limit flexibility.

'It means following time-honoured portfolio principles implying fewer concentrated positions and broader diversification, and it also means fewer complex strategies not readily understood,' Cripps added. 'In the years leading up to the crisis, many of these elements were ignored, and cautionary advice not accepted.'

This back to basics approach is also evident in increasing demands from high-net-worth investors for greater transparency and better information from their private banks, a fact reflected in the World Wealth Report 2009, conducted recently by Merrill Lynch Wealth Management and Capgemini. According to the report, high-net-worth clients want much more transparent product offerings, product suitability, robust due diligence and real-time, customised reporting with proactive risk/reward analysis versus a point-in-time snapshot of their wealth and holdings. They also want more information about how their holdings are being transacted, processed and managed.

'High-net-worth investors are more clued up in the sense that they want all the information and they want to understand all the risks before they invest. Before they were a lot more trusting of their advisers,' Dialdas said.

The latest Global Wealth Survey, conducted recently by PricewaterhouseCoopers (PwC), in the United States underscored this sentiment. Some 53 per cent of the private banking clients surveyed by PwC said that their primary source of financial advice was now their own research capabilities and independent knowledge, an indication perhaps of their scepticism about the quality of the advice they have been getting.

According to Cripps, although the global economy appears to have avoided a deep deflationary spiral, and the markets have rallied in response, risk can never be ruled out.