I wandered through a City shopping centre earlier this week and marvelled. Here, in the midst of the credit crunch and on the edge of a nasty recession, were hordes of people shopping. Not in Woolworths or French Connection, but in Tiffany, Paul Smith, Hermès, Penhaligon’s and Gucci.
And not just window shopping, either – business looked brisk. It’s a scene apparently being played out in smart malls all over the world. Sales at the likes of Mulberry, Burberry and Horne & Co have been soaring and, in defiance of what most of us would consider common sense, those with access to cash continue to throw money at ‘passion investments’ – fancy diamonds, wine, boats and luxury travel.
Some of these big spenders probably just haven’t quite figured out the extent of the economic carnage going on around them, but odds are that another good percentage just don’t care. According to the latest Capgemini and Merrill Lynch World Wealth Report, there are 10.1m people around the world with at least $1m invested in financial assets, the average being just over $4m. This gives them the right to be referred to as ‘high net worth individuals’ (HNWIs).
Now, those numbers may not be entirely accurate – they run up to the end of 2007 and a lot of people have lost money in the past six months. But we’re still talking about a huge number of people without a financial care to their name.
Still, this lot aren’t just spenders: as much as they like to keep the luxury goods industry alive, they want to preserve their spending power for the future, too. And that’s why the global wealth management business is booming.
According to Scorpio Partnership, total assets under management rose by 11.6% in 2007 to $17trn. That’s a lot of money, but there’s still much to play for – Capgemini puts total HNWI wealth at more than $40bn and Scorpio suggests that $9bn or so of that should be considered up for grabs. No wonder new wealth management companies, boutique banks and financial planners are springing up all over the place.
So, if you’ve got money – say anything from £250,000 – how do you choose one of them to look after you? They might come to you, of course. Keep too much money in an ordinary bank account and a 20 something manager from its wealth department will find your phone number and promise you 7% a year for ever.
But how will you know if he can make good his claims? You can’t. A wealth manager doesn’t come with a ready list of performance figures – you can’t see an index that tracks his exact performance over any given period of time.
Anyway, as one senior financier said to me recently, what difference would it make if you could? Most managers are far too young to have a clue about how to manage money in a real bear market. So, these days, past performance numbers have to be treated not just, as is usual, with suspicion, but as utterly irrelevant.
Still, there are questions that will help on the way to finding the right manager. One place to start is to wonder if you want your money to be looked after by any of the institutions that have recently proved so monstrously incapable of looking after their own money. Say Citi or Merrill Lynch, for example. If you think not, you won’t be alone. Most of these big names have, says Scorpio, seen “disappointing asset growth” over the past year.
And staying away from them is probably no bad thing – sub-prime losses or not. The bigger the institution you choose, the more likely you are to have your portfolio managed sausage-factory-style, the more expensive ‘structured products’ you’ll find you own, and the more likely it is that your money will find its way into an in-house fund (these aren’t all bad, but they are mostly not exactly what the industry likes to call ‘best in class’).
Next, ask where your money will be invested. For all the excitable talk of alternative asset classes and diversification, the average private client portfolio remains very traditional. Late last year, I looked at one held for an elderly lady by one of the UK’s bigger managers. It had been put together by someone who clearly thought diversification was not so much about having exposure to the UK, Asia, the commodities sector, a few hedge funds and a little Latin America as about owning Bradford & Bingley as well as Barclays.
Ask about asset allocation (much more important than stock-picking) and about fees. If the latter are more than 1% or so a year, they are far too much. Remember, the upfront fees are just the beginning: there’ll be transaction fees too and the management fees embedded in any funds your manager buys on your behalf.
Then ask about staff turnover. Wealth managers move all the time and every time they move they’ll try and make you move with them. That’s boring, but forming a relationship with a new manager at the same institution is boring too. And if your manager looks like he might stay put, ask how many clients he has: if you’re a smallish client (under say £500,000-worth of assets), you may find he has 100-plus clients. That might not matter, but it will mean that when you call there’ll be five minutes of pointless chat while he scrabbles around in his spreadsheets trying to remember who you are.
None of this is easy – those with spare time and not an overwhelming amount of money might find it simpler to take a view on asset allocation, buy themselves 10-15 exchange-traded funds (effectively listed tracker funds) and be done with the whole thing.
On the plus side, some of those considered to be HNWIs in 2007 might find they don’t need to bother thinking about managers in 2008 or 2009. The biggest drivers of wealth, says the report, are “real GDP growth, domestic savings rates and market capitalisation performances”. In many countries, the first and the third of those aren’t exactly moving in the right direction.
• This article was first published in the Financial Times