In today’s climate, and in the face of the pandemic, wealth management continues to grow in importance. While the world’s UHNWI population grew by 2.4% between 2020 and 2021, this expansion in wealth was not universal; regions like North America, Europe and Asia saw growth, but with that also came a fall in the numbers in Latin America, Russia and the Middle East. (Source: The Wealth Report 2021, Knight Frank)
In this article, Prashant Tandon, Chief Executive Officer of Lighthouse Canton Capital (DIFC) Pte. Ltd., outlines the 3 stages of the financial lifecycle and the importance of wealth management in the context of the pandemic.
The concept of money and the advent of wealth management
The concept of money has been in existence for over 4000 years when Barley was used as a means of exchange in early Sumerian period. Since then, it has continued to evolve through the millennia; from silver shekels of ancient Mesopotamia, the minting of the first coin in 640 BC in Lydia, the use of gold and silver denarii in the Roman empire, to the modern day, where only about 10% of the $38Trillion that is out for circulation is represented by hard currency, with the rest being just electronic entries in financial ledgers.
Wealth itself was only conceived somewhere in the mid-19 th century. It started off by being measured in dollar amounts when the industrialized nations like the United States of America, England and Germany began to measure progress tabulating social welfare based on income generating capacity of individuals, corporations and countries.
The concept of wealth management is newer still. Almost a century ago, banks began segregating their regular customers from wealthy ones, thus creating a distinguished suite of services that went beyond the mere processing of receipts, payments, or taking of deposits. This concept was provided with several shots in the arm through events like departure from the gold standard in the 1970s, Black Monday in the 1980s, the dot com bubble, and the great financial crisis where the need for active and professional management of one’s wealth became very important.
What is wealth management?
The Cambridge dictionary defines wealth management as “the business or activity of advising people, especially rich people, on how to invest and manage their money and property”. However, the industry has evolved significantly over the past decades and Wealth management has now become a financial service, provided to those seeking advice on their entire financial or family footprint as they progress through the financial lifecycle of wealth creation and allocation, wealth preservation, succession planning and the transfer of wealth to the next generation. Wealth management should also be distinguished from asset management with the latter being primarily concerned with maximizing the value of assets under management whereas the former being of a wider remit with fiduciary responsibility thrown in the mix.
The financial lifecycle
a) Wealth Creation
This is the first stage in the financial lifecycle where one accumulates wealth through either employment, business or vocation. At this stage one might be focused on building a financial foundation, getting into the right ecosystem, and maybe raising capital for a startup. With the requirements at this stage of the financial lifecycle being very distinct, the services of a wealth management expert can be extremely important for several reasons – ranging from deciding upon the right business structure and domicile, through to evaluating and deciding upon the right allocation of savings or surpluses that are generated over time Whether a business needs to be established in the United Kingdom, Singapore, Dubai or China for example, what is the most efficient structure, what are the pockets of capital that one can tap into, what are the asset classes that one needs to consider for deployment of surpluses and how to oversee the allocation, execution and efficient management of the portfolio. These all fall under the purview of wealth management.
b) Wealth Preservation
As important it is to rely on expert advice during the stage of wealth creation, it is equally important to pay attention on the deployment of wealth so as to ensure that it both multiplies and is also preserved during times of stress. The quality of advice and resultant management of wealth determines whether one can navigate during uncertain times, and if one is able to take advantage of market dislocations that appear as a result of disruptive events. The importance of effective wealth management and advice came to fore during the recent stress that COVID-19 caused in the early months of 2020. Left to their own, most wealthy individuals and families suffered due to severe depletion of their portfolios, compounded by their impulsive reaction to liquidate at the depth of the crises. Whereas if advised properly, they should not only have held on to those positions but acquired more at fire sale prices. These times and situations have proven how important it is to have professional advice to sustain the growth of wealth, and to ensure that the wealth accumulated is also preserved in times of volatility and market stress.
c) Wealth Transfer/Succession planning
Maintaining generational wealth and keeping wealth within the family has been the focus of many families. Once a wealthy family has put in place an effective plan for managing their accumulated wealth, successful transition of the same to the next generation becomes an important part of their overall wealth management exercise. This is where wealth planning plays an important part in the journey. One may need to achieve the most tax efficient, seamless and acceptable ways to transfer their legacy to the next generation, where the advice they seek transcends mere financial considerations. Families need to consider several factors like the family composition, needs and aspirations of the next generation, and how they fit into the existing structure, wealth and estate equalization etc.
What wealth management means today & the rise of a new breed of wealth managers
While traditional wealth managers continue to support and play a key role in the lives of wealthy clients, as outlined above, the need for a new breed of wealth managers is becoming apparent. Wealth management today has evolved from being a mere asset allocation exercise to become an over-arching framework for the entire financial lifecycle and the lifestyle aspirations of a client. This evolutionary process has further been accelerated by the pandemic.
Many wealthy individuals and families today, particularly the next generation, place a growing emphasis on the impact and sustainability of their activities. As such, Environmental, Social and Governance (ESG) concerns in allocating capital and philanthropic causes are just some of the areas new age wealth managers can help provide clarity on. These wealth managers are distinguished by their ability to adopt cutting-edge technological tools which help clients track and make informed decisions on their portfolio allocations, the existence of robust institutional infrastructure that can support dispersed teams and clients, and an ability to efficiently allocate capital yet adhere to ESG norms, all while also ensuring that the strategies align with their client’s investment philosophy; these are just some of the many additional factors which will distinguish quality wealth managers from the also-rans.
Discerning clients very well understand the importance of the following phrase in Idowu Koyenikan’s book “Wealth for All”: When money realizes that it is in good hands, it wants to stay and multiply in those hands.