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Analysts at GlobalData Financial Services provide expert commentary, insight and data on the global private banking and  wealth management industry that is engaging, actionable and informative 

After years of calm, volatility returned to global markets in 2018 with a bang. This HNW investors are expected to spread risks across multiple providers as they seek diversification, according to GlobalData Financial Services.

However, without transparency regarding clients’ total assets, it becomes increasingly challenging to provide the best possible advice and achieve true diversification.

Our data shows that HNW investors across the world already use an average of 2.9 wealth managers to invest their wealth. And indeed, there is a clear rationale for this: clients have become disillusioned with banks in the wake of the financial crisis, high-profile scandals such as the Bernie Madoff affair, and the failure of ‘too-big-to-fail.’ . 

Spreading their portfolios across several wealth management firms allows investors to hedge their bets. Of course, HNW investors’ more complex needs may also justify the use of multiple providers that specialize in different areas.

This is bad news for wealth managers. Greater risk and strategy diversification across portfolios creates more competition among providers, which are continuously competing for the biggest slice of the pie.

Admittedly, on the client side this approach has the potential to minimize the effects of one firm seriously underperforming.

However, if markets turn sour, the differences between companies when it comes to ROI are likely to be marginal.

What’s more, spreading wealth across multiple wealth managers makes it harder for advisers to build a truly diversified portfolio, given that they are likely to be blind to their competitors’ investment strategies.

On average, a client’s main wealth professional attracts 60% of their managed wealth leaving another two wealth managers competing for the remainder.

For argument’s sake, assume that a client’s secondary and tertiary wealth managers attract 20% of managed wealth respectively: without knowing how the remaining 80% of wealth is invested, wealth managers will find it challenging to create a balanced strategy.

This means that diversifying wealth across multiple wealth managers actually has the potential to result in an overall less diversified portfolio.

Wealth managers must use this narrative to their advantage, highlighting the benefits of a single full-service provider in ensuring balance and diversity across the entire portfolio.

When asked how the average HNW portfolio will look in 12 months, most advisers expect little change. In order to engage clients in their allocation strategies and boost retention rates, advisers will need to take a proactive approach, according to GlobalData Financial Services.

In 2017 positive stock market performance skewed HNW portfolios towards equity investments.

Given the recent market volatility, coupled with growing political uncertainty worldwide, investors are now unsure on which asset class to choose to rebalance their portfolios, and so hold on tightly to their current portfolio structure.

According to GlobalData’s 2017 Global Wealth Managers Survey the only exception to this is alternative investments, with most respondents forecasting a slight increase over the coming year.

This means investors are looking for new ways to diversify their portfolios during market uncertainty, and advisers must be proactive in providing guidance.

In fact, our data also shows that volatile market conditions have a negative effect on retention rates, as in this context investors’ fear of losing wealth prompts them to switch adviser.

As Turkish and Chinese investors are more inclined to switch adviser than their global counterparts, competitors will find it hard to build client bases in these markets.

In fact, competition among Chinese private banks is fierce, and wealth managers in the country are struggling to build loyalty.

Advisers need to provide well-designed education programmes to their clients in order to guide them through market uncertainty and avoid them taking uninformed decisions driven by fear.

Companies that are unable to bridge this knowledge gap will risk losing clients to competitors that can.

Equities are still the main asset class in HNW portfolios, and recent stock market performance is helping maintain this trend. But when the bull run inevitably ends which markets will be hit hardest?  GlobalData Financial Services explains

Equities have long been favoured by HNW investors for the capital appreciation opportunities they offer, and the current stock market bull run means their appeal endures.

According to GlobalData’s 2017 Global Wealth Managers Survey, 38.6% of the typical HNW investor portfolio is held in equities, followed by fixed income investments at 24.9%.

In fact, the stock market has performed well over the last 12 months across all regions, with MSCI regional markets indices showing a consistent upward trend, with double-digit returns in 2017.

On a country level, the markets where HNW investors have most equity exposure include Canada (64.7%), the US (56.9%), and the Netherlands (56.9%). The prime motivation for equity investments in eight of the top 10 markets is capital appreciation.

The two exceptions are Germany and the UK, where dividend income is more important when investing.

Yet at some point the bull run will end. As such, advisers in the top ten countries invested in equities will need to be primed to discuss strategies to rebalance clients’ portfolios.

The bright spot is that our data also shows that 70.5% of investors globally are open to new investment ideas, with countries such as China and India showing particularly strong openness.

However, agreement levels are also high in developed markets on top of the ranking such as Canada and the US, which means advisors in these countries will have a better chance to diversify their clients’ portfolios.