The pandemic has forced profound changes in investor-adviser relationships that we’re only just beginning to understand.
How high-net-worth individuals and family offices work with their financial advisers to protect and grow their wealth is today’s most pressing issue. Covid-19 will be remembered as a near cataclysmic, black-swan event that continues to shake global economies, markets and industries in ways that are still being worked out. The effects of human isolation have both worsened and changed how people relate to each other and make investment decisions.
Private wealth managers say that extended periods of restricted personal interaction and communication among family members can exacerbate existing tensions about estate succession and wealth management. Mega-rich family dynasties can quickly descend into a showcase for dysfunction, highlighting the witless cruelty of the entitled and the pathetic emotional inadequacy of the endlessly spoiled. The scheming and backstabbing between monstrous and self-entitled family members can become exposed for all to see, as if it was all in a television soap opera. As Tolstoy said in his novel Anna Karenina: “Happy families are all alike; every unhappy family is unhappy in its own way.”
Governance in a sprawling family office risks being largely based on family relationships rather than institutional policies. A private banker once told me that he asks his wealthy clients, “What is your relationship with your money?” Because how you relate to your money says a lot about your personality, and ultimately decides how succession and management conflicts will be resolved.
For families, the weakness is that most decisions are undergirded by emotion – and that’s unpredictable and undemocratic as a basis for a family’s long-term investment policy. The gut rules as its own tyrant. It doesn’t have to account for itself any more than divine inspiration can be questioned by believers. It’s not open to contradiction because it’s entirely personal. All decisions must flow from the instincts of the singular leader. So everyone must accommodate themselves to unpredictability. And when you’re rich, whatever you say is considered wisdom. Engaging in realistic and critical thinking is a lot more complex and challenging than resorting to clichés.
Governance risks lurk in the market for family-owned, public companies. Activist funds and proxy advisory firms hunt for opportunities to exploit the impaired structures and weakened valuations of family- owned businesses trying to appoint unqualified second- or third- generation descendants as top managers. Balancing the interests of professional managers and the desires of the next generation is an ongoing family risk. Young people love risk because they can’t imagine the consequences, while the older generation love building golden tombs and sealing the rest of the family in with them.
The pandemic has highlighted the importance of sustainability and the fragility of our entire ecosystem and relationships. Never lose sight of the primacy of preserving capital, downside protection and the importance of sustaining a collective and disciplined succession process. Building and maintaining a formal family-governance and individual portfolio-management policy requires effort, especially in a time when normal communication methods are impaired.
Many clients have been forced by the pandemic to remain at home. Travel, in-person meetings and socialising have largely ceased. While videoconferencing capabilities have existed for a long time, they were never the first choice for communication. Now with the pandemic in full swing, it has become a major lifeline, offering an opportunity to improve the dialogue and relationship between clients and their financial advisers.
Advisers have observed how commonplace mobile video- conferencing technology allows them to devote more time to clients because their daily work routine has become disintermediated. At the same time, clients want to be better informed and comforted about their investments and the markets in such an uncertain period.
The pandemic ironically represents a unique opportunity for high-net-worth individuals and wealth managers to better understand each others’ goals and services.
Carefully discerning how you and your family’s life and investment objectives change over time and market conditions has never been more important. You need to maintain discipline to cultivate and maintain long term goals. Ignore short-term, emotional, reactive trades trying to catch opportunities in a volatile market. However, investors at all times need to fully understand their personal tolerance for risk and expectations of returns.
Despite resistance to change, there is little doubt the post-Covid world will offer a significantly different operating and living environment. Human communications and how technology is used to establish and maintain relationships are undergoing profound changes that have not
yet been determined. That more people are more comfortable with working from home will alter the nature of the workplace.
Nonetheless, the post-Covid financial world will still demand some sort of one-on-one, relationship-driven nature in wealth advisory. Consuming information and planning portfolios entirely online has always been possible, but now mobile applications have made it more accessible and conventional. However, clients also need to experience a level of investment intimacy, sympathy and personal service, too.
The digitalisation of financial services has been reshaping the traditional banking landscape for years. But the pandemic has forced all participants to further redefine how humans interact with technology. Innovations may reduce the need for regular face-to-face engagements and force a redefinition of what constitutes a financial relationship and how people make investment decisions.
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