For the money, not the few
Wealth managers are promising business-class service for the masses
Banks, brokers and tech buffs vie to look after common people’s $72trn stash of cash
Linda, a 54-year-old event consultant in Los Angeles, is neither disorganised nor innumerate. Ask about her finances, however, and you lose her for two hours. She opens her current (checking) account on a mobile app, then cites a rainy-day fund at another bank. She has 14 credit cards, five mortgages, six insurance policies and several pensions with ex-employers.
Ranks of pinstriped advisers have long helped the very rich to invest, minimise tax and pass money down the generations. Everyone else has had to work it out on their own. “People’s relationship with money is broken,” says Martin Gronemann of red Associates, which uses anthropology to advise businesses. It reckons that personal finances are a bigger source of stress than worries about crime or health.
Now, however, financial firms are competing to democratise wealth management. On December 8th Goldman Sachs, which used to shun clients with less than $25m, said its robo-adviser could soon serve clients with as little as $5,000 to invest. And on December 14th Vanguard, an asset manager with nearly $6trn under management, teamed up with Alipay, a Chinese tech giant, to counsel customers with at least 800 yuan ($114).
The wealth-management sector is fragmented and ripe for disruption. ubs, the global leader, has a 3% market share and is the only firm in the top four in each of Europe, Asia and America.
The industry remains technophobic, says Charlotte Ransom, a Goldman Sachs veteran now at Netwealth, a challenger. Advisers spend half their time on tasks that could be automated. According to ey, a consultancy, only 56% of clients fully understand the fees they pay.
The industry stratifies customers in a manner rather similar to airlines.
“Affluent” clients, with between $300,000 and $1m in assets, get premium-economy treatment.
They may talk to advisers by phone, but banks will do all they can to keep them out of branches.
Investment options are limited to ready-made funds.
“High-net-worth” clients, with up to $15m, fly business class, picking stocks and chatting in person with named advisers.
Flying private are the “ultra-high-net-worth” individuals, who have access to venture capital and currency hedges, with exclusive dinners, golf outings and so on as cherries on top.
Whereas high-net-worth individuals typically pay no more than 1% of assets in fees each year, the mass affluent often pay over 2%—the average yield of s&p 500 stocks—for inferior service. Cattle class gets no service at all. Saving for retirement is the second-biggest financial commitment most adults ever make (after buying a home), says James McManus of Nutmeg, a British fintech. Yet most do it with no help.
That leaves a lot of money on the table. According to Oliver Wyman, a banking consultancy, the affluent, with $21trn in assets, and those below them, with $51trn, have as much to invest between them as high-net-worth individuals. The problem is that advisers, branches and time are costly. Most private banks deem portfolios below $2m barely profitable.
Yet three factors are conspiring to bring that figure down. The first is technology. In 2001 Credit Suisse tried to go budget with a pan-European online network. But the cost quintupled to €500m ($447m), in part because it relied on huge servers. Today data are in the cloud, and firms can bolt on apps instead of coding everything.
Second, the top of the pyramid is getting crowded. Banks love wealth management, with its high returns and low need for capital. As they have all tried to expand their high-net-worth offerings, competition has squeezed margins. The market value of a panel of 100-odd wealth managers has dropped by 15% in the last year, using Bloomberg data.
Third, negative interest rates are eroding the money held by the masses, about half of which is in cash deposits. So clients are crying for help.
That has sparked a race between banks, fintechs and investment firms. Wealth managers need several strengths to succeed, says Matthias Memminger of Bain, a consultancy: technology, trusted brands, marketing dollars and a human touch. Private banks have the last three, but score poorly on it. They also fear cannibalising their high-net-worth business. ubs shut its robo-adviser in 2018, a year after launch. Investec, a bank, folded its own in May.
Startups have the opposite profile. Their robo-advisers generate recommendations by asking simple questions, keeping fees down. They allow customers to buy fractions of shares, and net out orders to reduce trading costs. But their brands are weaker, so acquiring customers costs more. And clients entrust them with only smallish sums. Launched in 2011, Nutmeg manages just £1.9bn ($2.5bn), and Wealthfront, a decade-old American firm, $22bn.
Brokers and asset managers also have good technology, which they use to compile data and execute trades. They pile clients’ money into cheap exchange-traded funds and have cut fees to rock-bottom, hoping to cross-sell premium products. Charles Schwab’s robo-adviser manages $41bn; Vanguard’s, $140bn. But their expertise lies in manufacturing investment products, not distributing them. They help people pursue single investment goals, not plan their financial life.
To tick all the boxes, contenders are combining forces. In May Goldman Sachs paid $750m for United Capital, a tech-savvy manager. It has also invested in Nutmeg. BlackRock has backed Scalable Capital, a digital service whose robo-adviser is used by banks including ing and Santander. Insurers are jumping in, too. Nucoro, a fintech, recently said that it would power Swiss Risk & Care. Allianz has tied up with Moneyfarm, a British robo-adviser.
The logical endpoint is financial platforms—perhaps super-apps that sit on smartphones—which would let customers stitch their patchwork of financial products back together. But the model has not yet been tested by rough economic weather. Volatility makes financial clients prize human contact, says Christian Edelmann of Oliver Wyman.
The consultancy reckons the average cost-to-income ratio for the biggest wealth managers would jump from 77% to 91% in a recession. It remains to be seen how well mass-market wealth managers will perform in a downturn.
FOR THE MONEY, NOT THE FEW: WEALTH MANAGERS ARE PROMISING BUSINESS-CLASS SERVICE FOR THE MASSES / THE ECONOMIST
WHY I´M STICKING WITH STOCKS IN 2020 / THE FINANCIAL TIMES OP EDITORIAL
Why I’m sticking with stocks in 2020
The balance of probabilities suggests a higher risk premium in fixed income next year
Joseph Little
The global policy pivot — with more than 15 major central banks including the ECB (above) cutting rates this year — has been the single most important driver of strong returns © Reuters
The strong performance of financial markets in 2019 might seem counter-intuitive. After all, investor sentiment has been bearish for most of the year. But the key reason for solid returns — central bankers’ policy pivot towards further monetary easing — reveals an important truth about how markets work and provides some clues about what might come next.
The backdrop to 2019 has been what we call the age of uncertainty. Political instability and recession worries have dominated investors’ thinking and tempted them into cautious strategies, with large cash weights in their asset allocations. That has proved to be a costly decision as markets have performed strongly across the board, with positive returns in fixed income, equity and alternatives.
There is, of course, more than just one reason behind this impressive performance. A lot of the rhetoric from politicians, for example, was more about threats than action. What is more, many risk asset classes started the year at quite beaten-up prices after a sell-off at the end of 2018. However, it is the global policy pivot — with more than 15 major central banks cutting rates this year — that has been the single most important driver of strong returns.
This monetary easing, which was the opposite to what economists anticipated at the start of 2019, pushed interest rate expectations significantly lower — a shift that warranted a re-pricing of risk across the full range of asset classes.
So, what comes next?
Many of the key questions from 2019 remain unanswered as we head into the new year. Are we approaching the end of the economic cycle? Will political tensions continue to undermine growth and profits? That uncertainty creates an ongoing challenge for the economy today — and it continues to constrain the private sector’s “animal spirits”. It makes it difficult to predict a phase of strong, synchronised global growth emerging in 2020.
But it is not all bad news. The baseline scenario remains reasonably favourable: one of slow and steady growth, linked to robust labour markets and some carry-over from this year’s policy easing. What is more, sustained low inflation means that the prevention of recession is likely to continue to dominate policymakers’ decision-making, rather than concerns over cyclical overheating. If anything, policy is skewed towards further modest easing.
In this environment, though, investors need to be realistic. Based on our research, long-term investment returns already are set to be quite mediocre: for example, the expected return on global equity today, over the longer term, is only 6.5 per cent before inflation. That means asset class returns in 2020 could be some way shy of 2019’s bumper performance. One way around that arithmetic is if markets re-price themselves again.
There are two ways that such a re-pricing can occur. First, if we see a further round of unexpected policy easing, and second, if there is a compression in the risk premium — the required reward for taking risk — in asset classes.
Interest rates are where the action has been in 2019. It seems unwise to expect a repeat performance. That means better than expected market returns would need to be delivered from falling perceptions of risk pushing asset prices higher. However, the risk premium in many asset classes already looks low. It is negative when it comes to long-term government bonds and has compressed significantly in credit. If anything, the balance of probabilities suggests a higher risk premium in fixed income going forward, especially if policymakers begin to make more use of fiscal stimulus.
That leaves us with equities and equity-like asset classes. Perhaps surprisingly, after a year of strong performance in 2019, the global equity risk premium is still above long-run norms — we measure it at 4.5 per cent today versus a historic average of 4 per cent.
So, while overall prospective returns look low, equities still appear attractively priced, compared with alternatives. This is not a guarantee of success. But what it does mean is that if events play out more favourably than economists expect, stocks could do well again in 2020.
Strong performance in 2019 against a bearish news cycle might seem surprising, but it is not. The fundamental truth about how investment markets work has not changed.
Market action is driven by cash flows, interest rates and asset class risk premia. That disciplined way to think about expected returns remains really important in these uncertain times. As we head into 2020, we need to be realistic.
But sticking with stocks still makes sense.
The writer is global chief strategist at HSBC Global Asset Management
THE BEGGINING OF THE END OF TAX SECRECY / THE WALL STREET JOURNAL
The Beginning of the End of Tax Secrecy
As social pressures on companies build, Shell has voluntarily published the taxes it pays in each country
By Rochelle Toplensky
While President Trump has battled to keep his tax returns private, global companies are deciding to go public with the taxes they pay—or don’t pay—before they are forced.
This week, Royal Dutch Shellvoluntarily published its revenue, profit, taxes and other business details in each of 98 countries. The disclosure aligns with a drive by the energy company, which often attracts criticism from environmental activists, to present itself as forward-thinking, transparent and socially-minded.
That didn’t stop the information feeding a predictable host of headlines in the U.K., where the company is partly based, that it didn’t pay taxes in the country (because of losses carried forward and tax refunds). In the U.S., Shell accrued $137 million of tax—a rate of 8%.
This kind of detailed reporting is required by tax authorities in about 100 countries including the U.S. since 2017, based on rules agreed by the Organisation for Economic Cooperation and Development, but it is rarely made public. Shell is hoping to entice others to follow its lead. Mobile-phone company Vodafonepublished similar information earlier in the year.
Companies that don’t jump may soon be pushed. Economy ministers from European Union countries are considering a proposal that would require all large companies with total revenue of more than €750 million ($834 million) operating in the bloc to publish the information annually. The Global Reporting Initiative, an organization that establishes sustainability standards, recently agreed to include a similar requirement.
The information may prove useful to investors in helping them understand companies better. Warnings that the public disclosure could give rivals insight into a company’s competitive advantages are likely overdone—unless a firm’s skill is avoiding tax. It is true that the information may be too complex for some media and civil groups to properly understand, but that doesn’t prevent a lot of other very complex disclosure.
Greater transparency could also spur reform efforts and reduce incentives for complex tax arrangements. Investors should probably brace for higher tax rates as pressure builds for companies to follow Shell’s example. The EU has required all large EU-headquartered banks and extractive industries, such as mining companies, to publish some country-by-country information publicly since 2014. An academic study of the European banking sector concluded that banks with activities in tax havens paid a higher effective tax rate after the reporting requirements came into force.
Companies, investors and states all agree that it is best to find a global solution to the problem of aggressive tax planning. The OECD is focused on reforming the rules that allocate corporate taxing rights to countries to try to better incorporate digital earnings and assets. Nearly 140 countries are involved.
Progress has been slow as the overhaul could change states’ tax revenue and their ability to attract investment. Hopes had been high for an agreement next year, but there are indications that the U.S. may be getting cold feet.
Corporate tax reform at a global level is no sure thing, but it says something that some companies want to get ahead of the transparency trend.
CHINA´S ENIGMATIC LOAN TO BELARUS / GEOPOLITICAL FUTURES
China’s Enigmatic Loan to Belarus
By: Ekaterina Zolotova
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Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
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Lao Tse
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Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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