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.

Why I’m sticking with stocks in 2020

The balance of probabilities suggests a higher risk premium in fixed income next year

Joseph Little

FILE PHOTO: European Union flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach/File Photo
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 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

By: Ekaterina Zolotova


Rather than continue drawn-out negotiations for a Russian loan, Belarus on Monday signed an agreement with the China Development Bank for a five-year, $500 million loan.
From an economic perspective, this case is of little interest, since Chinese loans are a common practice in the countries of the post-Soviet space, especially if the country is included in China’s Belt and Road Initiative.

But from a geopolitical perspective, this could be a significant event. Belarus is integral to the balance of power in Eastern Europe, and any disruption or interference can change the behavior of Russia and the West.

The thorny question, then, is why China is disturbing this balance with moves that apparently help Belarus to reduce its dependence on Russia – especially just days before an important meeting between the presidents of Russia and Belarus – which is sure to annoy the Kremlin and please the West.

No Strings Attached

The economy of Belarus is not going through the best of times. Changes to Russian tax policy – a so-called tax maneuver – are expected to cost Belarus more than $10 billion by 2024, including a direct hit to the budget of nearly $3.24 billion. (Despite an agreement reached by Moscow and Minsk on a “compensation” scheme for the tax maneuver, Moscow will not return the full amount. Russian subsidies could amount to $1.5 billion.)

Moreover, Minsk owes some $3.8 billion in 2020 in foreign loan repayments and interest, and it is looking for ways to refinance previous credit payments without relying on Russia and increasing Russia’s leverage over it. Belarus’ geopolitical strategy hangs on balancing Russian influence with the promise of greater cooperation with Europe.

Falling too firmly into the Russian camp would undermine the strategy and put Belarus squarely in Russia’s pocket. One need only look at the recent loan issue for a demonstration of what that might look like. In February, Minsk asked Moscow for $600 million.

The Kremlin agreed in April, but it linked the transfer to progress on the integration of the two countries as part of the Union State. (Negotiations on the $200 million seventh tranche of a loan from the Eurasian Fund for Stabilization and Development were also cut short.)

So in the summer, because of the lack of progress in negotiations with Russia, the Belarusian Ministry of Finance turned to the China Development Bank for the money.

China and Belarus have recently been interacting more and more intensively. In fact, this is not the first Chinese loan to Belarus. In 2015, the China Development Bank and the Development Bank of the Republic of Belarus signed a credit agreement worth $700 million.

Belarus received from China another approximately $450 million in 2016, $300 million in 2017, and $500 million in 2018. Two other agreements were concluded in April 2019: The China Development Bank provided $110 million to Belarusbank, and the Export-Import Bank of China allocated about $70 million to state-owned Belarusian Railway.

Most of the Chinese loans and investments go to finance joint projects between Belarus and China (like the BelGee automobile assembly plant, the Vitebsk hydroelectric station, the Great Stone industrial park and the Minsk-Gomel high-speed rail project), which significantly increases China's position as an important trading partner for Belarus.

In 2018, bilateral trade grew by 17.1 percent, to $3.5 billion, making China Belarus' third-largest trading partner. When Moscow over the past decade restricted Belarusian agricultural products' access to the Russian market, Chinese imports helped pick up the slack. In 2018, for example, as the value of Russia’s imports of Belarusian milk and dairy products fell to $578 million, an approximately 20 percent decline from the previous year, China bought $60 million worth of the same goods – a more than 900 percent increase.

China is also giving Belarus a boost in military procurement, which traditionally is Russia’s sphere. The headline project is the joint creation of the Polonez multiple launch rocket system, which could be deployed against tank groups and infantry dispersed over large areas.

Simply put, another Chinese loan to Belarus couldn’t be called unexpected. But this latest loan, unlike the others before it, is unconditional; the funds can go anywhere and are not required to be invested in Chinese projects or used to refinance previous Chinese loans. This is highly unusual for China, whose loans typically fall into one of two categories – soft loans and commercial loans – and which are normally secured or guaranteed by the government of the borrowing country.

Previous Chinese loans to Belarus were intended to set up joint projects, with the condition that the Chinese component of the project would be at least 50 percent, or financed state programs with the participation of Chinese partners. For example, funds allocated for the modernization of the railway in Belarus and the purchase of 18 trains immediately went to Chinese suppliers.

Winners and Losers

It isn’t clear yet how Belarus will use the loan, but there are two main possibilities. One is that Minsk could pay off some previous Chinese loans coming due in 2020. In this case, the loan wouldn’t ultimately be a significant deviation from China’s usual practice, in that the funds would return to China.

Still, this would serve as a reminder of China’s growing economic influence in Belarus – not to mention a potential Chinese debt trap. The other possibility is that the new loan could be used to refinance loans from Russia.

This would be significant in that it would slightly reduce Moscow’s leverage over Minsk. Russia owns about 50 percent of Belarusian foreign debt, amounting to some $7.5 billion to $8 billion out of a total debt of $16.6 billion as of Nov. 1.

In trying to understand why Beijing attached no conditions to this loan, it’s worth considering which countries the loan benefits. The main beneficiaries of a decline in Russian influence over Belarus – aside from Belarus itself – would be Poland and the United States.

Neither the U.S. nor the European Union is willing to antagonize the Kremlin by providing credit to Belarus. No such impediment exists for China. Since the U.S. and China are still negotiating a trade agreement, this could be interpreted as a small concession by Beijing as part of the phase-one deal, or it could be linked to sanctions relief for North Korea.

But we don’t think that China is interested in driving a wedge between Russia and Belarus to satisfy the United States, particularly since any help to the U.S. in containing Russia only frees up Washington to focus more on containing China.

Of course, it’s also true that Belarus occupies an important geographical position, the last piece needed to link China’s Belt and Road Initiative to Europe. But since China sees Russia as a much more important partner than Belarus, it is not in Beijing’s interest to anger Moscow.

The trade turnover between Russia and China is many times that between Belarus and China, plus Russia-China trade has been growing steadily in recent years – by 2.2 percent in 2016 compared to the year before, by 20.8 percent in 2017 and by 27.1 percent in 2018.

Russian exports to China in 2018 amounted to $56 billion, while Belarusian exports were worth only $480 million. From January to October 2019, agricultural imports from Russia grew by 12.4 percent in annual terms, and automobile exports from China to Russia grew by more than 66 percent.

There’s also the recently inaugurated Power of Siberia gas pipeline, which will increase Chinese reliance on Russian gas.

For now, Belarus can rejoice that it found the additional funds – and on favorable terms, with less politicized conditions.

From Minsk’s perspective, the loan will significantly strengthen its negotiating position with Moscow, enabling the country to attain better terms when its president meets with Russian President Vladimir Putin on Friday to hammer out a deal on energy prices, subsidies and economic integration.

The Kremlin, for its part, is unlikely to react to the Chinese loan.

But if Moscow starts to suspect ill intentions on the part of Beijing, it will think carefully about how to express its dissatisfaction.