Pierre-Alain Wavre, equity partner, head of Pictet Investment Office, chairman of the investment committee of Pictet Wealth Management, highlights three key trends in the wealth management sector that have been at the forefront in 2015 and will continue to dominate in 2016
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1. Focus on Fintech will sharpen
Everyone is aware that the financial sector faces a technological revolution, especially in how we interact with clients. For example, robo-advisors are offering algorithm-driven automated investment services and typically charging lower fees than a financial advisor.
The blockchain protocol is likely to disintermediate most processes in financial services. Business models are now becoming increasingly technology-driven, and these trends have the potential to have a big impact on margins. After a slow start, Fintech began to take off in Switzerland in 2015, and players in the wealth management sector will sharpen their focus on this area in 2016.
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By GlobalDataHowever, it is not yet clear how the rise of Fintech will play out for the wealth management industry, specifically how far these new technologies will find favour with clients in this space. On the one hand, harnessing ‘big data’ will improve our understanding of clients’ behaviours and needs, and will make wealth managers better able to personalise and customise their offering. (One impact of this will be to increase the impact of the ’emotional bias’ of investors, making behavioural finance even more important.)
On the other hand, will ultra-high-net-worth individuals really be willing to entrust their wealth to an algorithm? The situation looks similar to the tech boom in the 1990s in some respects — probably there will be significant changes for the industry, but less revolutionary than initially envisaged.
2. Private equity will continue its rise
Private equity is set to be the best-performing asset class in 2015, and on our forecasts will also offer the strongest returns on a nominal annual average basis over the next ten years, at 13%. In a world of low returns, interest in private equity has understandably risen — even though the higher returns offered by private equity need to be weighed against its lack of liquidity (with a full investment cycle typically 7-8 years).
Wealth management institutions need to be prepared for private equity to continue to grow in importance in 2016 and beyond, which means cultivating strong partnerships with private-equity firms — as Pictet has been doing over the course of 25 years.
3. Fear of volatility will persist
People are still in a 2008-09 mindset, worrying that equities will crash — and this is likely to remain a feature of 2016. Even though, looking at it on a ten year basis, the impact of 2008-09 on returns actually was not that dramatic: in fact, US equities returned 10.9% annually on average in 2005-14, compared with 8.9% on average historically (since 1871). Yet many investors have low tolerance for volatility — and this will become more of an issue in 2016 as volatility increases, because of desynchronised central bank policies.
The problem is that returns on traditional ‘risk-free’ assets are poor. The reason a 60/40 portfolio was able to deliver double-digit returns for much of the past 30 years was that long-term interest rates were steadily falling. As rates normalise, we expect 10-year US Treasuries to return only 1.6% annually on average over the next decade, which means returns of 6.9% on a 60/40 portfolio (split between the S&P500 and US Treasuries). Investors need to realise that in a world of low returns, there is no free lunch. If you want to boost returns, you have to take on more risk — or, more precisely, to accept more volatility, which does not actually mean risk.
