This article was written by Julien Serbit, portfolio manager at Prime Partners. It appeared in the June 2018 issue of Citywire Switzerland.
The question may seem stupid, but the answer is not obvious. Back in the day, asking an institution (mainly private banks in Switzerland) to manage your wealth was recommended, with no real alternatives for those who wanted to manage their money through liquid investments.
At that time, investing in financial markets required a network of professionals supported by structures that had access to them.
Buying equities or bonds was not easy, and during that period we can presume that the private banking industry benefited from a kind of ‘operational’ monopoly.
Things on the operational side developed, but what clients were looking for also changed. Technology, and especially the internet, completely altered the way people accessed markets, especially liquid instruments. It is now possible for almost everyone to trade financial products from anywhere around the globe, a revolution compared to just 20 years ago.
Consequently, money managers have been forced to adapt and concentrate their financial advisory skills and performance-generation objectives, relinquishing their privileged position as the sole gateway to financial markets.
Obviously, trading and custody fees have been condensed by the democratisation of financial products, with banks now facing web trading platforms or online banking institutions as competitors. The pricing power of banks has been reduced throughout the years as technology constantly provides easily accessible new solutions for clients engaging with financial markets.
The place of wealth management
However, one essential thing remains: the art of wealth management and the quest for capital appreciation. This is not something that technology alone can provide to wealthy clients, even if the emergence of robo-advisers is a marker of significant changes on that front.
We believe in the virtues of asset allocation, and we rely on the irreducible human ability to manage a portfolio. The ability to trade simplistic financial products is not sufficient enough to generate monetary growth. A deep and thorough understanding of market mechanisms and a constant engagement with portfolio management is still required to perform efficiently and productively.
Following a buy and hold strategy through passive products without any asset allocation alterations is still a valid approach, especially since 2009 in US equities. For any asset allocator, it has been challenging to beat the S&P 500’s returns over the past nine years. The
global situation is different if we take into account 2008, however, when a 100% equity portfolio lost more than 40%. Cash was king in 2008.
We believe in the idea that tactical asset allocation, if well realised, is key in decreasing the volatility of a portfolio. This means less client stress, and prevents wealth from being eroded by major market drawdowns such as corrections, not to mention outright crashes. For us, this is the essence of money management, and an important part of why wealthy clients are still looking for portfolio managers. In all, important technology developments over the past 10 years have been positive for anyone looking for a wealth management solution.
The increasingly competitive environment for investment professionals, especially on trading fees, has enhanced the transparency of one of the most basic and important services for which money managers are paid: performance generation.