The changing dynamic of wealth preservation in a sluggish economy

By Janice Roberts

By Martine Steinegger Allocca, Senior Vice President at Lombard Odier and William Frank, Assistant Vice President at Lombard Odier.

For many High Net Worth Individuals (HNWIs) and Ultra HNWIs (UHNWIs), preserving wealth can be much more important than securing sizeable returns. This may seem like a simple ask however, in a sluggish economic environment, preservation can prove rather challenging. The global economic environment is in a state of flux with factors such as trade wars, emerging market challenges, shifting commodity prices, rising interest rates, etc. contributing towards volatility and the asynchronous bull and bear markets in different geographies.

Navigating these dynamics to preserve wealth can be very complex, requiring the expertise, insight and foresight of global wealth management experts who have consistently and successfully helped clients weather a diversity of proverbial storms. In South Africa’s particular political and economic context, there are many factors contributing to a pervasive level of pessimism. Key among these are policy instability, currency fluctuations and a general low growth environment against the backdrop of extremely high unemployment rates and an ever-escalating debt to GDP ratio.

While these factors may be discouraging, it is important to note government’s prioritisation of economic stimulation, emphasis on entrepreneurship, a strengthened civil society and the great opportunities presented by South Africa’s significant youth population.

Applying the 3 Cs and 2 Ps
Looking at the opportunities the South African economy presents, to effectively preserve wealth, it is critical to maintain a long-term view and understand that challenges are not unique to South Africa. This is – in some ways – a natural (albeit elevated) ebb and flow. Equally, there is no place for impulsive decision-making when it comes to wealth preservation as it requires taking a long-term view, especially when the socio-political and economic environments seem to be taking a turn for the worse.

Knee-jerk reactions to buy or sell can severely impact capital and result in substantial losses, undermining the objective of wealth preservation which can be summarised as putting in place mechanisms that mitigate against possible losses and secure inflation-beating returns to ensure capital continues to grow sustainability.

Preserving wealth often revolves around specific goals and needs which can at times be complex. The most common of which are:
– Securing a nest egg that can meet the individual’s future income requirements
– To secure your financial position and ensure the desired lifestyle is maintained, in any given context
– Accumulating wealth for succeeding generations

Building wealth requires the three Cs – courage, confidence and conviction – while preserving wealth involves the two Ps – patience and extraordinary prudence.

Imprudence comes with a high price tag
Clients – especially within the wealth management space – are looking for a wealth management specialist that can truly understand them and their ambitions. They are looking for someone who can understand their goals, bring them back on track when knee-jerk mode has been activated and reinforce their strategies. They are also looking for experts that will make processes as convenient and seamless as possible for them and provide guidance on the most optimal decision-making to secure their wealth for generations to come.

They are seeking experts that they can develop long-term, meaningful partnerships with as they navigate various stages in their wealth management and investment journey. Many HNW and UHNW clients are seeking solutions and services that have been customised down the minutest detail. To ensure relevance, it is important that wealth managers adapt to the dynamic and changing needs of each client whilst keeping an eye on developments in the economic environment.

Essentially, a well-balanced investment portfolio is the critical ingredient to weathering the frequency and diversity of risks inherent in capital markets in order to preserve wealth. This is where the expertise of wealth management professionals can be invaluable in helping understand the diversity of risks and guiding clients on the most effective options based on their personal goals.

Sometimes, it takes very little for things to go severely pear-shaped and what seems like a fantastic investment decision can turn into a nightmare – instantly. CEO of Japanese telecom company, SoftBank, Masayoshi Sun, saw $70-billion shaved off his $78-billion fortune in just a day due to the dotcom crash. Before the loss, he was the richest person alive and this loss remains the highest individual financial loss in history. Another devastating example is that of Seán Quinn (once the richest man in Ireland) who lost his $6-billion fortune in the 2008 financial crisis and ended up more than $3-billion in debt.

When one considers such scenarios, the established expertise of seasoned professionals becomes a non-negotiable. These examples, whilst rare, show the critical role wealth preservation plays, especially in times of economic flux.

Technology – a great complement
Technology is a key contributor to the wealth preservation process and within the investment space, the evolution has been remarkable with a growing number of funds and portfolios operating “independently” through a set of algorithms. However, a heavy reliance on technology is not without its risks. Thus, a responsible approach to wealth preservation will always entail oversight by a wealth management expert who is in a position add value by making decisions that support the goal of wealth preservation but equally, considers the client’s individual preferences. Ultimately, the right balance of human interaction and technology can result in a beautiful symphony that plays to the tune of wealth preservation.

The must dos and definitely must do
In a sluggish economic environment, preserving wealth becomes a more intricate process and the most important considerations for clients are:

  • The expertise of established wealth management professionals to maximise potential for enhancing returns – within the context of your objectives and preferences
  • Think long term as any knee-jerk reaction to sell or buy – especially when the market appears to be correcting – can be counterproductive and perhaps even detrimental
  • Diversify your investments to hedge your bets but also maximise on the diversity of opportunities available. It is never wise to put all your eggs in one basket as the more your risk is spread, the better you will be able to ride out the storm in volatile markets conditions
  • Stick to your strategy no matter how tempted you may be to make changes – even if you anticipate these to be short-term
  • Ensure a multigenerational approach by preparing your children and grandchildren to effectively manage and grow wealth. Educating future generations and building an appreciation for the same philosophy can pay immense dividends.

Considering this, wealth preservation is an integral part of wealth management, even more so in times of depressed economic activity. The two Ps of patience and prudence are critical to ensuring that the hard work of acquiring wealth is not undermined by knee-jerk reactions that have the ability to destroy a hard-earned fortune.

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