How much risk should investors take on?
Sponsored Post-boom investors have learned hard lessons about risk
It has been a challenging few years for wealth managers. Not only has there been a widespread destruction of wealth as a result of the global financial crisis and the subsequent collapse of bubbles such as the Irish property market, but scandals throughout the financial services sector have also hit. As such, retaining and regaining trust, while sticking to the core of wealth management – capital preservation rather than speculative investment strategies – are likely to be the focus going forward.
Having been hurt in the downturn, advisers are now finding clients are more engaged. “It’s fair to say that clients are much more discerning, having learned some very hard lessons about risk,” says Pat McCormack, head of Barclays Wealth in Ireland.
Today, wealth management clients want to be more involved, they ask more questions, and spend more time trying to understand things. They are also much better informed.
“There is no question that there are those who would have experienced wealth destruction, who have very volatile portfolios are now very interested in getting the specifics on staying on top of what’s going on,” says Edward Yusko, a director with Key Capital.
This means that when it comes to returns, investors are willing to forgo the heady returns of the boom years.
“Double digit returns would have been an expectation – but now people are more willing to focus on capital preservation,” says Yusko.
This means a return to a diversified, well-balanced portfolio. Indeed, while advice on diversification might have been taken “with a grain of salt” in times gone by, Yusko now sees a “huge maturity” on the part of investors, with more people realising how relevant those principles actually are.
And leverage, so popular in vehicles such as contracts for difference and property syndicates, is now out of fashion.
“People are more willing to look at lower leverage portfolios – in the past there was a view that leverage was a primary part of the whole investment. Now people feel it’s not necessary any more,” says Yusko, adding that where investors are willing to take on risk, it’s often in a “satellite” part of their portfolio.
Another consideration in the post-Madoff world is a greater focus on the quality of institutions investors deal with.
“They are far more aware of counter-party risk,” says McCormack, adding, “clients want to know that their capital is secure.”
In this regard Yusko notes that there is “still a bit of nervousness” on the part of clients when it comes to alternative investments such as hedge funds, but that this has “dissipated a bit over time, as they see the value in having an exposure to hedge funds”.
Indeed with the threat of inflation on the horizon, and deposit rates on a downward spiral, for some, their risk appetite is returning. “Clients have to take on a little bit more risk. Their capital is not protected in the sense that it’s being eroded by inflation. Hence, some are beginning their journey as regards getting their money to work for them,” notes McCormack.