Wealth Manager's Response to a Sustained Crisis
Michael Obaga  |  Aug 17, 2020  | 
Michael Obaga  |  Aug 17, 2020  |  Investments

The Covid-19 pandemic is a black swan event that has marked the end of an extended bull run since 2008/09 recession and caused an economic downturn of unprecedented scale world over. Whilst governments have been able to impose measures against its spread to save lives, these measures have had undesired outcomes on the economic environments in which these governments operate, sparkling record volatility and plummeting prices across assets classes in wealth management. It is apparent that the financial markets have since experienced huge capital outflows and panic sell-offs in a flight-to-quality, as investors seek safety and stability in perceived stable assets and precious metals. With this sense of dislocation and uncertainty, wealth managers have to seek to new strategies and measures in order to adapt to these emerging challenges and position themselves at a vantage point to remain competitive in the long run.

i. Automation and digitization

Automation is shaping the future of wealth management. A surge in robo-advisory sign-ups in the US during the first quarter of 2020 is an exemplar one can allude to. Investors continue to prefer robo-advisors as they make investment decisions based on real-time statistics and are unfazed by emotions even in tumultuous times such as Covid-19. Further, tactical re-evaluations by digital portfolio managers are able to mitigate against the effects of volatility on investments.

Adoption of digital channels across the wealth management value chain can support business continuity amid a sustained crisis. These digital tools enable personnel to work remotely, teams remain connected and communication becomes effective improving team playing, sharing of data and resources across teams. Digital CRM functions from investor on-boarding to redemption, aid firms to break free from shackles of a paper based environment. Integrating clients into the digital platforms also ensures real-time tracking and access to their portfolios through omni-channel options that includes email, web, apps, social media, USSD (Unstructured Supplementary Service Data) and IVVR (Interactive Voice and Video Response). Besides, digitization allows individuals to assume multiple workflow roles and remote sessions drastically reduces office space demands improving operational efficiencies and cost rationalization.

However, increased reliance on digital tools especially when working remotely may weaken the security protocols and expose firms to cyber-attacks and phishing attempts. To mitigate against this, wealth managers IT security departments should collaborate with digital service providers to ensure safety and stability of their digital platforms.

ii. Communication

In times of uncertainty, timely communication is rewardful pursuit. Wealth managers have a responsibility to communicate regularly with their clientele advising to remain calm and committed to the long-term investment goal. In light of observing social distancing, financial advisors should reach out to investors through phone calls, emails and virtual meetings in order to build goodwill and inspire more confidence in their clientele. To sustain investor confidence, a continued engagement with the client is vital. Tax guidance should be carried out to address tax concerns in line with deflationary fiscal policy adjustments.

Wealth managers with a large clientele can seek to adapt Artificial Intelligence (AI) in a bid to send communication to the investors via customized emails and social media connection. However a mix of analogue and digital communication model can yield better results because of the different client niches. General non-confidential communication such as market reports can be done through websites and social media platforms. Investor education on investment philosophies can be done through podcasts, webinars, circular notes and video calls. Most importantly, non-disclosure and confidentiality must be prioritized through safeguarding and protecting investor information and data at all times.

iii. Value Preservation

Both public and private markets continue experiencing downturns since the declaration of Covid-19 as a global pandemic on March, 11th 2020. Effectively, disruptions in supply chains, lockdowns, travel restrictions and social distancing orders have adversely affected the sectors in which these markets operate. Public markets such as the stock markets characterised with high levels of liquidity exhibited sudden loss of liquidity and high volatility, however the stock markets have since bounced back. Private markets such as private equity and asset-class real estate investments have not been spared either. Reduced investor sentiments during this period has reduced revenues, leverage and valuations of both equity and debt investments.

Assessing the impact of this market turbulence, wealth managers should build contingency plans, liquidity management procedures and roll out value creation strategies in order to minimize cash-burn as the enduring during effects of the bear market last. Some of the measures to be considered in value preservation include, debt refinancing and restructuring, bonus issues in place of dividend pay-outs, interest capitalization and redemption gates to tame short-term panic that might arise as a result of the economic downturn. However, these strategies should be executed carefully under periodic disclosure to the investor and their success is dependent on the strength, competency and track-record of the wealth manager.

iv. Asset Allocation

According to the Modern Portfolio Theory, a well balanced portfolio is composed of 60% stocks and 40% bonds. Well, with Covid-19 this theory no longer holds. Investors are seeking long term capital appreciation, safety and stability. Clearly, this won’t be achieved on these two asset classes alone. Therefore wealth managers should consider asset allocation techniques in view of reducing portfolio risk and maximizing risk-adjusted returns.

To this end, in-depth portfolio knowledge, stimulating and rebalancing of portfolios allocation within a risk controlled framework in order to reflect the current market and economic outlook is key. Fast-tracking deployment of Asset Management can be done through strategies such as strategic asset allocation, tactical asset allocation and dynamic asset allocation. These strategies are premised on risk-return trade-off and investment horizon while paying attention to the prevailing market sentiments. Lastly, empirical studies have revealed that markets regimes ebb and flow through periods of expansion followed by periods of contraction, so do assets in different market phases. This makes a compelling case for a strategic asset allocation.

Michael Obaga. Senior Financial Advisor. Cytonn Investments. mobaga@cytonn.com