The Economist Reports on the Rich

Brother, can you spare $10 trillion?

In the Wealth Report, Robert Frank headlines the estimated $10 trillion that the world's rich have lost in the credit crisis, according to The Economist's Special Report on the Rich.

Happily, as the chart shows, there are plenty more trillions for wealth managers to fight over.

In Servicing the Rich, The Economist's Philip Coggan cites anecdotal evidence that most of today's rich either don't use private wealth managers or don't trust them.

Investment performance? That's a hard sell. Coggan explains why with the very same excuses I was stringing together for Merrill Anderson's clients decades ago:

Ask for performance figures, and the best you will get is the record of some model portfolio; clients are all different, managers say, and have different attitudes to risk. Besides, they argue, looking after a client is not just about performance, it is also about tax management, family structures and all manner of other things. Some clients have strong opinions and will want a say in how the portfolio is run; others will have long-standing positions in particular businesses or properties that they may be unwilling or unable to sell.

The carrots many wealth managers dangled before their prospective clients in the boom years were "alternative investments." Some turned out to be not such a good idea:

An important development in recent years has been the use of so-called structured products. Like the toxic versions that were undone by the collapse in the American housing market, these products involve the use of derivatives. That makes them a tempting sales opportunity for investment banks with derivative expertise. An enthusiast would say that these products often have tax advantages and can be used to manage an investor’s risk profile; a cynic would say that the structures can disguise a lot of fees and charges.…

But the bigger problem has been investment losses. During the boom years some Asian private-banking clients were sold a toxic product known as an accumulator. The structure sounded simple. If shares in a company, say General Electric, stayed above a given level, investors received a high yield; if the shares dropped below that level, they ended up owning the stock. In effect, the clients had written a put option on the share price. That was fine in rising markets but proved to be a disaster in 2008 when clients ended up owning shares that were falling rapidly.

Wealth managers will share some of their clients' pain, says Coggan: "Downward pressure on fees seems inevitable."