Despite the evidence that major world economies are heading for trouble, the vast majority of wealth managers seem unconcerned. Only five of the 65 wealth managers Datamonitor surveyed across the globe say that a potential recession most worries them. This will be to their detriment, and to the advantage of those banks that do take action now. Three new reports foresee a sustained economic downturn in 2008–09 that will have a significant negative impact on money managers. Despite this, as late as September 2007 most of these companies did not believe there would be a downturn, putting them at risk of losing both their clients and their investment returns.

The most highly-publicized troubles center on ‘sub-prime’ mortgages in the US, but a number of institutional practices and economic trends are exacerbating the problem there. Over the last several years many mortgages in the US were originated without deposits, effectively giving borrowers a loan with no financial commitment beyond the monthly payments. At the same time interest rates rose 16 times since June 2003, making variable rate mortgages more expensive. Furthermore, US savings rates turned negative in 2005, meaning that consumers have been spending more than their income since then, going deeper into debt with a dwindling ‘cushion’. As a result, a large number of homeowners have walked away from their mortgages.

But the residential mortgage market is only one side of the equation. Banks across the US and the world have packaged their mortgages together into mortgage-backed securities (MBS) and sold them into the secondary mortgage market. This market is enormous worldwide, and this is where the knock-on effect of America’s delinquencies will be most keenly felt because these MBS are on the balance sheets of the world’s financial institutions.

During market volatility, clients want to understand the impact on their portfolios, now and in the future. Unfortunately, as of late September, Fidelity International and Bank of America / US Trust were among the few wealth managers to formally communicate their market view to clients. This leaves most investors uncertain about their financial future during a time when their needs are changing. Several wealth managers are well-positioned to take advantage of these shifts in clients’ financial thinking.

The volatility in the equity markets will undoubtedly propel more consumers to seek the security and predictability of fixed income instruments. Despite competition in the form of mutual funds and insurance products, Datamonitor predicts that in the world’s major economies, deposits will continue to dominate retail savings and investment portfolios.
Providers need to develop a joined-up strategy in association with the IFA community to ensure that clients are kept informed not only of the major market changes but how this will impact their portfolios directly.

Further Reading: Weathering The Storm in Wealth Management
Further Reading: Weathering The Storm in Savings
Further Reading: Weathering The Storm in Life and Pensions