The emergence of a next generation that is set to inherit record levels of wealth and is highly focused on purpose-driven investment is presenting a new wave of challenges and opportunities for wealth managers.
The purpose of this article is to analyse how equipped international finance centres (IFCs) are to deal with this new type of HNWIs and respond to changing priorities in areas such as Philanthropy, ESG Investing and FinTech.
We will share our view of these new “financial objectives”, which are somehow consistent with the so-called “woke capitalism”.
The Emergence Of New Trends & Concepts
There are many trends shaping the future of the economy and wealth around the world.
One of the main topics is how the next generation is changing the attitudes of the wealthy towards the environment, social investing, and corporate governance. This is generally called the “ESG Approach” and has a wide range of meanings and implications.
Concepts and topics such as philanthropy, ESG and other forms of responsibilities associated with the environment are emerging rapidly, whether we like it or not.
On the other hand, software, digital assets, and the internet of value have allowed many people to build considerable fortunes. So, in addition to the next generation of traditional ultra-high net worth families, we have “new money” and the demands of these new riches for wealth managers may be different.
Not only the vision people have regarding investments in general and its purpose have changed, but also the vision regarding wealth itself has been modified, mostly due to social media and left-oriented political leaders constantly promoting ideas which demonise wealth, blame the rich for crises; and who try to infringe their privacy rights and increase their taxes.
Wealth managers and wealth advisers must respond not only to new demands coming from old money, but also to new money, to the “demonisation” of wealth and to new risks and asset classes.
New generations are changing their investment preferences and objectives. Nowadays, the range of investment possibilities and new assets are bigger than ever before, due to the appearance of new assets and the deepening of globalisation, which has simplified access to the same.
On the other hand, social factors such as the economic crisis, the pandemic and the damage caused by the Russian invasion of Ukraine have also contributed to creating this feeling of "social responsibility" when investing.
Investors are now looking for sustainable investments, human centred design of products, removable energies, etc. And there is nothing wrong in these “purpose-driven investments” and/or the ESG approach. They however present risks, and wealth managers will have to take many precautions with them.
In other words, in a highly globalised market, opportunities are enhanced but so are the risks.
The emergence of crypto assets, for example, has presented a great challenge, and the bankruptcy of numerous exchanges has demonstrated many risks within this new market and the effect they can have on the entire economic system. However, this potentially could have been prevented by due diligence processes before investing.
"Green" projects could present, for example, "greenwashing" risks. This means that one project could be less sustainable and “green”, socially responsible or contribute less to the environment as pretending to sell.
Other kinds of scams could be hidden behind concepts like “philanthropy”, “green”, “environmentally friendly”; and the case of FTX and Bankman-Fried is just one example. It was not the first one and it will definitively not be the last.
Consequently, investing in due diligence processes and investigating projects in depth, as well as prioritising critical analysis over marketing, will make the difference between wealth managers, and therefore between the results of the investments of their clients.
Each investor is of course free to decide what kind of investments they make and for any purpose, but it will be indispensable for the wealth manager to be able to maintain objectivity and carry out their work, avoiding the marketing that may distort projects and the tendentious guidelines that social media and the States intend to establish.
The Role Of IFCs And Wealth Managers
Wealth managers must develop a wide range of skills not only to respond to new demands and assets, but also to compete in an increasingly globalised services market, with greater technological risks in terms of cybersecurity, privacy, and frauds like greenwashing in certain investments and projects.
In this context, soft skills such as communication and critical analysis will be essential to avoid scams, misleading marketing, misinformation, and potential biases from social media. Therefore, the central challenge will be how wealth managers interact and explain their labour before a generation which is constantly consuming socialist trends and slogans like “Tax the rich" that create guilty feelings about having a considerable net worth.
In addition, other tendentious ideas derived from those guidelines, like fighting against privacy rights and tax competition, are emerging forcefully.
Sadly, these thoughts are promoted not only by the media but also by artists, influencers, representatives and even through state policies. In other words, wealth managers will have to protect their clients from social media, scams, cybersecurity risk, cognitive biases and, probably, even from themselves.
Consequently, communication capabilities when explaining to clients how investments could impact on the environment and society will make a difference. The wealth managers of the next generations should develop many skills due to not only the investors having changed, but also changes in the market and investments strategies which have incorporated new risks as well as opportunities.
Above all, the most important skills will be soft ones since the greater challenge will be to communicate how to comply with the ESG approach and mitigate the potential risks, as well as responding to new technologies.
Nonetheless, wealth managers will have a strategic role to combat these kinds of guidelines and ensure that clients understand that the environment can be preserved with strategic trade and investments in certain sectors through an ESG approach; as well as taking the necessary precautions to prevent fraud such as greenwashing and information leaks; and building resilience plans.
This not only requires training on new technologies and market trends but also investing resources in due diligence processes before investing and other measures of security to prevent the risk of fraudulent projects.
But not all new concepts carry risks.
Technology presents great opportunities to implement better investment strategies, cybersecurity, resilience plans and reach new markets and new clients. And at this point, it is an opportunity to rethink technological strategies and remember that it is necessary to empower ourselves, but to also never replace human skills such as communication, adaptability, resilience, and leadership.
Especially, work in multidisciplinary teams will be necessary given the complexity of new assets and the “ESG approach”.
If they wish, wealth managers will be able to contribute to the energy transition and combat climate change by advising their clients with this approach, filtering solid projects, and promoting strategic investment in them.
To conclude, there are a few things worth highlighting:
Martín A. Litwak
Lawyer specialised in wealth structuring and investment funds. Martín has focused on providing advice to high net worth (HNW), ultra-high net worth (UHNW) and institutional families domiciled in Latin America. His expertise in setting up and/or managing fiduciary structures designed to tackle issues related to the lack of rule of law, the lack of privacy and the fiscal voracity of the countries in which they reside and/or conduct their business activities, as well as his experience in resolving succession issues and/or to ensure that the family assets are well protected makes him one of the foremost lawyers in this field. He has also assisted several Latin American based fund managers with the establishment and licensing of hundreds of investment funds, the majority of them in the British Virgin Islands and the Cayman Islands. Finally, Martín has been very active in multi-jurisdictional mergers and acquisitions, international financial transactions of several types (i.e. private equity/venture capital deals, project financing, structured finance, IPOs, etc.), tax amnesties and the provision of advice in transactions involving crypto-assets and Blockchain (ICOs, STOs, etc.)
Camila Da Silva Tabares