While asset allocation for all clients poses challenges, high net worth individuals have tax-advantaged schemes at their disposal. JLT Wealth Management's Karen McCaffrey explains...
High net worth individuals (HNWIs) may have more tax consequences to consider but, fundamentally, what does everyone want? For most, the starting point is more than cash deposit returns but with no risk.
Once we break down what risks, opportunities and likely outcomes there are, we can steer people towards thinking about what they need to do to meet their objectives. Looking at desired annual rates of return, we have to think about how we try to achieve them.
The risk/reward ratio of every asset class needs to be constantly assessed in this ever changing world where excess liquidity has been placed into the markets via governments’ various forms of quantitative easing (QE). This artificial liquidity has led to a large skew in the valuation of assets and their future rewards.
Maximising returns for your HNW clients
For much of this year, equity markets in most areas have steadily risen. Investors responded positively to reasonable economic figures, a lack of further bad news in Europe and the continuing flood of liquidity caused by QE.
However, even during this time of optimism, there were two major concerns: was the recovery in economic activity as real as it appeared, and what would happen if the money tap was turned off?
We have said for some time that QE was boosting asset prices but having little noticeable effect on real economies. The major question now is whether the reverse is true. Will a withdrawal of QE, however ‘tapered’ that turns out to be, lead to more subdued asset prices but not necessarily a slowdown in economic activity?
In these conditions, the chances of receiving a real return on cash anytime soon seem slim and bonds generally look unattractive. This leaves equities as the only alternative but can we rely on history and the returns received so far? No, we must look forward and constantly reassess.
The buy-and-hold approach is a dangerous game in these market conditions. No one can rest on their laurels and decisions must be implemented with a focus on that ever important risk/reward trade off.
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