Investment managers should be rethinking portfolio diversification strategies for their HNW clients as recent regulatory changes will encourage flows of assets to the US, already leading as the world’s biggest offshore market, according to GlobalData, a leading data and analytics company.
The company’s latest report, ‘2019: Trends to Watch in Global Wealth Management’, identified four main trends to come in the year:
- In the wake of CRS, non-participating countries such as the US will continue to grow as offshore centers.
- Volatility will require a rethink of diversification.
- As use of technology increases, wealth managers will have to take more serious action towards cybersecurity.
- New client demographics will become more prevalent.
Although there are some delays, in 2019 the vast majority of committed countries will be exchanging information under the Organisation for Economic Co-operation and Development’s (OECD) common reporting standard (CRS).
Sergel Woldemichael, Wealth Management Analyst at GlobalData comments, “The OECD’s CRS has a focus on clamping down on tax evasion but it will not largely disrupt the offshore market. Tax benefits are not the only motivator to look overseas for investments, geographic diversification, and access to a better range of investments, are all unaffected by CRS. Nevertheless, the US market which is exempt from CRS, will continue to benefit from not participating. The country already has 27% of HNW global offshore wealth, and this proportion can increase.”
Further flow of assets to the US might jeopardize investment managers’ efforts to geographically diversify client portfolios. According to the report, only a third of wealth managers GlobalData surveyed are concerned about a potential market downturn. However, it will be paramount that wealth managers make their clients aware of its possibility, to avoid them being taken by surprise if the markets do descend.
Woldemichael adds: “Advisors should encourage diversification both onshore and offshore. In particular, alternatives will be a key way to diversify portfolios as they cope with market downturns better than traditional asset classes. In order to drive uptake in alternatives, client trust and education will be vital”.