There have been a series of unexpected events this year that makes one question the relevance of the traditional wealth management practices. We asked this question to Robert W Dannhauser, who directs the global private wealth management practice of CFA Institute and Vidhu Shekhar, Country Head of the CFA institute in India, to find their views on this.

Excerpts from the interview:

What are the implications of the recent demonetisation on wealth managers such as yourself?

One of the immediate consequences of this will be more assets flowing into formal capital markets as opposed to just being held in cash outside the institutionalised system. It will be a new experience for many investors as they look for alternative ways to hold their wealth. This will be a positive for both wealth management professionals as well as investors, a bit of an upsetting way to get there. But it’s a bold and dramatic move that’s certain to have repercussions.

In India, we have been encouraging our charter holders to enter wealth management profession. The phrases I have been hearing over the last couple of days, ‘digitisation of payments’ and ‘financialisation of savings’ is what is actually happening now. People moving away from gold and property towards financial savings can only be good for our profession.

With Trump’s victory, demonetisation, Brexit etc, are the old rules of wealth management changing. Response time has to be far quicker…

The temptation is to speed up the cycle, but the old rules still apply and are still useful. People have to take a long-term view and not be upset by troubling day-to-day news.

While you might think looking at events such as Trump victory that the world, as we know, is coming to an end, the fundamentals remain the same. There are larger shifts taking place such as structural changes in demographics, changes in saving habits, the way in which saving is passed on from one generation to the next; these are far more important.

In India, equity has been the best performing asset class, but what has been the experience globally?

As a former investment marketer, I can say with confidence that if you give me a long enough time period, I can find the right time-period within that to showcase a particular asset class. I used to sell pretty strange things and was good at picking the right points. That said, equities do have persistently superior risk-adjusted returns over longer periods. But if you are looking at shorter periods, say, 20-year blocks, that could change depending on the time-period you are looking at.

But in modern practices people are not just looking at the return numbers to choose between assets. They are looking more at the risk side of the equation as well. In financial planning, if you are wealthy, you have greater capacity to take losses. The mirror of that is your need for risk. In order to achieve certain financial goals, the amount of risk that you need to take. Some trouble arises when automated solutions try to quantify the more subjective elements of risk.

A study looked at commercially available risk surveys in the market and answered them all as conservatively as possible. But the equity allocation in the portfolios suggested by these survey ranged between zero and 70 per cent.

In India we are told that your portfolio has to beat inflation. Is it the same in other countries? And with inflation close to zero in many countries, what are the other metrics used for asset allocation?

Indeed, inflation is very important, so we would like to have people talk about real returns rather than nominal returns. We also encourage people to consider the effect of taxes. High frequency portfolios with lot of taxable transactions can have returns that are inferior to a boring portfolio. Inflation and taxation are very relevant, even in a low inflation market. The tricky part, for long-term investors, is how to anticipate when a period of low inflation will end; the kind of instruments and strategies that can help weather such periods, taking on some equity risk can help in such patches. There are products in certain markets that are built to be more responsive to inflation, such as TIPS (Treasury Inflation Protected Security) in the US.

What is the recent thinking among the wealthy regarding alternative assets such as hedge funds, art, wine and so on?

Institutionals of all types have woken up to the fact that hedge funds are very expensive and the returns that they offer, when risk-adjusted, may not be worth the price. We are seeing a softening of the fee schedules. Some of the big institutions have begun pushing the funds to take on some of the downside and upside and for lowering the fee.

That said, if smart investors who run hedge funds do what they said they will do — offer a hedge against other factors in the market — it is still a viable product. But not all hedge funds are doing that. It is less than an asset class and more of a vehicle, a vehicle that enriches the fund manager more than the investor.

Collectibles have valuation issues, it’s a very thinly traded market. For many wealthy, it’s the secondary benefit that matters. They do not always invest for financial returns, but they might be indulging in a passion of their own. It also mostly tends to make a small part of the portfolio.

What are your views on high frequency trading and dark pools?

We have been quite unpopular with our members in taking the view that high frequency trading is not evil. The Michael Lewis book was very compelling; he is such a good story teller. But we tell clients that they have never had it so good. They can key in trades much faster and save on costs. There is a view that high frequency trades are stepping in front of other investors because they have superior information. But a SEC’s study shows that this is not a built in defect of the market. HFTs anticipate and take positions ahead of the market in the same way others have done over decades. When we look at the HFT traders, most of them are trading as principals and not stepping in front of their clients, putting their own capital at risk.

There was an interesting paper done on dark pools that showed that they improved depth and liquidity in market up to a certain point. Beyond that point there is diminishing returns.

There is one school of thought that says changes have to be made at the margins. Another school says they need to be scrapped. Reviewing these rules is a challenge as finding the right people without commercial interest is not easy.

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