Wealth managers unprepared for turmoil - Charles White Thomson

Moral hazard has skewed retail investors’ approach to risk, with the view that central banks and policy makers always ride to the rescue of investors, providing safety nets, with cheap money and loose monetary policy and that is a high-risk strategy.

The recent large price declines, US equities entering a bear market, and extreme falls in the more speculative end which includes crypto currencies, is a salutary lesson and a reminder that in the end it is the responsibility of the individual investor to build a ‘safety net’ for their portfolios and not central banks. Indeed, rampant inflation is also pressurising policy makers to hike interest rates at a faster rate than previously predicted.

In general, we are now in reverse and those who listen to the sounds of the markets will hear the ‘suction noise’ as liquidity is withdrawn. Unlike before, where bad news was seen as good news as it triggered more quantitative easing or rate cuts – now, bad news is just that, bad news. We are in difficult markets with very accommodative monetary policy and rock bottom interest rates now largely behind us. Intervention remains a factor in emergency situations, as we have seen with the Bank of England, and the £65bn bond purchase programme to stabilise what was effectively a broken Government Bond market and GBP in free fall. This brings me nicely onto the subject of policy failure and inflation.

Managing and taming inflation is the focus for central banks. This is challenging and opens the way for one of my major concerns - policy failure including mismanaging the interest rate / inflation conundrum and damaging economies, consumers, and financial markets. Take the UK – the last time we saw this sort of inflation was during the 1970s, which means that the current decision makers are on new ground and are struggling to manage the situation. The actions of policy makers in this environment are of the upmost importance, as is the markets confidence in them. Both areas are currently being heavily scrutinised.

Charles White Thomson, Chief Executive Officer at Saxo Markets UK

As I review the last couple of years, I have found that the subject of Moral hazard, basic risk management, downside protection or making money when markets decline has been largely ignored. These are viewed as esoteric subjects for the ‘hedge funders’ and some institutional investors or just not thought about at all, and that buy the dip is the underlying strategy.

To add to this, wealth managers in general have not adequately prepared their retail clients for these highly challenging markets. This is a missed opportunity and an increasingly expensive one as retail investors review the performance of their portfolios. Perhaps the market shocks we are seeing now will encourage retail investors to explore this more thoroughly with a focus on – diversification, active risk management, low leverage, and a greater understanding of all the gears an investment portfolio has.

I would encourage retail investors to be demanding of their wealth manager and to ensure they have access to the ‘different gears’ of a portfolio at a fair price. Ignore the rhetoric that the risk management process is too complex – it is not, especially if delivered and presented well.

This message also applies to those investors who are overweight in the UK. As we have covered, it is not difficult to paint a challenging picture for the UK – policy failure, significant inflation, a cost-of-living crisis, a stretched consumer including mortgage debt in the face of interest rate hikes, a heavily indebted government, the interest rate / inflation conundrum, and significant volatility in financial instruments.

Therefore, the lesson should be not to rely on central banks to bail out markets. We are in a period of sustained market volatility and how investors manage this ‘risk’ will be key to how their portfolios will perform.

Charles White Thomson, Chief Executive Officer at Saxo Markets UK