Ranked #1 in the World
Loading ...
Frances Aldrich Sevilla-Sacasa, a 1978 Thunderbird graduate and current member of the Board of Trustees, has spent the past 30 years in global financial services. Most recently, she was president of U.S. Trust, Bank of America Private Wealth Management. Sevilla-Sacasa shared her perspective on the global financial crisis Jan. 16 at the Global Business Forum at the University of Miami in Coral Gables, Fla. Here is an extended excerpt from her speech:
By Frances Aldrich Sevilla-Sacasa
1978 Thunderbird graduate and member of the Board of Trustees
Like some of you, I have attended the World Economic Forum in Davos, Switzerland, where thoughtful leaders gather once a year to discuss and debate the important issues of our times and together seek solutions to our problems, which, increasingly, are mirrored in every country, on every continent. This year, when the conference convenes at Davos at the end of this month, the theme will be “Shaping the Post-Crisis World.” Is it not stunning that just months ago this title would not have occurred to most of us?
As we have heard loud and clear at this forum over the past couple of days, the state of the world’s economies certainly has changed very quickly over the past year and certainly not for the better. Lost jobs, lost wealth and lost opportunities are plaguing every country, some more than others, but all are impacted. We have learned many lessons from the crisis, and we, undoubtedly, will learn more before we rest easily again. But, overwhelmingly, as we try to get our bearings, we cannot forget that we live in a world where we are a click away from each other.
That was not true in World War II. That was not true in the Great Depression. Today, thanks to the amazing information superhighway, what happens on Wall Street is felt thousands of miles away, in real time. What happens in Japan or in China or Germany or Iceland affects all of us. It affects our pocketbooks, our savings accounts, our confidence, our intentions for the future.
The economic crisis that we all are trying desperately to tame and to understand underscores, once again, how truly interconnected the world is today and how vast our impact is on other countries and on the lives of individuals we have never met.
When the global financial markets awoke last March to news that Bear Stearns was in trouble and that the Federal Reserve Bank was engineering a rescue by JP Morgan, there was hope that skepticism about Bear Stearns’ liquidity would end. Unfortunately, the Fed’s belief that Bear Stearns was too connected to fail was wrong. And, unfortunately, the belief elsewhere that this was a sole U.S. problem also proved wrong.
Too few bankers in too few countries understood the real nature of global connectedness. What started out as a depreciation of U.S. real estate because of sub-prime mortgages turned quickly into a global credit freeze.
The nerve-wracking roller-coaster economic ride we have been on can be explained by greed, the euphoria that economic growth and profits would continue to rise ever higher, the added complexities of more sophisticated, much broader and interconnected global capital markets and a general reluctance to see the good times end.
As you heard, I have spent the past 30 years of my life in global financial services, and 25 of those specializing in wealth management. During that time, we have experienced a period of tremendous economic expansion, innovation and global wealth creation. I have had the good fortune during that time of working with fascinating families from all walks of life in many parts of the world. With the bottom seeming to fall out of the financial plans of so many people across the world, I will address my thoughts on how the upheaval in the markets will shape the industry and the needs of investors.
Given the unprecedented current state of affairs, global investors are looking for signs that would give them hope and optimism for the future. The restoration of confidence to investors is fundamental, yet this is a highly complex issue in the globally connected world of today. As I think about this, and as the value of securities, real estate and other assets plummets, as even the wealthiest global families are experiencing wealth deterioration, I am repeatedly struck by how rapidly things have changed in just three short decades, yet, how basic values, goals and aspirations remain the same.
Twenty-five years ago, most of the wealthy global families I met had either inherited their wealth or had built up successful family businesses over many years and even generations. Few of the great fortunes had been made by new entrepreneurs. Over the past three decades that has changed. Much of today’s wealth that I encounter has been created by entrepreneurs who were able to execute upon a good idea and who gained access to the rapidly developing global capital markets and other sources of funding.
Also, many smaller local family businesses which were no longer able to successfully compete with larger and more global enterprises either created strategic partnerships, they merged or they sold their companies, oftentimes generating vast amounts of liquidity for their families.
We also have seen a surge in wealth from corporate executives with lucrative compensation packages consisting of stock and options and from talented world-class athletes and entertainers.
Even with the drastic, frightening developments in the markets, the number of high net worth individuals is growing, as is the need for wealth advisers who manage large quantities of data well and have access to a wide range of products and services. There are still some estimates that the total global wealth available for investment may reach $50 trillion within a few years.
Nearly half is still in North America, but Europe and Asia Pacific nations are increasingly producing ultra high net worth individuals. Yet only about half of them have professional wealth managers.
Many of the families I served 25 years ago were primarily concerned with wealth preservation, the confidentiality and safety of their assets, and the orderly transition of their patrimony to successive generations. In those days there were fewer and less complex investment choices, information was not as widespread and immediate as it is today and, hence, investors had less knowledge and fewer global investment opportunities.
Moreover, investors were generally content with a consistent and steady return that would be just enough to provide a reasonable hedge against inflation. These families typically took their risks in their businesses, many of which had been in the family for generations, as they felt comfortable that they could control the outcome based on their knowledge and experience in the business.
The face of wealth has changed considerably over the past thirty years, partly due to the onset of technology as we know it today, the rapid development of global capital markets and the globalization of the world.
Wealthy families today are far more global, have numerous international investment opportunities available and, up until the current crisis, were generally willing to take far more risk for the prospect of better returns. In fact, many families had set aside “risk capital” in order to seek extraordinary opportunities for extraordinary returns.
At times, there seemed to be, to use Alan Greenspan’s term, an alarming irrational exuberance that should have been a warning to everyone, but clearly was not.
Most families and investors have seen their wealth and savings impacted over the past year, and some of the most highly regarded institutions and families have been victims of fraud.
So, what are families and investors looking for today? Not surprising, many of the families I speak with are seeking many of the same attributes that were important decades ago: Wealth preservation, safety of assets, diversification, and appropriate planning strategies.
But, the world has evolved and so have people, and we are all learning invaluable lessons. In addition to instilling consumer confidence which will be a critical component of the global economic recovery, we must restore investor confidence.
And yet we have to prepare our investors for a far different climate. In the recent boom years, we all grew accustomed to instant gratification and to quick and easy profits. Companies needed to be managed for quarterly profits to satisfy Wall Street and, hence, investors.
We have the onerous chore now of reprogramming our psychological selves when it comes to making money. And we wealth managers have to take our clients along for the educational ride.
Increased regulation and more aggressive enforcement, it is clear, are coming, and they will slow down the pace of Wall Street. This will have an effect on all companies, not just the financial services sector.
This will result in greater transparency and disclosure regarding complex financial instruments. There will be less use of leverage and we will probably rely on the use of less complex securities. All these new signs of new times will temper the growth of profits.
I am convinced all of us must become more accustomed to more reasonable rates of growth and returns. And gaining this new mindset will not be easy. We will have to remind our investor families of an old saying: If it seems too good to be true, it probably is.
The relatively new industry of wealth management will have to retool very quickly, as the financial services and the wealth management industry adapt to the new environment. Many large and smaller firms and boutiques in the wealth management business are consolidating, some are breaking up, others are going out of business and I am sure that new firms will emerge.
The firms — large or small — that will be successful in this new reality will be firms that cater to what their clients need and want, that are committed to developing long term relationships, and that provide superior service and un-biased advice.
Clients will look for firms with experienced leadership and superior intellectual capital. At the higher levels of wealth, firms must be able to customize their service and offerings.
People will want to do business with and invest in companies that operate at the highest level of ethics and integrity, that have sound risk management controls, and provide transparency. This has to do not only with the firms that advise high net worth clients, but also with the underlying investments that are made, whether those investments are made outright by the family, through a bank, in a hedge fund or as part of a private equity investment.
I realize that none of this sounds profound or even new, but the reality is that many of these basic requirements were being overlooked in exuberant times.
We will return to those basic principles, while having to adapt to the requirements of the newer generations as wealth transfer to the baby boomers and their children continues.
Today’s younger generation of global families has largely received more superior formal education than their parents or grandparents did. They have been educated at the finest universities, sometimes studying abroad for their degrees. They are generally well traveled. They are more informed and they are far more technologically savvy than their parents; they are dependent on their Blackberries and they remain much more connected with the world at large through social networking sites. They value innovation, speed and access to instant information, and thought leadership.
The more successful advisers are those who can communicate more effectively and quickly with global families and are sensitive to a wide variety of cultures. They are knowledgeable and sophisticated about what investment opportunities and trends and challenges are emerging around the globe. And they can deal effectively with different generations — the grandparents, the parents, the children, the grandchildren, all of whom, obviously, have different financial needs and concerns and level of sophistication.
Throughout my career I have been to literally hundreds of family meetings where, periodically, several generations gather. The purpose is generally to review the family’s investment portfolio and financial needs and goals. But what has struck me about these meetings is how quickly the conversation turns into the “softer issues” that the families are facing: Is the next generation being properly prepared to carry on; how is the family governing itself; are the family’s philanthropic goals adequate and up to date?
I have been in many meetings where only a fraction of the time is spent on reviewing the investment portfolio and most of the time is spent on all of the other “softer” issues, issues that are vital to a family’s self-identification, pride, survival, bonding and legacy.
There is also an increased interest in educating and preparing successive generations to be responsible citizens of the world, as well as of their own countries. Global forums and conferences are bringing together like-minded people with energy and vision as well as wealth and a passion to give to others.
This is one of the most encouraging aspects of the new globalization which we are just beginning to understand and promote. These are issues that have to do with the “softer side” of wealth which financial advisors today need to be prepared to handle.
A number of years ago, I initiated a program for Latin American parents interested in getting their young adult children involved in managing the family business and wealth.
We invited Latin Americans in the age group of 21 to 29 to New York City for several weeks of training. We gave them access to our firm’s top leadership, in both social and question-and-answer sessions. We learned it was a dynamic way to build relationships with the next generation of clients and also enhance our relationships with their parents and grandparents, who were thrilled we were showing a serious interest in caring for the entire family and its future.
Another, unexpected benefit was that the young adults, from various countries in Latin America, forged strong bonds with each other that led to business relationships and, in one delightful case, a marriage that brought two significant families from different countries together. We later expanded the program beyond Latin America to other regions.
Affluent families today are not only more passionate about their children and grandchildren, but also about world issues, and are more inclined to help make the world a better place for successive generations.
Not only will they themselves look to invest in companies that are aligned with their interests in this regard, but they will also take an active role in their philanthropic and charitable endeavors.
I have spoken about the prevailing global crisis as it relates to the financial services industry and, in particular, the wealth management industry. We have reviewed some basic concepts, though not new and at times overlooked, which I believe investors going forward will be more cognizant of when making investment decisions: Strong corporate governance, commitment to social responsibility and sustainable business strategies producing consistent, reliable and reasonable profits.
We will undoubtedly continue to muddle through tough economic and market crises for some time, but I remain optimistic about the lessons learned and about the future.
Many years ago one of our wealthiest Americans, John D. Rockefeller Jr., the son of the Rockefeller who built that family’s great wealth and thus at one time the leading member of the country’s second generation of the super rich, wrote the following:
“I believe…
…that every right implies a responsibility: every opportunity an obligation: every possession a duty;
…that thrift is essential to well-ordered living and that economy is a prime requisite of a sound financial structure whether in government, business or personal affairs…
…I believe ….in the sacredness of a promise, that a man’s word should be as good as his bond, that his character, not wealth or power or position, is of supreme worth.”
These timeless words and aspirations are as true today and tomorrow as they were decades ago.
Leave a Reply