Buffett Has Edge on Wealth Managers Flattered by Debt

(Bloomberg Gadfly) -- Warren Buffett may have won his decade-long bet against hedge funds, but can his advice to investors to use only low-cost index funds beat the red-hot record of wealth managers?

Readers of the 2017 Capgemini World Wealth Report, released on Thursday, will be shaking their heads.

High-net-worth individuals reported an average 24 percent return last year on assets managed by wealth firms, according to the study. The figure for Asia-Pacific outside of Japan was a staggering 33 percent -- or 26 percentage points in excess of what the regional MSCI index returned. The rich, it would appear, are better off listening to their advisers. Self-directed accounts performed less well, while the Oracle of Omaha's cheap do-it-yourself toolkit is intended for those who don't have the minimum $1 million to invest.

These figures, however, give a vastly exaggerated account of wealth managers' prowess. It's entirely possible that the outperformance, as Capgemini's own previous surveys have shown, is being driven partly by leverage. The rich in Asia-Pacific are world leaders when it comes to using credit to make investments. Global household debt topped 40 trillion euros ($47 trillion) for the first time last year, thanks mainly to a 17 percent jump in Asia-ex-Japan, according to Allianz SE. Nor was this a flash in the pan: The figure has grown at a 10-year average of 14.5 percent.

How much longer can a debt-fueled wealth accumulation spree continue? For one thing, liquidity won't be this inexpensive or abundant forever; for another, hit trades are overcrowded.

A third home -- or a shopping mall for that matter -- isn't what moneyed Asians are after. They've been wary of real estate for some time now. Over the past five years, the region's affluent have pared back allocations to property and doubled down on equity. China's high-net-worth market is still hooked on principal-protected trust funds, even though returns are dwindling. Fixed income accounted for 71 percent of the $5 billion of wealth management products distributed last quarter by Noah Holdings Ltd., the mainland's leading adviser to the rich outside of the private-banking industry.

In addition to high leverage and crowded trades, clients themselves provide a second reason to take wealth managers' astounding returns with a grain of salt. In Asia, as many as 75 percent of high-net-worth individuals who already have advisers won't mind opening an account with the likes of Alibaba Group Holding Ltd. or Amazon Inc., should the tech czars use their expertise in big data and artificial intelligence to grow wealth-management wings. Or at least that's what they told Capgemini.

Asian rich willing to use tech company wealth services

75%

Put that yearning for a tech revolution down to the wealth management industry's caste system. Returns last year were 10 percentage points higher for those with $20 million or more in assets than for those who could only spare between $1 million and $5 million. For the poorest of the rich, chatbots that use algorithms to spread money across inexpensive exchange-traded funds may make more sense than paying through the nose for a human wealth adviser.

When it comes to the mass affluent, the Buffett DIY approach may be one up on wealth managers, too. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

To contact the author of this story: Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.