Wealth Management Insights for Investors

View Full Transcript

Mark Haefele: [00:00:00] Were known for, for banking, uh, more than one out of two billionaires in the world. The server will say, you know, "Do you want, uh, vanilla ice cream or chocolate ice cream?" And they say, "Yes, I'll have both." 

Joseph Cass: I wanted to talk a bit about inheritance. 

Mark Haefele: I know this really smart, successful, uh, billionaire. He said, "Figuring out the inheritance is the hardest thing that I've ever tried to do."

His wife is better. She's like, "Just do it so they don't fight." You know? If you don't get those right first, actually being a, quote-unquote, good investor can really mess up your life and your money. 

Joseph Cass: If someone young, say someone in their 20s, is looking to build wealth through investing today, how would you say they should structure their path?

Mark Haefele: The number one thing is

Joseph Cass: What's the biggest mistake [00:01:00] wealthy investors make with their money? 

Mark Haefele: They make it about so many different things that aren't about the money and the stated goal of, you know, having a good retirement or, or other things. That, uh, that always fascinates. They say they wanna invest for the future, save for retirement, but we all know that money is so many things, emotions and pride and identity.

The difference between who you wanna become and what you should do with your investments, I hope, is really part of what a good wealth manager can do for a client. 

Joseph Cass: What are the world's wealthiest people most worried about right now? 

Mark Haefele: I think that, uh, most worried about is kind of the rapid change to the world order.

It's kind of a s- a search for safety in terms of where should they be based and where should they tell their children to be based, um, both [00:02:00] kind of physically, but also, uh, directionally on the future and where they should be investing their time and their money. It can be an emotional topic. Where, where's your family based, where are your businesses?

Where is the, the safest place physically? That's always open for debate. What's the best place for business? What's the best places, uh, you know, for the kind of stability of the tax regime? All of those things can play into making these kind of decisions, uh, kind of at the upper end for people who are, say, highly mobile.

Joseph Cass: You've worked with wealthy families for, you know, many years. What's the most surprising thing you've learned from working with these extremely wealthy families and individuals? And that could be around The financial side or the social side? Well, I, I think there's, 

Mark Haefele: uh... You know, there's, there's two things.

I like to say that, um, you know, going to dinners with a lot [00:03:00] of billionaires, you know, dessert comes around, and the server will say, you know, "Do you want, uh, vanilla ice cream or chocolate ice cream?" And they say, "Yes, I'll have both." You know? And that kind of mindset of abundance, uh, I think can be really profound and, and always check yourself.

Like, why am I using a but in this sentence? You know, the F. Scott Fitzgerald line, like, the, the rich are, are really different than us. I, I kind of tend to differ. I think, I think there's a lot of forces in the world that wants, uh, us to, to think that rich people are somehow different or even make rich people think they're different, and because you're different you should spend your money on these very stupid things.

But I, I actually think people are people, and, um, kind of res- we all have our inner caveman, and a lot of what we try to do is prevent the [00:04:00] inner caveman from running the portfolio. Uh, you know. If you want the inner caveman to run the rest of your life, we don't recommend it, but that's kinda your business.

But to the extent we can help, uh, with the, you know, getting that under control, we think it's to the benefit of portfolios. 

Joseph Cass: Hmm. And in terms of dealing with, say, billionaire clients that you've mentioned, what asset class are wealthy families increasing their exposure to? 

Mark Haefele: Well, I think that, uh, you know, the rise of privates is always a topic, be that, you know, private equity, private credit.

But I think the biggest switch really is from a mindset of, uh, investing in fixed income as interest rates, you know, fell in, in the 1980s to below zero, to now where we have potentially, uh, you know, rates above zero, potentially rising rates, kind of making the switch from being a fixed income investor to [00:05:00] some form of equity investor.

Joseph Cass: I wanted to talk a bit about inheritance. 

Mark Haefele: Mm-hmm. 

Joseph Cass: So this must be a big issue, um, for you, kind of transferring from one generation to the next to the next to the next, I guess if you've got a client over many years, many decades. What are wealthy families most worried about when passing assets on to the next generation?

Mark Haefele: There's so many different paths. I, I know this, um, really smart, successful, uh, billionaire who, uh, he, he kind of, he said, "This is, figuring out the inheritance is the hardest thing that I've ever tried to do. I tried twice and failed and gave it up, but this is kind of my third attempt at it." Um, and he is really trying to, um, put together a system to keep the kids together as a family and pass on values and, you know, manage very specific aspects of how, how the [00:06:00] money flows, uh, while, while he's alive and, and, and his wife is, is...

His wife is better. She's like, "Just do it so they don't fight," you know? And, uh, but he's trying to maneuver everything. Um, and then I've, I've talked to other families and, and, you know, was talking to this gentleman, he's like, "Well, you know, you saw the movie, uh, The Godfather, and there's the Rother- Robert Duvall character who's the consigliere.

Like, that's my role in the family. Like, my brother makes all the decisions, but I'm kind of the guy who knows the, knows the legal side and is kind of the fixer." And, you know, in, in his family, one family member makes all the decisions, right? Other-- And then in other families, it's run much more like a corporation where, where people vote, I think.

Um, but, you know, as to the goals, uh You know, there are some people who wanna control things, uh, beyond, beyond their grave. There's many more who say, "I, I really don't wanna [00:07:00] pass a lot on to my kids. I'm-- I want them to get a good education, but I fully intend to have my f- foundation disperse all of this wealth."

And so, um, yeah, that's really interesting to see. I, I don't know anybody who has it all figured out. 

Joseph Cass: Uh, 

Mark Haefele: yeah.  

Joseph Cass: It must be, you know, challenging situation. If I think about something like Succession, the TV series, it's obviously a TV series. Yeah. So not that it's real life, but having these kind of dynamics within the family and maybe the politics within the family, decision-makers, the kind of godfather setup, it might-- it must be kind of challenging for you and your team to navigate that situation whilst at the same time trying to b-put your best foot forward in terms of advice or investing kind of position.

Mark Haefele: We're not doctors, but I think there are parallels, right? Because a, you know, a doctor has clear goals [00:08:00] about what they want to achieve, which is to wherever a person's health is, to improve it and, and im- you know, and improve their life. Um, but a doctor also kn-knows that, you know You gotta stop smoking and eat less, right?

Like, that's true, but if it... Th-th-that's not getting it done, right? Mm. So, uh, it's similar with portfolios. It can be you should trade more or you should trade less. We do a lot of work on creating asset allocations that we think are ro-robust and, uh, suited for clients based on, on their goals. Trying to get the clients to actually make their portfolios, um, look like that is, is similar work.

But, you know, you feel like there-there's a, there's a clear goal. Uh, you feel like you're trying to help people, and so you've gotta meet them [00:09:00] wherever it is they, they come to you and try to move in that direction. So, um, it's act- It can be fascinating. Yeah. 

Joseph Cass: What separates families that preserve wealth over generation to generation to generation from those who potentially lose it?

Mark Haefele: You can, you can divorce it, uh, you can lose it to kind of, uh, disea- disease, plague, or war. Uh,

you can s- you can spend it, but it... I, I, I think, uh, you know, spending it is, i- is of- Just spending it on things or whatever is not often necessarily the biggest driver of what happens to the portfolio over time. So there's a luck component, you know. Are, are you properly in the right location? You just can't control that.

And so... And the flip side of all that is, well, you know, if you truly diversify with an asset [00:10:00] allocation and you stick to it, you're very unlikely, uh, to destroy, destroy the wealth. But, uh, the difficulty is people, uh, while they may intellectually understand the concept of asset allocation and rebalancing, and, um, sticking to it is a big part of the work.

Just like people understand that, uh, you know, they should s-stop smoking and not eat too much, but it's difficult. We're people. 

Joseph Cass: Every case is different. Every family is different. Every client's different. But if you had to give, say, a template of asset allocation for one of your clients, how would it potentially factor percentage-wise?

So X percentage of this, X percentage of this. And is there any allocation made for things like cryptocurrency? 

Mark Haefele: Yeah. So l- look, I think the, the most important decision that people have to make, and it wasn't easy for me to come to this realization, [00:11:00] is much simpler than that. It's kind of, uh, we call it the three Ls, uh, liquidity, longevity, and legacy, which means kind of what do I need for the next three years?

What do I need over the course of my life? And then what do I potentially wanna pass along? That, that is the first step, uh, actually in creating the asset allocation because obviously, uh, the liquidity is much more around cash and, and fixed income, whereas the legacy can be more about long-term-- I mean, you could put a forest or, uh, y- you know, a wind turbine in your, uh, your legacy bucket, right?

In a way that you couldn't in your liquidity. So that's the first thing. But I would say that one of the things that we focus on is trying to get clients, uh, more invested in equities because I think over the past twenty years since the financial crisis, the role of equities in s- in kind of the way that the government thinks about the [00:12:00] economy has changed to a degree and become, I think, more important.

Joseph Cass: And what long-term risk do you think markets are maybe underpricing right now? 

Mark Haefele: Well, I think at an individual level, what you see time and time again is, uh, a mispricing of liquidity and liquidity needs, and we can see that from major universities who, uh, have misjudged their liquidity needs and are forced to sell off privates sooner than they thought.

You see that in individuals as well. That gets back to this kind of bucketing your assets between what you need for today and what you need for the future. Uh, so that's a perennial mispricing. And then I think, um, a, a, another thing that people misprice is geopolitical risk, because very often it does not have that much of an impact on portfolios beyond, say, a very short-term [00:13:00] period.

Uh, but, you know, given the accumulation of geopolitical factors today, I think a lot of people are maybe revisiting that. 

Joseph Cass: Do you think we're entering a fundamentally more unstable decade for investors? 

Mark Haefele: Well, you know, the, the, the famous quip, "In times like these, it's important to remember there have always been times like these."

I, I don't-- Uh, I think it's different, and I think there are, uh, new rules and new things you have to know about this period that, that matter. Um, but whether or not, uh, you know, it's worse than the Cold War, uh, you know, or, uh, some of the other things that we've been through, I think, I think that's hard to say, right?

We all felt fantastic about a month before, uh, COVID hit, you know, that everything was fine. You know, so I think the, the difficulty that people have in assessing risk is, [00:14:00] uh, it's a key reason that I'm able to have a job, so

Joseph Cass: I wanna talk a bit more about private markets. 

Mark Haefele: Mm-hmm. 

Joseph Cass: Very interested to know kind of the conversations that you're having with wealthy families about private markets, or wealthy individuals. So how are wealthy families thinking about private markets today? 

Mark Haefele: Well, private markets have, uh, grown so much and become, you know, s- such an important asset class because, uh, public markets, you know, are for some, for many more companies, not attract- uh, not an attractive way to go forward.

So, uh, to get, to get a, a asset allocation that does take on, say, all of the assets out there, smart families have turned more to private, privates. But of course, uh, again, they, they [00:15:00] very often don't have the same kind of daily liquidity. Uh, and as, as I've mentioned, you know, I think often people underprice that.

So, uh, again, a lot of the questions are about what do you need in terms of liquidity. We've seen, uh, private, uh, particularly, particularly on the credit side, we've seen firms come up with, uh, funds that have more liquidity to try and tap into the more, um, you know, uh, individual market. And I think those are important discussions to have because, uh, you know, there is a difference between A private credit fund that offers some liquidity, maybe with some gates and, you know, the ability to trade a Magnificent Seven stock all day long or potentially twenty-four seven.

So those, those are some of the conversations. Uh, and then I think, you know, th- there's [00:16:00] important conversations to be had about what are you trying to achieve from the asset class. Is it capital appreciation? Is it that you need the yield because you wanna spend the income? Is it just you think it's safer?

What does safe mean? So, um, you know, millions of clients ar- around the globe, I think, uh, people enter the conversation in different places, but it, but it all comes down to kind of perceptions of risk, uh, perceptions of what they're trying to, uh, add or subtract from their portfolio, and that's where it gets complicated and, and kind of individual.

Joseph Cass: And do these wealthy families come to you with any assumptions around private credit? And do you almost have to take a kind of advisory educational role around what it can do and what it can't do? 

Mark Haefele: What we call high net worth. So, uh, you know, families that are not billionaire families are a [00:17:00] huge part of our business. 

W- I think we're known for, for banking, uh, more than one out of two billionaires in the world. But, you know, the amount of money that a family have-- has does not necessarily indicate their sophistication or comfort with any particular asset class. So I, I'd be hesitant to say, um, you know, there's one thing.

Obviously, now that, uh, private credit is in the news a lot, you know, a lot of what we do is explain why it's in the news. What are some things that, that they should think about, you know, if you have private credit in your portfolio, uh, what... First, what is the size of your exposure? Second, you know, this is not an S&P five hundred index fund, uh, from various providers.

It-- The provider and the actual fund and the, uh, exposures matter a heck of a lot. Uh, and so-- and going through that with them as well is, uh, you know, key to helping them assess [00:18:00] or, or, you know, where we manage the funds, assessing, um, what the exposures are and what the right amount is. 

Joseph Cass: And maybe ignoring the recent noise in private credit, do you still s- think there's gonna be kind of long-term appetite from your clients for the asset class in over the next, say, three to five years?

Mark Haefele: Without a doubt. Because, uh- You know, the way that regulations have evolved, there is, uh, b- it's almost, you know, by design, regulators around the world have created, uh, almost a need for private credit because, uh, it's very hard to get this, this credit into the public markets or for, for it to be handled by banks and things.

And so, um, yeah, it's s- uh, so much of, of the financial landscape that we see today, you know, is based on [00:19:00] what regulators have created, and they've basically created this asset class the way that, the way it is now after the financial crisis and the, and the way they regulated banks and insurance companies.

Joseph Cass: Are there any asset classes which wealthy families will proactively bring up and say, you know, "What about this?" 

Mark Haefele: He or she ca- you know, ca- came up, say, over the past fifty years or something, they may ha- they may have a, a preconception about equities as risky versus fixed income as kind of safe. But, you know, I think trying to ex- unpack that and say, well, you know, volatility is the way that we often measure risk, but, you know, as Warren Buffett says, kind of, really risk is the, uh, lo- permanent loss of capital, right?

And so, uh, you know, in a world where bond yields can rise, the... what is risky, uh, is different than when bond yields could only [00:20:00] go down. And so I think reestablishing that conversation and, and, uh, is key to what we do and also how we can help clients. 

Joseph Cass: When UBS advises wealthy individuals on bond investments or fixed income, how important do you think credit ratings are, like the ones we do at S&P?

Mark Haefele: Credit ratings are integral to the entire, uh, financial system. And f- for us, they can play a specific role because You know, some of-- we do-- we think that most of the, the returns that people get are based on the overall asset allocation, but we also do tactical, uh, positions to try and add some, add some returns.

And on the fixed income side, you know, kind of understanding when companies are going to change ratings either up or down, uh, that can be a significant source of alpha. So we pay very close [00:21:00] attention to ratings, uh, and you know, which companies we think are gonna get upgraded or, or downgraded around the ratings.

Joseph Cass: And for you personally, has advising and investing on behalf of wealthy individuals, wealthy families changed the way that you think about money? 

Mark Haefele: Hundred percent. Uh, when I started out classic value investor, uh, very micro was... I mean, I, I started-- I was getting my PhD, and I used to spend the days reading about dead people in the library, so switching to reading ten Qs and ten Ks was actually very exciting, and I had a tremendous stamina and capacity to do that.

But I think I've learned that, you know, the big chunks are the things that we've been talking about, asset allocation, um, separating the, the part of investing from all the emotions that we have [00:22:00] around money. Those are the big chunks, and if you don't get those right first, actually being a quote unquote good investor can really mess up your life and your money.

Joseph Cass: If someone young, say someone in their twenties, is looking to build wealth through investing today, how would you say they should structure their path? 

Mark Haefele: I think the number one thing is, uh, make investing, like, as boring as possible. It should be like brushing your teeth. It's a habit. You don't get emotionally worked up about it.

You just do it a little bit every day. Uh, that's-- it sounds ridiculously simple and stupid, and I could give you, you know, very long and complicated answers about, uh, asset allocation or the way you should think [00:23:00] about, uh, earnings improvements as part of, uh, you know, your equity allocation. But honestly, it's, it's the behavioral stuff that matters the most, and it's the hardest for people to get on top of.

Joseph Cass: Mark, thank you so much for joining us today. 

Mark Haefele: Thank you, Joseph.