NEW YORK — Recent market volatility is unlikely to curb investors’ appetite for collateralized debt obligations and other complex securitized-debt products despite the risks, wealth management executives said.
In fact, demand from ultrahigh-net-worth investors and institutional investors is expected to continue to grow for CDOs, mortgage-backed securities and other forms of securitized debt.
Despite jittery markets, the investments will continue to be marketed aggressively by high-end firms such as New York-based
Goldman Sachs & Co. Inc., according to industry observers.
“These products are sold, not bought,” said Tom Wynn, director for Chicago-based Spectrem Group, which recently released a study on high-net-worth investors’ use of alternative investments.
“There’s a tremendous number of highly skilled [quantitative-
computer-program trading specialists] in the industry, and their skill set is to build products that take advantage of complex mathematical formulas,” said Tony Greene, a vice president who heads Atlanta-based Reliance Trust Co.’s multifamily-office unit. “That’s what they do and will continue to do.”
Product innovation
As a result, securitized products and derivatives based on debt may be joined by new products from the insurance and alternative-energy industries, wealth management professionals said.
“Insurance companies are among the most active product manufacturers,” Mr. Greene said. “They always need new strategies for their own money, and they’re very adept at applying what they’ve learned to the mass market.”
Some consider the products to be gimmicks, but insurance companies have been successful with a variety of annuities, and it is likely that they will introduce structured products in the future, as well, said Jonathan Satovsky, chairman and chief executive of New York-based Satovsky Asset Management.
Increasing concern about global warming may be another source of sophisticated financial products in the not-too-distant future, said Joseph Montgomery, the Williamsburg, Va.-based managing director of investments for Wachovia Securities LLC of Richmond, Va.
“I think you’ll see alternative energy as a genesis for many new products, such as what we’re now seeing with carbon credits,” he said. “I think there’s going to be a real trickle-down effect from new areas like this which are just beginning to be explored.”
The increasing speed and flow of information in the financial world has been, and will continue to be, responsible for generating more-sophisticated products, said Mr. Montgomery, who is a member of the New York-based Dow Jones Wealth Management Advisory Council. Last month, the council released a survey on wealth management trends for the next five years.
“Everything is moving so quickly that products can’t get there fast enough,” Mr. Montgomery said.
“Between information that’s being generated and what computer-driven models can do with it, the effect is like a fire hose,” he said. “There’s enormous pressure for things to move rapidly and fill up the pipeline.”
The high level of risk of complex products is unlikely to deter wealthy investors, executives said.
Witches’ brew?
“Products like CDOs can be a witches’ brew, but there will absolutely be a market for them,” said Stan Richelson, a registered investment adviser who works with high-net-worth clients as an associate for Scarsdale Investment Group LTD of Blue Bell, Pa. “Big firms will say they are on the leading edge with these products, and if the product is new, they are on the edge.”
The problem is what happens later, and investors seem to have no memory of what occurred between 2000 and 2002.
“Things won’t change, despite what we’ve seen in the markets lately,” Mr. Greene said.
“Wealthy investors may buy these products because they’re being pushed, but they are the biggest Nervous Nellies around,” he said. “People buy high and sell low; it happens every single time.”
But Bob Schullman, senior vice president of New York-based Monroe Mendelsohn Research, thinks that wealthy investors may be more cautious and less prone to buy complicated financial products in the future.
“Wealthy investors tend to be older, and as baby boomers get older, there are more wealthy investors,” he said. “Even though they’re more likely to own and trade stocks and funds than people who are less wealthy, they also tend to be less risk oriented as they get older.”
In fact, Mr. Montgomery said, another key finding of the Dow Jones wealth management survey was the growing need for wealth managers to provide returns for their aging baby boomer clients as life expectancy increases, and retirement age gets lower.
“Wealth managers are faced with the daunting challenge of ensuring that their clients can afford their lifestyle for 30, 40 or even 50 years of retirement,” he said.
