As much of a calamity as COVID-19 has been for the world from a health perspective, it has also had a serious impact on the financial services industry. Given what amounted to a global recession during the summer, it’s hardly a surprise to point this out. However, as we near the end of 2020 and look ahead to a year in which we hope to see meaningful recovery, it’s worth looking past the general assertion that COVID-19 has had an economic impact.
To that point, we’re going to explore the specific effects COVID-19 has had on some important sectors and functions within the financial world.
ASSET & WEALTH MANAGEMENT
On a surface level, the impact of COVID-19 on asset and wealth management would seem to relate to broader struggles in capital markets (which we’ll touch on below) and the sheer difficulty of successfully handling wealth. To be sure, particularly early in the pandemic, the job of wealth management itself was a challenge even for experienced professionals — both because of market difficulties and because of understandably fearful or uneasy clients.
Beyond these basic surface-level concerns though, the primary impact on asset and wealth management has had to do with operations and technology. As Forbes put it in an article written at the very beginning of the global coronavirus outbreak, the abrupt transition to remote work posed a challenge “for companies new to or unfamiliar with remote working,” particularly on a “shortened timeframe.” In other words, lots of companies — not just in finance or asset management, but across all industries — simply weren’t prepared to transfer operations to homes or remote facilities.
In wealth management specifically, this meant everything from interrupted contact with clients, to loss of trading and management resources, to concerns about data storage and security- as we discussed about the challenges and new remote working arrangements in our interview with Fiske. Modern wealth management typically depends on offices that are equipped for these aspects of the job, and in some cases even experienced professionals did not have the technology handy to make a smooth transition to remote work without an interruption in performance. Perhaps as a result of this rocky transition (as well as the more surface-level issues mentioned above, we saw plummeting value for asset managers who are publicly traded earlier in the pandemic.
Arguably the most complex impact within the broader financial sector has been on insurance industries. To begin with, we’d note that these industries are experiencing some of the same difficulties that apply to asset and wealth management. Insurance is not a market so much as a business, and one that typically depends on close contact between workers, office participation, office systems and technologies, and so on. The abrupt transition away from offices has disrupted communication, strained basic operations, and given rise to new data and security concerns. In short, providers across various types of insurance have been less able to do their jobs.
Insurance industries also face some unanswered questions regarding demand. To give a rather extreme example of why this is the case, we’ll refer you to the Wimbledon tennis championships. Per the sports site SB Nation, Wimbledon had actually been paying pandemic insurance for 20 years heading into 2020, and netted a $141 million claim when it was forced to cancel its annual tournament. Again, this is an extreme example, but it does illustrate the notion that we could see new demands for certain kinds of insurance. (Interestingly, Wimbledon is reportedly unable to secure pandemic insurance for the 2021 tournament.)
Given the logic behind the Wimbledon example, it won’t be a surprise if we see increasing enthusiasm for commercial lines insurance for any number of businesses that now desire some form of disaster coverage. There may also be growing demand for property and casualty insurance merely as a means for people to protect themselves as thoroughly as possible against future misfortune or financial hardship. And, given the struggles some insurance companies have experienced, an uptick in captive insurance could also occur, with more businesses seeking greater autonomy over their policies.
The capital markets arguably made for the most dramatic financial impact of COVID-19, simply by virtue of the fact that they command an inordinate amount of attention. That is to say, a crash in a prominent stock exchange is likely to generate more headlines and attract more attention than, say, changes in the insurance industries.
In the case of global capital markets, the most severe impact came early, and was visible not just in the plummeting values of assets, but rather in general volatility. As was written by FXCM in a post laying out a timeline of market reactions to the pandemic outbreak, “volatility hit record levels in the global equity, commodity, currency and bond markets” early in the pandemic. Indeed, primarily in the period between February and March, the world witnessed major capital and money markets first crashing, then sporadically recovering, and partially crashing again. It was as unpredictable a time in these markets as we’ve seen in the 21st century.
For the most part though, this extreme volatility in capital markets was limited to the early months of the crisis. There remains uncertainty in certain specific areas within exchanges, of course, and investors in many cases remain wary of trusting apparent recoveries. But as The Guardian wrote back in August, “the only V-shaped recovery” after coronavirus would be seen in the stock markets. This was a way of nodding to the fact that major capital markets have generally recovered more swiftly than other parts of the financial world.
THE WAY FORWARD
Altogether, these are complex problems for financial markets, but not insurmountable ones. There are productive ways forward that can lead the companies and individuals involved to weather the storm and emerge functional and effective once the pandemic passes.
As we alluded to in a post on “Key Strategies And Tools” in wealth management, “digital tools are the lifeline” that will lead to survival in many cases. By forming more robust digital presences, establishing client portals, shoring up digital security, and even adopting forward-looking practices like analytics and improved customer service, wealth management and insurance companies alike can manage a lot of the difficulties that have come up as a result of the pandemic.
In capital markets, there is less of a proactive way forward — yet, as mentioned, this also appears to be the corner of the financial world most likely to see a positive, “V-shaped” recovery. That is not a guarantee, and it may not solve problems like the potential for subsequent coronavirus outbreaks leading to market crashes, or a long-term drop-off in investor confidence. But capital markets have a chance to sort themselves out.
Ultimately, we will not know the full range of impacts of COVID-19 on financial markets for some time yet. But hopefully this has provided a clearer picture of where things stand and what needs to happen for these markets to move forward successfully.
Exclusively written for contemi.com
By Alexa Jackson