Beyond the Volatility: The Two Hidden Risks Keeping Wealth Managers Up at Night
From The Cara Weekly Navigator Report, August 24, 2025
In a market buffeted by political shocks and a relentless hunt for yield, wealth managers are grappling with a new set of challenges that defy traditional playbooks. While daily volatility captures headlines, two deeper structural concerns are fundamentally reshaping portfolio strategy and client conversations. Understanding these risks—one immediate and geopolitical, the other long-term and market-born—is crucial for any investor today.
1. The Clear and Present Danger: Escalating Tariffs and Trade Wars
The first major concern is the tangible impact of escalating tariff policies on global trade. Recent expansions of taxes on imported goods—from steel and aluminum to automobiles and semiconductors—have moved from theoretical risk to operational reality.
The consequences are threefold:
Unnerving Volatility: These actions have blindsided multinational corporations and investors alike, triggering sharp sell-offs and rallies in major indexes tied to trade war headlines. This environment makes disciplined, long-term portfolio planning exceptionally difficult.
The Squeeze on Profit Margins: Tariffs directly increase the cost of imported materials and components. While companies aim to pass these costs to consumers, they operate in a competitive landscape. The uncertainty is paralyzing; as one portfolio manager noted, "Earnings guidance has become a guessing game, as executives have no visibility on what might be taxed next or if consumers will accept higher prices." This was exemplified recently when a major tech firm slashed its quarterly forecast by 15% citing unexpected semiconductor tariffs.
Retaliatory Spiral: The tit-for-tat nature of modern trade conflicts means other nations swiftly impose their own tariffs on U.S. exports. This not only slows global economic growth but also fractures intricate supply chains built over decades. When a company cannot forecast revenue due to unpredictable policy shifts, it effectively loses control of its operations.
For wealth managers, this creates a pervasive sense of uncertainty, fueling fears of a stagflationary environment—a toxic mix of rising prices and stagnant economic growth. The classic defensive move of raising cash is a fraught decision, as it sacrifices potential growth during a period of persistent inflation.
2. The Looming Systemic Risk: The Great Private Market Illusion
The second, perhaps more insidious, concern is the massive flood of capital into private markets—private equity, private credit, and venture capital. Chasing the promise of higher returns in a decade of low interest rates, investors have dramatically increased their allocations. Institutional portfolios, for instance, now routinely allocate 25% or more to private equity, up from single digits two decades ago. This herding behavior introduces novel risks that are often masked by the illiquid nature of these assets.
Valuation Inflation: Unlike public stocks, which are priced by the minute on open exchanges, private assets are valued infrequently and often using optimistic models and significant leverage. This can create a dangerous illusion of stability and inflate worth far beyond what a public market would bear. In a economic downturn, these valuations could face dramatic, wholesale corrections.
Severe Liquidity Risk: The most significant danger is the inability to exit. If a wave of investors suddenly needs cash (a scenario known as a "liquidity event"), they cannot simply sell their private holdings. They become forced sellers in a market with no deep pool of buyers, potentially leading to fire-sale prices and catastrophic losses. This contrasts sharply with the liquidity of public markets, where even in a crash, positions can be exited.
The Correlation Trap: The sheer volume of capital chasing a finite number of quality private deals has created a "crowding" effect. This means that assets once praised for their diversification benefits may, in fact, all fall in tandem. A crisis in one corner of the private ecosystem—a wave of defaults in private credit, for example—could rapidly spread and trigger widespread losses across millions of portfolios that were supposedly diversified.
Navigating the Uncertainty: A Manager's Fiduciary Duty
In this complex landscape, wealth management is less about chasing returns and more about prudent risk mitigation. Managers have a duty to guide clients through these twin threats with clarity and careful planning. This involves:
Conducting a Liquidity Stress Test: Rigorously reviewing each client’s portfolio to quantify exposure to illiquid private assets and modeling the impact of a multi-year lock-up during a downturn.
Scenario Planning: Moving beyond traditional models to stress-test investments against specific scenarios, including a protracted trade war, a sharp recession, or a crisis in private markets.
Prioritizing Transparency: Clearly and consistently communicating these risks to clients, ensuring they understand the potential trade-offs between chasing higher returns in private markets and maintaining portfolio liquidity and flexibility.
Ultimately, the role of the wealth manager is evolving. It is no longer just about asset allocation; it is about providing stability and strategic clarity in an era of profound uncertainty. By focusing on these hidden risks, managers can do more than protect capital—they can uphold the trust and secure the long-term financial well-being of those they serve.