The way that the wealthy invest is very different to others, in part, due to regulators wishing to protect those less-sophisticated investors. Also, historically, it has been a challenge to support smaller
investors when accessing relatively illiquid assets where the minimum capital required to buy a fund, a car, or some real estate can be substantial. Knight Frank’s Wealth Report 2023 (January) interviewed 500 high net-worth investors(HNWIs) interviewed from ten countries around the world offers us ome insight as to where the wealthy invest. Furthermore in the report, despite the rising interest rates which have helped lead to three out of the four biggest banking collapses in the US, bonds
were still categorized as safe and lower risk than equities.
How HNWIs rank asset classes for stability (1 = safest and least volatile)
Source: Knight Frank
For many years, gold has been perceived as a safe haven. Yet, Marion Laboure, analyst at Deutsche Bank, states: “I could potentially see Bitcoin to become the 21st century gold”. Whether Bitcoin does indeed become classified by investors as ‘digital gold’, since its supply is limited and the total number of BTC that can be mined is restricted to 21 million coins, we will have to wait and see. Given that one of the strongest drivers for the price of any investment is sentiment and confidence then, if interest rates are needed to rise to curb ongoing inflation pressures, we would see a further reduction in bond values. And, considering the huge levels of debt at corporate, government, and individual levels, then higher interest rates will lessen the appeal and prices of real estate and equity markets, whereby potentially making gold and cryptocurrencies more attractive. For example, USmillennial debt has increased by 27% since 2019 and older millennials have racked up even more debt. According to CBS News, people between the ages of 30-38 account for nearly $4 trillion of total household debt in the US. Therefore, it is worth noting that there is strong demand for advice regarding investing in FinTech, crypto, and alternative investments amongst 2,600 clients in twenty-seven countries, according to EY’s2022 report.
Percentage of clients seeking advice
Whilst ultra-high-net-worth investors (i.e. individuals with assets worth $30 million+) typically have 50% of their assets in alternative investments (art, cars, hedge funds, gold, jewelry, cryptocurrencies VC, PE, etc), other investors who have smaller portfolios only hold 5% in alternative investments - proving that a clear, digitally-led onboarding experience is important for all clients. The EY report also found that, when asked, the top three most important criteria when opening an account are, by %:
- the ability to track their account status digitally - (74%)
- clear onboarding steps - (72%)
- the ability to share account setup documents digitally - (69%)
This lends further weight to the growing importance of having funds and other investments available in a digital format and equally helps to explain why firms such as KKR, Fidelity, Alliance Bernstein, Franklin Templeton, Blackrock, and Abrdn, to name just a few, are looking to offer digital versions of some of their funds. The US banking giant JP Morgan has been very vocal about the potential of digitizing funds. Tyrone Lobban, head of the bank's Onyxdigital-assets platform, said: “We think that tokenization is a killer app for traditional finance,” Lobban told CoinDesk. “If you think about private markets – private credit, private equity, and private real estate – they are pretty much double the size of public markets, but many orders of magnitude less liquid, so there’s this huge disparity." It also may account for why, last year, Schroders (with £389 billion under management) acquired a stake in the Swiss-based firm, Forteus, a specialist asset management company that uses blockchain technology to digitize funds. Indeed, how long will it be before we also see Schroders join the growing list of other traditional and alternative asset managers making their existing mutual and alternative funds available in a digitized format? Interestingly, alternative investment is a term often banded
about, yet one of the key challenges with alternative investments is that they tend to be very illiquid and, as the chart below illustrates, the price of an individual item means only the very wealthy can afford them.
Pricespaid for a variety of different alternative investments
Furthermore, many are arguing it is for this reason that, by digitizing alternative investments and making them more available for smaller investors, this not only will bring liquidity (useful
for existing investors) but also makes some of these alternative investments more accessible to a huge number of smaller investors. As to who are the natural buyers of these digital funds, the EY report further offers some insight: “Millennials are three times more likely to use a digital wallet than older generations, and twice as likely to buy alternative assets in response to market volatility. Emerging innovations such as the fractionalization of financial securities and the tokenization of physical assets or legal titles may be more attractive to Millennials and emerging Gen Z clients. Adding fractional investments to product offerings could help providers to increase recruitment and satisfaction among younger investors.” Another question existing is, how quickly will we see wealth managers and asset management firms using the metaverse to create more immersive and better training/educational environments for investors to address the desire for better education? Again, the EY report offers clues by proposing that: “Interactive education and gamification delivered via a combination of personal and digital channels can help to inform clients of their options without creating regulatory concerns. At present, only half of clients indicate satisfaction with the financial education and training they receive. Millennial and less advantaged clients have the greatest appetite for education.”
An additional key feature and benefit of usingblockchain-powered platforms is the extra transparency that is available. Of note, the EY survey also pointed out that transparency was of fundamental
importance: “The proportion of clients concerned about hidden costs hasincreased from 42% to 54% since the 2021 survey. Concerns over costtransparency are even higher in Asia-Pacific (62%), Latin America (73%).” Thedigitisation of real assets has been spoken about for a while; indeed, back in 2017, TeamBlockchain held a series of workshops with Tim Bird(an Iron Man competitor, so you can imagine his bills get paid on time!) at the law firm, Fieldfisher, where we posed the question: “What infrastructure wasrequired to enable the digitisation of real assets?” On this occasion, weinvited a number of professional service firms, exchanges, banks, insurance and custody specialists, as well as a handful of legal and regulatory experts. The conclusion was that real adoption of digital assets will only truly occur when regulated institutions are able to participate, and for this they require:
· Regulated digital exchanges- Archax in London, Swarm in Germany, Sixth in Switzerland, ADX in Singapore.
· Insurance- Ben Davis at the specialistLondon based insurance broker Superscript told us: “London, US & Bermudabased underwriters are becoming more active in the digital asset insurance space. As more regulations for digital assets are unveiled, the insurance industry will be able to offer more capacity for professional indemnity and directors and officers liability insurance. These covers are pivotal for companies looking to work and protect themselves in this space such as issuers, buyers, custodians and exchanges”.
· Custody -there are traditional custody service providers such as Northern Trust, BNPY
Mellon, HSBC, etc, offering digital asset custody services, as well as some
newer providers such as Fireblocks, Copper,Taurus.Meanwhile, Custodiexhas developed what may prove to be a ‘killer’ custody solution as, according to its chairman, Kealan Doyle: “We permitcustodians to store assets off-line in cold storage whilst having easy access
to those assets within seconds and at scale.”
Philipp Pieper, co-founder of Swarm, has reported that “retail investors have more access to financial markets than ever before. But this still comes at the cost of custody rights and fee-based investment models. Fully digital asset ownership is the next logical step in the evolution of retail asset ownership. It means an investor can custody a stock such as Apple, Tesla, or even US Treasury T-Bills in their own digital wallet, which requires no management fee or complex custody arrangements that blur the ownership rights of the investor. This is critical because too often we’ve seen platform failure ends in the terrible realization for investors that the assets they ‘held’ weren’t in fact legally theirs to redeem immediately. One of the biggest innovations of modern investment platforms has been fractional ownership. You too can own a piece of a major tech firm, even if one share is too much to buy. But this fractional ownership more often than not is illusory. On top of that, investors are reliant on bulk purchase orders for stocks that often leave them with less-than-best value prices for the assets they buy. Digital ownership does away with these issues at a stroke.”
Historically, wealthy investors have invested their capital very differently compared to most other investors. However, the digitization of alternative investments, whether it be via funds or directly
into real world assets, means that smaller investors will be able to mimic wealthier investors and so benefit from greater diversification and also access assets that have historically performed better than equity and bond markets. The digitisation of alternative assets not only will enable smaller investors potentially access to these assets but will also bring liquidity to these asset classes which ought to be beneficial for existing investors. However, those looking to gain exposure to alternative investments need to remember that often alternative investments have higher management fees, can be less transparent, and may be subject to less regulation - which is why they have history cally not
been allowed to be sold to smaller and often deemed less-sophisticated investors. Nevertheless, whilst there will no doubt be restraints as to who can and cannot invest in these digitised alternative assets (depending on jurisdictions), financial markets are changing. And the available choice is set
to expand for many....