By Francis Menassa, Founder of JAR Capital, an independent wealth and asset management firm based in St. James’s, London
No sector is immune to disruption and innovation has already started to reshape wealth management amid the growth of robo-advisers and new digital communication channels. However, in an industry where clients require a tailored and flexible approach, technology is complementary to wealth managers’ activity but cannot replace them since no algorithm is more powerful than trust. Wealth management remains foremost a people business.
I. Millennials and the Great Wealth Transfer
In the post-financial crisis landscape, wealth managers are facing profound changes in their market environment. A combination of fast developments in technology and competition from fintech players, a tighter regulatory context, ultra-low interest rates, more emphasis on socially responsible investing (SRI) are calling the traditional wealth management model into question. However, the single greatest shift I am witnessing right now is demographic. We’re on the cusp of the biggest wealth transfer in history. Research by Cerulli Associates forecasts that in the US alone, nearly 45 million households will transfer a total of U.S.$68.4 trillion in wealth to children and charity over the course of the next 25 years. Meanwhile, CBInsights predicts that by 2030, Millennials will control U.S.$20 trillion of assets globally and their parents (the baby boomers) will pass down another U.S.$30 trillion by 2050 in North America alone. The generational shift in wealth will impact the wealth management landscape over the next quarter century in an unprecedented way, since Digital Natives’ approach to wealth management differs greatly.
II. The need for a more client-centric approach
In some families I have been working with for generations, while the parents wanted everything on paper, their children use cloud storage, remote access and communicate via new channels such as WhatsApp. Having grown up with ubiquitous digital technology, Millennials are hyperconnected and demand more communication and transparency from their wealth manager, expecting the latter to be available 24/7. They live in a very competitive economic landscape, and therefore are more price-sensitive than their elders. Millennials are witnessing first-hand the deployment of a new wave of automation and robotisation spurred by the Fourth Industrial Revolution. Deloitte estimates that by 2025, over U.S.$16.0 trillion assets under management (AuM) could be managed with the support of robo-advisory services. A 2017 joint survey by EY and Finantix found that 71% of wealth managers believe clients are ready to take advice from robos. The fast development of Big data and Analytics will transform the sector: real-time information collected from a variety of sources and platforms, from social media to the sensors of smart homes and connected object, could be analysed to continually and automatically rebalance portfolios. Artificial Intelligence (AI) will be of great assistance in risk management and compliance, where it will automate data analysis, reduce the burden of administrative tasks and therefore allow humans to focus on higher value-add activities.
“Without facts and principles, data is useless” – Bob Hoffman
However, do not expect even the youngest clients to relinquish traditional media and face-to-face meetings. According to research by Deloitte, 82 percent of younger clients would appreciate more personal meetings with their investment adviser, showing that technology is not a substitute for personal interactions. Another notable difference compared to previous generations is Millennials’ ethics: 75 percent of them claim they want to remain ‘authentic’ and refuse to compromise family or personal values (Deloitte). In addition, almost two-thirds are not only concerned with the state of the world, but also feel obliged to change something, demonstrating that SRI investing has bright days ahead. This is a double whammy from our perspective since investing in sustainable and ethical assets offers another mechanism of due diligence. The other good news is the expansion of the Millennial market. The global volume of HNWI+ will increase by around 25% to almost U.S.$70 trillion by 2021, with demand stemming mainly from the US, China, Russia, Brazil and India, EY forecast in its 2018 Wealth Management Outlook. Many opportunities lie in this new distribution of wealth. Technology will undoubtedly assist and augment us. It is, however, just one part of the overall picture: many white spaces still need to be filled in the wealth management market.
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood
The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.
The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.
Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.
Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.
Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.
Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.
Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.
We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.
We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.
We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.
On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.
Optimising tax reclaim through tech: What wealth managers need to know in trying times
By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange
This has been a year of trials: first, a global pandemic and, now, many countries facing the very real possibility of a recession. For investors, private banks, and wealth managers, these tumultuous times have manifested largely in asset price volatility, ultra-low interest rates and uncertainty about when things may level out, as well as questions about what can be done to safeguard portfolio performance.
The answer here lies within identifying and creating efficiencies to maximise performance and minimise cost, and while there is a slew of options as to how to do this, they are often siloed or have a single USP. Tax optimisation, on the other hand, provides benefits to all, not just in increasing returns for investors, but also in creating economies of scale across stakeholders, creating millions – if not billions – in savings for banks.
Evolving tax reclaim
The tax reclaim process used to be a tedious one banks had to manage themselves, and required detailed, industry and country-specific knowledge to stay on top of constantly shifting requirements and regulations. And when we consider that many countries – such as the UK – allow for capital gains exemptions, tax optimisation may not seem like an integral part of the process. However, this isn’t the case for all countries, and can lead to severe after-tax implications on global portfolios.
Furthermore, even if you’re able to avoid double taxation, getting the money back is not always as simple as it sounds. This, combined with the fact that countries often have contradictory taxation rules or requirements, makes navigating the tax reclaim space a challenge even for those with the right expertise and experience.
Ultimately, providing tax optimisation to investors ends up being a heavy lift for private banks and wealth managers, who often don’t have the right solutions, are relying on outdated technology and manual processes. While this is generally fine for business, it is no longer fit for the purpose when it comes to tax optimisation. To date, knowledge and expertise have been the key to protecting and maintaining profitable investments and avoiding tax leakage. However, through tax optimisation services starting to emerge, portfolio managers can now manage and reinvest easily.
Today, technology has evolved the process so that banks are able to access and submit tax reclaim – and the relevant documentation – online, leaving the tech provider to coordinate next steps with custodians and tax authorities behind the scenes. In essence, taking the legwork out of the process while assuring consistency and completeness in execution.
Simplifying tax through tech
While tax optimisation may seem like an easy choice in theory, it is not always the go-to for every private bank or wealth manager. Without the right supports and setup, including innovative technologies and automation, tax reporting must be done manually, leading to labour intensive processes and huge time wastage. Changing these processes can be overwhelming for those used to a certain way of operating.
By making tax reclaim digital, banks will be more able to optimise returns and gain efficiencies while reducing redundancies and unnecessary complexities. Cloud based solutions or platforms can offer a safe and secure solution for banks, wealth managers, and investors to access and submit any information required, processing the data automatically for conformity and completeness.
It is critical that providers who intend to offer tax services are able to do so efficiently with the right software and data processing capabilities. Not only does this drive continuity in service and efficiencies in process, but it is the only sustainable way to handle such a complex landscape sustainably without wasting time or money.
End-to-end, technologically driven tax services offer a huge number of advantages to private banks and wealth managers, the most important of which is the ability to provide continuity through tumultuous times. As we move through the end of 2020 into 2021 this will only be increasingly important as banks, managers and investors look to provide new services to clients and strengthen existing relationships in a difficult market.
As investors seek to find returns amid the global economic downturn, the demand for innovative solutions will only increase. Technology like cloud-based software, AI, and data optimisation can all serve to improve not just the tax reclaim processes, but the overall client experience within capital markets. Private banks and wealth managers are suitably equipped to provide these innovative solutions, but those who do not prepare themselves effectively and keep ahead of trends will run the risk of losing current and new clients to someone who can offer more for less.
Equity Sharing – How do you choose the right plan for you?
By Ifty Nasir, co-founder and CEO of Vestd, the share scheme platform
In a survey of 500 SMEs, nearly half told us that the pandemic had made them re-evaluate how they operate. That’s not surprising as they’ve been faced with some unique challenges this year. Government support during the early stages of the pandemic, is now being extended till March 2021 but many businesses continue to struggle.
Making good people redundant improves cashflow in the short term but will have a long-term damaging impact on the business. At the same time, motivating employees, who are working remotely and worried for their jobs, is not easy. It’s therefore not surprising that equity sharing, in the form of ‘share’ and ‘option’ schemes has become even more popular, with one in four SMEs now sharing equity with their employees and wider team
However, sharing equity can be a complex area and is easy to get it wrong. When it goes wrong there is a danger that you create tax issues (for you and your employees), de-motivate your team and even create future funding issues for the company. It is therefore really important that you choose the right scheme to set-up, but make sure you manage it too.
Below is a brief summary of the main schemes used by Start-ups and SMEs in the UK today. There are similar schemes and considerations globally.
- EMI Option Schemes – This is the most tax efficient scheme. Recipients pay just 10% Capital Gains Tax (CGT) on any value growth. The employer can also offset both the cost of the scheme and the value growth achieved by employees against its Corporation Tax liability. You can also set conditions to control the release of equity, such as time served or performance. The recipient can’t simply walk away with shares, having delivered no value (which is one of the top concerns of many of the businesses and founders we talk to). EMI Option Schemes are used by 41% of SMEs (who share equity) and, for good reason, are the most popular. Read our full guide to EMI for more information.
- Ordinary Shares – This is the issuance of full ordinary shares in the business, often without conditionality and with immediate effect. They are most often issued against cash investment. Once an employee (or any other recipient) has ordinary shares, you have no control over what happens to the shares thereafter. The individual can simply walk away with the shares, so we don’t normally recommend them for contribution that’s yet to be delivered. They’re also not tax efficient, as the recipient will have to pay tax at their marginal Income Tax (IT) rate, on any value the shares have at that point. These are used by 31% of SMEs.
- Growth Schemes – These are a good option when the founders have built value into their company. The recipient only shares in the capital growth of the business from the date that the shares are issued. You can give growth shares to anyone (not just employees) and you can attach additional conditions. These shares limit the risk of the recipient having to pay income tax on receipt of the equity, as they do not hold any value when they are issued but do pay CGT on the value growth at sale. Growth schemes are used by 31% of SMEs. Read the full details on Growth Shares here.
- Share Incentive Plan – SIP – This is a tax efficient plan for all employees that gives companies the flexibility to tailor the plan to meet their needs. Share Incentive Plans are used by 23% of SMEs.
- Unapproved Options – These are not very tax efficient as the recipient will pay IT on any value inherent in the share, above the exercise price, when they exercise the option. That said, they do provide more flexibility than the other options and are the easiest to set up as you don’t need HMRC approval. Unapproved Options are used by 22% of SMEs.
Is it worth the hassle? Earlier this year (i.e. during the first lockdown ) we carried out a piece of research with business leaders, exploring their attitude towards sharing equity with employees and wider team. We spoke to over 500 owners of SMEs and identified six main business benefits to doing so:
- Recruitment. You can combine salary with equity, to create compensation packages that match, or improve on, offers made by other more established companies with deeper pockets.
- Retain the best talent. Share schemes are proven to increase employee retention and can help you reduce if not avoid hiring costs.
- Increase productivity and performance. Studies have shown that employees who are also shareholders are more committed to their work and contribution because they feel directly vested in the growth in value of ‘their’ company.
- Improve employee engagement and happiness. The more all employees feel included in the mission, direction, and success of the business, the more they’re motivated to contribute to the company.
- Relieve cashflow pressure. Equity can be used to reduce the need for finance. Instead of paying people top rates and large bonuses, you can incentivise them via shares or options…giving them a share of the future they are helping to create.
Recruitment and retention are clearly the key drivers. It’s not too surprising to see why. Companies succeed or fail largely due to the quality of the people they manage to attract and retain. However, for smaller and start-up employers, attracting the right people can be difficult. Good people are typically attracted to the idea of working for a house-hold name brand, they look for job security and are enticed by comprehensive employee benefit packages and high salaries that are unaffordable by most smaller companies. Employee share schemes are an effective way for smaller companies to compete in the job market against larger companies, with that potential for a massive/significant upside.
However, at this challenging time, it’s not all about money, keeping people focussed and motivated during the pandemic is at the top of most employers’ worry list. If you choose the right scheme, equity sharing encourages employees to align their motivations to that of the long-term success of the business, over the immediate or short-term gains. And, right now, that is perhaps worth more than anything.
If you’d like to get into the detail then check out our guide to employee share schemes.
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