Tech wealth: trends and themes
Citywealth interviews legal FinTech experts to get an overview on tech trends and potential for future investments like tokenisation
In this feature on tech wealth, Citywealth talks about the main tech trends circulating at the moment in the private wealth sector. Trying to understand if UHNW and HNW individuals still make money investing in tech, Citywealth interviews legal experts in FinTech to get an overview of where money will go in future.
Investing in tech: are UHNW and HNW individuals making money?
Technology-oriented investments can be profitable and result in more money on the table to be reinvested somewhere else. Martin Cook, Partner and Head of Fintech at Burges Salmon, points out that “there is definitely money being made, and to be made, from technology and technology-related businesses. For those individuals who have made money in tech (and, in doing so, have become UHNW or HNW individuals), some of this money is typically taken out to invest in lifestyle assets (new homes and to provide a financial cushion, hence a diversified investment portfolio), but we also see these individuals and other clients: early stage investing in a range of new to market tech or fintech ventures as seed investors and advisors – the power of personal and business networks continues to be of huge importance; coming back to the market with new propositions (the serial entrepreneurs); giving back, with an ever-increasing commitment to philanthropy and for-profit impact investing.”
Talking about UHNWIs, Alastair Mitton, Partner in the digital team at Womble Bond Dickinson, has no doubt in stating that they are making tech-related investments, but are they making money out of them? With a mention to the crypto world, Alastair believes that “they are certainly investing in tech; whether they are making money, it depends on where they are in their cycle. We have clients who have made money in crypto currencies, although that is clearly a really volatile area that has fallen under regulatory scrutiny globally. In the UK the FCA has often expressed concerns about crypto currencies and some countries have even banned all types of crypto assets. That being said, crypto assets appear to be here to stay in the UK and in April 2022 the government set out a plan to make the UK a ‘global crypto asset technology hub’. This is part of a package of measures to position the UK financial services sector at the ‘cutting edge of technology, attracting investment and jobs and widening consumer choice’.”
Charles Kerrigan, Partner, member of the Crypto and Digital Assets industry team at CMS, and Michael Ward, Hedgehog Co-founder, dwell on the importance of crypto in the present scenario looking at it as a golden opportunity for investors, especially for UHNW and HNWIs: “The digital asset industry is no longer a niche sector that is shunned by the traditional finance community. As an asset class, crypto and associated digital assets exceed $2tn in value (Crypto’s Gone Mainstream: Here’s What Happens Next, Forbes). The industry has grown at a rapid pace.
The tokenisation (identified as the process of digitalising the rights or benefits to a particular unit of value with the resulting purchasable asset being a digital token that lives on a blockchain) of trillions of dollars of real-world assets is on the horizon. Private capital markets are ripe for tokenisation technology, in part because their current size and opacity makes trading activity overly burdensome. If private market assets were to be tokenised, they could be traded or used as collateral in much the same way as traditional public market securities. The investment universe of private market assets is on the cusp of transformation, creating a significant opportunity for HNW and UHNW individuals.”
But crypto is not the only available option. “At the other end of the spectrum, a number of clients have made money from the FAANG/MAMAA stocks, although for various well-known reasons, some of those are less attractive than they once were,” says Alastair. “Somewhere in the middle are the entrepreneurs developing, refining and bringing to market sector-specific tech solutions, where we have seen at first hand clients bringing to market things like conversational AI platforms and new ways of running legal software development and testing. And of course we have PE clients providing funding in these spaces, too, so we tend to have a fairly broad view.”
Technology-oriented businesses, AI and ESG
Technology is a powerful tool able to enhance connections and deliver ground-breaking solutions, but approaches to technical innovative tools may differ. Focusing on the major tech trends in the private wealth sector, it is no surprise that entrepreneurs aim at building solid businesses centred around technology, not forgetting about the possibility to invest in digital assets. Martin Cook confirms: “We are seeing increasing interest in technology and digital activities. This includes entrepreneurs founding and leading technology-oriented businesses who are seeking advice on wealth management and estate planning before and after taking money out of their business; of course, we would always advocate wealth planning before a liquidity event. In addition, and over the past couple of years, UHNW and HNW individuals were adding digital and crypto assets to their portfolios.”
“Across all of the wealth management organisations we work with, a combination of the use of new technology like AI, digitalisation of a whole range of functions and the ability to provide enhanced client facing platforms is the order of the day,” comments Alastair Mitton. Adding more details about implementation plans, Alastair says that “particularly when paired with legacy systems, rather than the blank canvas that emerging fintech companies have the benefit of starting with, these can be complex programmes whose implementation can span from anywhere from a number of months through to more than a year (with implementation budgets ranging from the high tens of thousands through to millions accordingly).”
Martin Cook also highlights the crucial role of technology to support ESG priorities: “Another key trend is ESG, including sustainable and impact investment. We had seen some steps towards clients looking at technology solutions to support this important agenda, although this is relatively early stage for most. I am sure it will become more important in the near future.”
Enhanced and more accessible pre-existing solutions can be offered to clients thanks to the implementation of AI technologies, as explained by Alastair Mitton: “One of the benefits of the relatively recent leaps made in technology is the ability to make use of pre-existing and standardised solutions – whether enhanced use of APIs to feed relevant data between systems, or easier access to external data through online banking initiatives, or wholesale adoption of increasingly sophisticated white-labelled solutions. This additional information enables wealth managers to better utilise AI technologies, placing them in an optimum position to provide bespoke and tailored advice. AI technologies can also be used by advisers to better assess the market trends and provide more informed insights for clients. So while the days of creating entirely bespoke solutions aren’t completely gone, you are much more likely to find that organisations using new tech will be trying to benefit from what is already there and readily supportable. Many have learned the hard way that ending up on a niche technology branch all on your own becomes incredibly expensive to keep running – particularly when you take into consideration the ever-increasing rigour of regulators around the globe as to how businesses in this sector manage third party risk.”
Private wealth: the rise of tokenisation and the (later) adoption of technology
Charles Kerrigan and Michael Ward reflect on tokenisation as one of the current tech trends: “The role of tokenisation in the private wealth sector is one of the major tech trends circulating at the moment. Many investors believe that tokenisation will revolutionise asset management (BNY Mellon, Institutional Investing 2.0: Migration to Digital Assets Accelerates). According to HSBC, tokenised markets are currently worth $0.5tn but could grow to $24tn by 2027 (HSBC, The 10x potential of tokenisation: Democratising investment opportunities). The tokenisation of assets could revolutionise the private wealth sector in a number of ways. First, it could give individual investors access to new or non-standard asset classes, including real assets, such as real estate. Tokenising real asset investment opportunities enables interests to be more readily divided across a larger number of investors, reducing minimum investment amounts. Second, the interplay between tokenisation technology and blockchain networks could lead to increased transparency of data and ownership as well as reduced friction, particularly in relation to settlement times. Finally, tokenising assets potentially affords a greater degree of liquidity, giving private investors an opportunity to get their money out if they need to.”
Despite being of interest, technology hasn’t been a top priority for UHNW and HNW individuals, but this is likely to change, as mentioned by Martin: “It’s probably worth noting that compared to other segments of the market, private wealth and services for UHNW/HNW individuals are typically later adopters of technology – there has been less intrinsic need when compared, for example, to the operating efficiencies needed for scaling into the retail market which have been made possible by rapid technological developments. We expect this to change, not least in line with increased interest in technology innovation in the wider asset management sector, which may impact upon how family offices also operate.”
What are the major concerns if you look at private wealth tech? Our experts think that…
… for all digital businesses, it is clear that cyber risk is a board level issue; I saw this first hand when working as a General Counsel in digital-first businesses. Business offering wealth tech solutions are no different in this regard – and we certainly see regulators (both the Financial Conduct Authority and the Information Commissioner’s Office) being less tolerant in terms of how threats (and responses to incidents) are managed.
The risks are taken so seriously because of the significant consequences of being successfully targeted including in terms of financial loss, the loss of sensitive business and personal data and – of course – the reputational impact that could follow. This is true for all, although UHNW/HNW could of course face additional scrutiny if things go wrong, and an increased risk of cyberstalking for some because of their higher profile. There is still some hesitancy in the UHNW segment regarding technology adoption given the ‘Panama Papers’ disclosures; it has no doubt left an impression.
This creates opportunity for some of course; the cybersecurity-solution market is buoyant.
Martin Cook, Burges Salmon
… If you ask the board at almost any corporate what concerns them, you’ll typically hear cyber risk fairly high on the list that comes back. That’s not surprising given the explosion of the level of threats generated by both the dark side of advances in technology as well as malicious actors across the globe. How you can best protect yourself for when – not if – a cyber-attack happens is absolutely key and requires constant attention and a high level of preparedness, particularly in the private wealth sector which, as we know, is likely to be a key target. Sadly, from what we see that’s often not reflected on the ground, with measures all too often taken too late and companies not responding effectively to incidents in order to limit their exposure.
It’s also clear from recent enforcement action that regulators are looking hard at the pre-emptive measures business have put in place when assessing the level of compliance with legal security obligations, as well as what levels of fine to impose if there is found to have been a breach.Just take the UK ICO’s £4.4m fine of Interserve in the last couple of weeks as an example – whilst, on the face of things, Interserve did have numerous compliance measures such as written information security policies and procedures in place, the regulator was clearly concerned as to whether those were actually being followed in practice.
So can you be hoisted by your own petard – yes absolutely you can.Just talking the talk isn’t good enough anymore and anyone writing a business’ policies needs to take nuances like that into account, as there is clearly no point in saying you’ll do X, Y or Z if, in practice, the organisation just isn’t in a position to be able to deliver on that when the worst happens.
Alastair Mitton, Womble Bond Dickinson
… the tokenisation of assets can revolutionise private wealth, but there are a number of challenges to overcome. First, regulatory clarity is required, otherwise companies could be forced into business and operating model adjustments. Regulatory clarity can potentially also instil confidence in investors, driving adoption of blockchain-based asset tokenization. Second, existing KYC/AML standards need to be met when it comes to private investment in tokenised assets. This is all the more challenging when it comes to the tokenisation of assets due to the anonymous, immutable, digital and decentralised nature of tokens stored on a blockchain network. Third, the custody of tokenised assets is a source of concern for participants in the ecosystem. Only a handful of companies have licences to securely store and manage private keys, which authenticate the ownership of tokenised assets. It’s necessary to overcome these challenges, amongst others, if the potential of tokenisation is to be realised.
Charles Kerrigan, CMS and Michael Ward, Hedgehog