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Wealth Management

DEMANDING EFFECTIVE WEALTH MANAGEMENT DURING THE PANDEMIC

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By Christophe Lapaire, Senior Project Manager at the Swiss Stock Exchange

 

2020 has so far presented the world with near unprecedented change. For investors, this change has mostly manifested in asset price volatility, ultra-low interest rates and tumbling financial markets.

Despite markets appearing to somewhat stabilise, revenues cannot currently be guaranteed, and return opportunities for investors are likely to be hard to come by over the next twelve to eighteen months. Private banks and wealth managers around the world have been left wondering what more can be done to safeguard performance in investment portfolios.

While there are several ways to identify efficiencies – with many simply just looking to negotiate a fee discount – to maximise performance, only forward-thinking private banks and wealth managers are exploring the option of utilising tax optimisation for their portfolios. A solution that looks to safeguard the performance of portfolios and achieve this aim of maximising the performance.

 

Easier said than done

Utilising tax optimisation to increase portfolio performance has clear benefits. However, the mere fact that it will benefit all private banks or wealth managers does not mean that all of them are capable of doing it.

When it comes to providing tax optimisation services to end investor clients, private banks and wealth managers have a decidedly mixed record. Many do not have the correct solutions – both in terms of software and processes – and they rely on antiquated technology and manual processing. This may set them up fine to conduct general business, but when it comes to delivering tax optimisation services, it just won’t cut it.

Given the benefits it provides to the client and the necessary infrastructure to support it, those who do offer tax optimisation services often see it as an integral part of the overall investment offering provided. Highlighting the offering to clients and explaining how it can help to reclaim any foreign withholding taxes.

 

What it means for clients

On the face of it, tax optimisation may not always seem so integral, given that many countries (including the UK) provide capital gains exemptions so that foreign investment trading is not impacted. Unfortunately, however, the same cannot be said for all countries. With these countries having a detrimental impact on the after-tax performance of any portfolio not optimising effectively.

Even when you do avoid paying tax twice on any dividends pay-out, getting the money back is not always as simple as it is sounds. When you couple this with the fact that many countries often have contradictory taxation rules or requirements, it becomes very clear that lacking the right expertise may mean you incur tax you may have avoided or mitigated.

As such, effective tax optimisation and knowledge is vital if you wish to be protected from the worst of any tax leakage at the investment level. This successful tax optimisation allowing investment managers to manage and subsequently reinvest funds easily.

Most notably, those who do not recognise the opportunities that tax optimisation presents risk losing clients to private banks and wealth managers that do.

 

Making use of tax optimisation

While tax optimisation is a no-brainer in theory, it is not always the right fit for every private bank or wealth manager. As previously mentioned, without the right setup – innovative technologies and automation – tax reporting to fiscal authorities can be incredibly labour intensive when done manually.

With that in mind, it is truly critical that providers who intend to offer the service are enabled with the right software and data processing capabilities to report tax information on behalf of clients, to ensure it is as efficient as possible. Doing so in a way that is sustainable and creates savings without detrimentally increasing labour efforts.

Those who do not have the requisite infrastructure in house should fear not however, as there are solutions available – such as the Swiss Stock Exchange’s Advanced Tax Reclaim – that allow them to offer a reclaim service at a reasonable cost, and therefore deliver value to clients.

These straightforward end-to-end tax reclaim services offer a huge number of advantages to private banks and wealth manages, but arguably most importantly, it allows them to provide a new service to end clients that strengthens existing commercial relationships and even attracts more business.

As investors seek to eke out returns amid the downturn, the demand for innovative solutions that blunt the impact of COVID-19 will only increase. The private banks and wealth managers that are suitably equipped to provide these innovative solutions will be the ones that reap the rewards. Again, in the end, those who do not equip themselves effectively will run the risk of losing current and new clients to someone who will.

 

Top 10

DOGECOIN MADNESS

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by Nathalie Janson, Associate Professor at NEOMA Business School

 

After the unstoppable increase of Bitcoin (BTC) since January – it added 10 000$ to its price every month since January reaching 60 000$ in April 2021  – it is now the turn of the Dogecoin to be the next cryptofrenzy.

This crypto created in three hours by Billy Markus as a joke to make fun of the Bitcoin community back in 2013 had no specific use except federating crypto geeks sharing the same sense of humor. Its capitalization quickly reached 60 million USD back then. This is why until Tuesday, April 13th 2021, its price was closed to 0 since cryptos value derives from their usefulness.

The Dogecoin belongs to the family of Altcoins using proof of stake to validate transactions – more flexible and fast compare to Bitcoin and Ether based on proof of work – but essentially not as decentralized and secured.  So far Dogecoin has mainly been used for  tipping creators of content or more interestingly to noble causes. These include raising funds for the bobsleigh Jamaïcan team to send them to the Winter Olympic Games in 2014, paying back victims of Dogecoin hack in the early days after its creation,  and raising funds to provide access to drinkable water in Africa.

 

Dogecoin… a billionaire maker joke

How comes the DogeCoin price surged in such irrational manner? Is this move another proof of market madness? A sign that we might be close to the next burst of the crypto bubble? Who knows? … Why is it so difficult to understand the pricing dynamic of cryptocurrencies?  You might think that what we experienced is the paroxysm of futility. In a week, some Dogecoin holders become billionaires, the price of the Dodge coin increasing from almost 0 to 43 cents at its highest. How mad that sounds? Similar to what happened to Gamestop, we are dealing with a community with a strong identity – the Dogecoin joined by new members like Snickers – the sweet bar and more importantly by Elon Musk – who wants to set a record and claiming April 20th being DogeDay with the clear goal to push Dogecoin up to $1. They are encouraging each other to buy more of the coins. Given the limited size of the market dominated by “whales” – five “whales” are said to control 40% of the market – the increase in purchases of Dogecoin leads to significant rise in price given the low liquidity.

The Dogecoin case is an emblematic case showing how subjective value is in economics. Indeed, like Bitcoin, the price of Dogecoin only depends on its acceptance that in itself depends on the size of its network that suddenly increased.

Why now? First, Elon Musk started to show his interest in the Dogecoins by tweeting about it. Why does Elon Musk opinion matter? Because he symbolizes the success story of a man who is a visionary. After all, if Elon Musk invests in Bitcoin and supports Dogecoin it must be for a reason, and he may be right like he has been right about the industrialization of electric cars as the success of the Tesla demonstrates. He performs a role similar to leading investors in traditional financial markets like Warren Buffet.

Secondly, the Coinbase initial public offering contributed to a rally in the cryptocurrencies market, with no exception for the Dogecoin. Over the week-end, the major cryptocurrencies – BTC and Ethereum dropped for technical reasons due to a sharp decrease in the hash rate after an electricity shortage in the Xinjang province in China. When that happens, it usually benefits altcoins.

More broadly speaking, the crypto market is frenetic since the beginning of the year. This frenzy is a symptom of a global economy that is still suffering from severe restrictions in some activities but at the same time is also experimenting acceleration in others. Combined with overgenerous monetary policy feeding liquidity in search of profitability away from traditional markets because of low interest rates and over rated stock markets, this is a perfect combination for investors to try anything new to boost their portfolio return if you add on the top of that, growing concerns about the return of inflation in the US.

In this context how long will the Dogecoin rally last? This essentially relies on the determination of its fans to support it but after a while, it will need to be more than a symbol!

 

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Wealth Management

WHY COMPLICATED INCOME STRUCTURES SHOULDN’T PREVENT HIGH NET WORTH INDIVIDUALS FROM INVESTING IN PROPERTY

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Mike Coates, Founder and CEO of Commercial Expert

 

An investor’s preference is usually to split their investment across different funds, in a varied and balanced way.  Research has shown that the most popular investments made by high-net-worth individuals (HNWIs) vary between stocks, shares, hedge funds, private equity, and real estates (residential and commercial properties).  The allocation of funds is predominantly governed by taxes, goals and individual preferences.

However, in the past decade, HNWIs have encountered barriers to accessing finance because of the way lenders approve loans.

 

The barriers facing HNWIs

In the aftermath of the GFC of 2008, a notable trend to emerge was lenders seeking to minimise the level of risk to which they were prepared to expose themselves. This was achieved through adopting a more stringent selection criteria when it came to assessing an individual’s financial situation before approving a loan.

As a result of this change in lending behaviour, securing finance has ultimately become more difficult across the board, including, ironically, HNWIs, whom you might expect would be unaffected. The reason HNWIs might struggle is because the new lending culture favours those with straightforward finances, and a regular income.

However, for HNWIs, this is not usually the case.  For example, a HNWI’s portfolio could be split across various asset classes and jurisdictions; their income may be irregular or derived abroad (including off-shore tax-havens); many HNWIs are expats and may be receiving income in different currencies.  When these factors are considered, it’s easy to see why HNWIs might be classed as ‘high-risk’ in the eyes of some lenders.  As a result, many HNWIs have struggled to secure funding or even a credit card.

Consequently, for HNWIs looking to take advantage of the current low borrowing rates, as well as the tax relief by securing finance, they will be better off finding a reputable financial adviser or broker who will take a more holistic view when it comes to assessing their financial situation.

Financial advisers have established relationships with a wide portfolio of lenders who aren’t just the regular high street banks and building societies. There are certain lenders who are used to dealing with clients that have huge property portfolios and are experienced in calculating the stress levels on existing portfolios. They are able to use different assessment criteria in order to approve loans, even where applicants have a low debt service coverage ratio (DSCR).  They may also request to see your SA302 (self-assessment tax returns for the last 4 years), tax overviews and accounts in order to gain a deeper understanding of your income structure. Where people have deferred tax, this also gets taken into consideration.  At the end of the day, it’s about having your foot in the door with the right lenders, that helps to determine your ability to secure a mortgage as an HNWI.

 

Reasons to invest in property

Compared to private equity and hedge funds, real estate investment is by far the least risky option. Real estate is safe and is set to lead us to recovery following the aftermath of Covid-19.

What we witnessed during the global pandemic was that contrary to early predictions, rental prices remained relatively stable and property prices rocketed. The UK house price index, published in January 2021, revealed that the average house price increased by 7.5% year-on-year. i   Initially, the stamp duty tax relief may have been attributed to the increase, however, as the tax relief deadline approaches, there doesn’t appear to be any sign of a slow-down.  This indicates that other factors are underpinning the rise. Many believe that lockdown has forced people to reassess their priorities, with an increasing number of people desiring more generous living and outdoor space in areas away from cities.

 

What properties to invest in

As it currently stands, almost 60% of HNWIs have revealed that they invest in real estate. ii The properties are usually where they themselves reside, or in “offshore” areas where they enjoy going on holiday.  If properties are situated in tourist hotspots with nearby beaches or mountains, they are often rented out to tourists during peak holiday seasons and available for their own holiday use during off-peak times.

 

Final thoughts

If you want to invest in properties either in the UK or abroad, don’t be deterred by previous failed attempts at securing finance. It is a good move to appoint a specialist commercial finance broker with access to the whole of market, who can undertake all the research required, and recommend a suitable lender and product.

There are only a handful of lenders who are equipped to deal with HNWIs, with complex income structures, therefore it’s crucial to make sure you’re speaking with the right people.

 

References:

i https://moneytothemasses.com/owning-a-home/house-prices-2/what-is-going-to-happen-to-uk-house-prices

ii https://www.fool.com/millionacres/real-estate-investing/articles/what-are-high-net-worth-individuals-investing-in-now/

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