This article was originally published in STEP Journal Jersey Supplement 2022/23. Enter here.
Digital adoption has been the talk of the private client world for the past few years. The pandemic is often said to have accelerated digital adoption among businesses by about four years (McKinsey, 2020), but digital transformation has been a feature of the private client space for some time. However, attitudes towards technology still differ.
In some respects, technology is seen as a panacea – a path to a highly connected world and a platform for more efficient delivery of solutions. However, the pace of digital adoption has raised operational, infrastructure, and skills challenges for private client advisors and family offices, while exposing families and individuals to cybersecurity vulnerabilities.
What is the role of digital technologies as the private client world seeks to fulfill its post-Covid ambitions? How are International Financial Centers (IFCs) responding to the changing landscape in providing digital support to individual clients?
The digital revolution
We are in the midst of a new digital revolution. While the first digital revolution 30 years ago was about the digitization of information through the creation of the Internet, today we are looking at the digitization of assets, whereby anything of value can be digitized, commoditized and transacted. This has the ability to penetrate all aspects of the private client space.
“Technologies such as artificial intelligence (AI) and distributed ledger technology offer transformational opportunities,” says Amy Bryant, Deputy CEO of Jersey Finance.
When it comes to trust structures, for example, the aspirations of the next generation will drive change as they seek to use new technologies to manage their wealth. In a survey by Hubbis, supported by Jersey Finance, 87 percent of wealth advisors in Asia said that digital technologies for banks and wealth advisors will be important or crucial in attracting the next generation of clients.
Bryony Cove, partner at Farrer & Co, agrees, pointing out how client adoption of digital technology has been accelerated by the pandemic, particularly the use of online communication channels: “We’re seeing everything from cradle to grave through online meetings, banking and professional services. mobile technologies such as service portals, e-mail and messaging services, and phone applications, for example, although not on a daily basis. The younger generation also feels invited to discussions about the legacy of wealth – even if there is no reason not to include them. they are studying at university or abroad, traveling or working”.
To connect with the next generation, private client advisers are turning to technology to improve productivity, deliver cost efficiencies, create product diversification and strengthen risk management, and private clients are embracing this, explains Farrer & Co partner Ali Hollingshead. : “Wealth planning is filled with the benefits of technology—from Zoom calls to crypto-investing, from standard banking apps to wealth reporting platforms. Many of our clients are not only embracing digitization, they’re driving it.”
Technology is also affecting the field of regulation. The adoption of “regtech” is essential to ensure the reliable and secure movement of financial flows across borders in a thorough and regulatory manner. With an average of 257 regulatory updates published every day globally, the importance of regtech solutions in the financial services landscape is already clear.
Bryant adds: “Jersey service providers are using regtech to stay ahead of the curve on compliance and reporting requirements. In particular, AI is supporting financial service providers in leading jurisdictions in meeting their compliance needs while reducing process costs.”
When it comes to investment approaches, we will see the rise of technology-based hybrid models of analytics and portfolio management, offering more detailed investment opportunities with digital tools.
It is an accelerating movement towards asset digitization that has the potential to change the way individual investors conceptualize investment. EY predicts that digital real estate will become as important as physical assets in the next decade, and the evolution of the “metaverse” will open up virtual worlds – fashion houses, art galleries, entertainment spaces – with additional investor opportunities. The World Economic Forum estimates that the global value of digital assets in circulation will reach $24 trillion by 2027.
Challenges and risks
Along with the opportunities for individual clients and their advisors, there are a number of challenges. The mass movement to digital platforms is accompanied by a dramatic increase in cyber security risk, and investors and their advisors must ensure they fully integrate cyber risk mitigation into their wealth and succession planning, emphasizes Farrer & Co partner Tom Rudkin. : “There are massive inadequacies in preparedness. The attitude of ‘It’ll never happen to me’ is still prevalent. Preparedness and risk reduction are always less time-consuming, stressful and expensive than responding to a crisis.”
The greater mobility of families and the use of digital solutions in family businesses raises serious questions about global taxation. The OECD’s proposals for a new global system of corporate taxation in 2023 are shaped in part by global efforts to address the tax challenges of digitization.
For this reason, it is important that both private client and family office advisors are aware of any potential tax implications of structuring family businesses with digital drivers behind their structuring decisions.
“Great digitization and mobility can cause problems for the family
business, but the benefits are more obvious, says Hollingshead. “Dedicated wealth management platforms help high-net-worth clients hold complex and high-value assets such as crypto, art, yachts and real estate. These platforms will help their advisors and family offices stay informed so they can ensure clients are tax compliant in all relevant jurisdictions.”
Specialized IFCs, embedded in the private client space and fully committed to digital innovation, play a key role in enabling families and private clients to address these challenges. For example, Jersey has worked to address the challenges posed by moves to change the global corporate tax system and has been at the forefront of responding to cyber security threats.
For IFCs with specific digital know-how, there is certainly an opportunity to provide reliable outsourced expert support, allowing family offices to focus on their best work in-house. IFCs are often hotbeds of digital innovation, offering sandbox environments and incentives that encourage fintech development.
Jersey’s ambition is to be the easiest IFC to do business remotely in the digital world with the aim of accelerating the growth of the financial industry by being at the forefront of digital technologies. It will do this through collaboration between the financial industry, Digital Jersey, government and the Jersey Financial Services Commission to develop a policy and shared fintech framework.
With this in mind, in early 2022, Jersey Finance renewed its fintech strategy to enhance client experience and deliver efficiencies by leveraging technology to enhance compliance and risk, improve productivity and improve interoperability across financial ecosystems.
There’s no doubt that digital adoption will continue to accelerate, and individual clients and families will increasingly look to their partners, including advisors and the jurisdictions they use, to support them. One of the areas that provide a special opportunity for the development of fintech is stable finance. Reputable IFCs that can support the fintech industry can significantly expand their existing offerings and, in turn, drive innovation in fintech.
Bryant says: “Fintech will play an important role in the growth of sustainable finance, and sustainable finance will accelerate innovation in fintech. We certainly see a symbiotic relationship between fintech and the environmental, social and governance (ESG) sectors and a clear role for the IFC. Jersey is both plays in growth.
There is a real opportunity for the smart IFC, which is agile, flexible and committed to fintech innovation, to support individual clients and families as they rapidly move into the digital age.
If you require further information about anything covered in this briefing, please contact Bryony Cove, Ali Hollingshead, Tom Rudkin or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2022