Wealth managers, especially those in charge of family offices with a multi-generational mandate, are notoriously conservative in their investing activities. “The primary goal of the family office,” says Tony Solomou, founder of wealth management software provider Elysys, “is to maintain the capital of the family and to provide revenue to beneficiaries. With prevailing global low interest rates, family offices are forced to rely heavily on investing to fulfil this mandate of generating return on family assets.”
While the ideal scenario is to have a risk-diversified investment portfolio that can deliver a stable income and growth of family assets, the worldwide economic situation has not been playing along.
One of the major obstacles in the way of delivering returns at the lowest possible risk is the volatility of the stock market. In worst case scenarios, stock market crashes result in unthinkable losses. In cases like the infamous 2008 burst of the housing bubble, losses tallied up and spread across the board broke down to $21,000 per individual in the developed world and three times as much for every wealthy investor (Source: Professional Wealth Management Net). These numbers only account for losses suffered during the period between the peak of October 2007 and the trough in November 2008.
In addition to the capricious markets, wealth managers face the increasingly high expectations of clients. Fintech writer, Amin Rajan, reports that investors are demanding uncorrelated absolute returns, capital conservation and inflation protection, all while remaining hungry for high returns. As if these demands are not enough, clients are getting more tight-fisted about paying fees and charges.
Living up to such expectations is nearly impossible in a situation where central banks’ monetary policies have borrowed against future returns by artificially inflating asset values, Rajan points out.
In response, wealth managers are embracing digital innovation as a potential solution.
A 2017 global research survey carried out by Create-Research and Dassault Systèmes has revealed the digital technologies that are most widely adopted by wealth managers in an attempt overcome their economic challenges and deliver the high demands of investors. While digital tools like social media and new digital platforms rank high on the list, younger technologies like cognitive technology and Blockchain make a noteworthy appearance.
Though the majority of wealth management firms have only taken their first steps towards the adoption of blockchain, it stands the nine-year-old digital innovation proud against the other more mature technologies on the list.
At Bitstocks, we have seen a growing interest from family offices - most particularly single-family offices (SFOs) - in cryptocurrency investment as means to portfolio growth. Also, in interview with Russ Alan Prince, Angelo Robles, founder and CEO of the Family Office Association confirms that the wealth management industry is moving towards the adoption of cryptocurrency as investment insvtrument:
“We’re seeing a growing number of single-family offices – especially those with greater assets – invest in less traditional assets such as bitcoin. There are a number of overlapping rationales for these single-family offices to invest in bitcoins. For example, there’s a fixed supply of bitcoins, more businesses are accepting the currency, and more and more investors from hedge funds to institutional players are looking at bitcoins as a way to diversify a portfolio. Also, bitcoin benefits by being first on the scene and establishing a beachhead of sorts. ”
What is behind the wealth management industry’s willingness to reach beyond traditional investment instruments? The answer may lie in the combination of unique qualities of cryptocurrencies like Bitcoin, and how they translate into benefits for investors and investment groups, including family offices.
Firstly, bitcoin is decentralised, meaning it has no central body of control and is therefore immune to human-led interference or coercion. Being outside of the legacy financial system’s framework of government-backed corporations, it also means that bitcoin is less affected by monetary policy or economic circumstances. Bitcoin can serve as a hedge when geopolitical crises send traditional markets into recession or meltdown.
While bitcoin’s price remains volatile, a number of factors indicate that the cryptocurrency’s prices will continue rising into the foreseeable future. These include Japan’s announcement last year that it would recognise bitcoin as legal tender and make the provisions for administrative and accounting systems to be enhanced for cryptocurrency transactions to take place seamlessly.
Much of bitcoin’s price growth to date can be attributed to a dwindling trust in central banks’ ability to preserve buying power and value of our fiat currencies at times when economic instability and political uncertainty is at its highest.
At Bitstocks, we advise investors to educate themselves on the security risks of transacting in cryptocurrencies. Exchanges and wallets, unlike the Bitcoin network itself, are not impenetrable and most especially when they are experiencing a surge in transactional activity and funds transfer, you can be sure that cybercriminals are earmarking them for attack. The safest way to secure coins is to hold them offline (known as deep cold storage), like we do for all our Bitstocks’ individual and institutional investment clients.