Month: April 2018

physical currency
Corporate Finance and M&A/DealsFinance

Why physical currency in a digital economy is still a must for UK travelers

Why physical currency in a digital economy is still a must for UK travelers

Trailing closely behind Sweden and Canada, the United Kingdom is the world’s third most cashless society. According to UK Finance, cash will be used for a mere 21 per cent of all payments by 2026. Increasingly, countries around the world are making definite moves towards a futuristic economy based on fully digital transactions for goods and services, with cash often portrayed as obsolete. In Sweden, 80 per cent of all transactions are made by cards via the mobile payment app, Swish.

However, deeming the role of cash in society as obsolete – according to travel money provider WeSwap – is far from accurate. WeSwap’s Founder and CEO Jared Jesner believes that as a nation, our adoration of travel means that although we are moving closer towards becoming a cashless society within our own borders, when we go abroad this all changes- people still like the comfort of cash in their pocket when they explore the unknown. According to a report in Reuters citing the Bank for International Settlements, the study found that the use of cash is actually rising in both developed and emerging markets. “Some of the breathless commentary gives the impression that cash in the form of traditional notes and coins is going out of fashion fast,” said Hyun Song Shin, BIS economic adviser and head of research “despite all the technological improvements in payments in recent years, the use of good old-fashioned cash is still rising in most, though not all, advanced and emerging market economies.” Furthermore, the Bank for International Settlements found that in recent years, the amount of cash in circulation has increased to 9 percent of GDP in 2016 from 7 percent of GDP back in 2000. That said, the same study stated that debit and credit card payments represented 25 percent of GDP in 2016, up from 13 percent in 2000.

Cash’s resiliency comes at a time when the odds are seemingly stacked against its historically ubiquitous presence, with the critical mass of consumers owning more credit and debit cards today than ever before, using them for smaller transactions than in years past. Moreover, thanks to new technologies, consumers are able to use contactless payments via their mobile devices to pay for things in record numbers. These now societal norms have led to predictions that cash is dying as the world moves to digital payments. WeSwap asserts this prediction as flawed.

Jared Jesner, WeSwap’s CEO, was surprised to learn how integral cash remains to society when he founded the digital payments start-up. Despite being credit card-dependent at home, travelers inevitably need to access hard currency beyond UK borders, especially as UK residents going abroad can never be certain how many shops, restaurants, or tourist attractions will accept credit cards. Jesner is optimistic about the potential to change the landscape of payments, having founded WeSwap to make currency exchange cheap and fair for ordinary people “I’m incredulous to the fact that we still ‘buy’ money when we should just be swapping with each other.”

With Futurologists long predicting cash will one day become obsolete, contextualised by the advent of blockchain technology, mobile money and similar innovations, a transition towards a more cashless society is inevitable, but not to the extent where notes are no-more. For all the convenience that digital payments offer, travelers remain reluctant to fully part with their hard currency. WeSwap believes that a security-based connection secures the role of cash amongst travellers—and creates a need for a fair and transparent currency exchange.

Issues

Issue 4 2018

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Wealth & Finance Magazine Wealth and Finance Wealth & finance banking finance funds markets regulation risk management tax wealth management market trends stock trends stock market trends wealth management magazine wealth magazine finance magazine
Welcome to the 4th issue of 2018 for Wealth & Finance Magazine, hosting an array of news features, and articles from across both traditional and alternative investment sectors. On the 19th April 2018, the PenFed Foundation announced the launch of its new Veteran Entrepreneur Investment Program (VEIP). Through Foundation contributions and matching funding of up to $1 million from PenFed Credit Union in 2018, the program will: provide veteran-owned start-ups with seed capital to build and grow their businesses, create robust networks and enable the PenFed Foundation to perpetually re-invest returns in future veteran-owned businesses. In this month’s issue, we discover more about Infinox Capital, a global brokerage, headquartered in London who provide a range of services to its valued clients. We spoke to Jay Mawji to learn more about the firm and how it works to provide the very highest standards of support and service. Elsewhere in this edition, Are You Owed Money (AYOM) is a debt recovery specialist in Preston, Lancashire. We speak to Marketing Manager, Daniel Fletcher as we aim to gain more insight into the success of the firm. Speaking of success, FACET is a Crawley based fund manager offering a range of investment opportunities to its valued clients. We spoke to Director, Christian Holland to learn more about the successful company. Here at Wealth & Finance Magazine, we truly hope that you enjoy reading this issue and look forward to hearing from you.
wealth management
Private FundsWealth Management

Wealth management and digital engagement

“Hey, Siri, how do I keep my clients?” Wealth management and digital engagement

By John Wise, Co-founder, CEO and Chairman, InvestCloud

Many wealth managers are wondering why millennials fire them after an inheritance. It’s a daunting problem with a very simple cause: millennials don’t see the value that wealth managers add. This is primarily due to a lack of empathy and resonance on the wealth manager’s part with younger generations.

There is a lot of money in motion right now. As Baby Boomers retire and Gen X’ers start planning for retirement, many are selling small businesses, downsizing their homes and starting to tap their retirement plan assets. Because of these dynamics, in the US alone, over $60 trillion of assets are becoming liquid and transitioning between generations now. This money is up for grabs.

The primary inheritors are millennials, and they are becoming a major presence. This generation represents approximately 30 percent of the US population. They are the largest age group demographic in the country and a close third of the investor base – around 30 million investors. This generation is already the next big thing in investing.

Millennial money

What are millennials going to do with this money? Well, it is not the same as previous generations, as the adoption of wealth managers is low among millennials. A recent report from Accenture shows that only 20 percent of millennial investors say they will work with an advisor exclusively. This is partly due to 57 percent feeling their advisor is only motivated to make money, and about one-third feeling their advisor doesn’t get to know them.

The result is devastating for the sector: up to six 6 out of 10 clients leave their benefactor’s advisor upon inheritance – i.e., the millennial fires the advisor upon receipt of the money. This is coupled with a distrust bias toward large brands – with an exception until recently for the tech platforms they use every day. This distrust is especially true of financial brands for a generation defined by the recent global economic crisis.

This is illustrated in that 70 percent of polled millennials would rather go to the dentist than listen to what their banks are saying. Worse still, a further 70 percent – across all age groups – say they would accept financial advice from a Google, Facebook, Apple or robo-advice platform instead of a traditional financial business. This is an engagement crisis for wealth managers.

So how do managers reverse this trend and engage investors?

Re-booting engagement – offline and online

Millennials are reported to have poor attention spans, a fear of missing out (FOMO) and a love of digital communication methods. While these observations don’t apply to all millennials, there probably isn’t going to be a mass exodus from short playlists and social media to steak dinners and golf.

Empathy is the key to better engagement – both offline and online. First of all, an obvious point: wealth management businesses need younger people to better engage with the latest generation of investors and to speak their language.

But empathy must be both in-person and digital. If in-person means connecting with investors in real life, then digital means relating it both in browser and through mobile apps. Digital is one of the saving graces for wealth management businesses – it makes them appear younger, and millennials clearly value digital, especially in finance.

Digital requirements

Any digital offering needs to meet certain requirements. Firstly, it needs to be available at any time, any place and via any device to give millennial clients power over how and when they interact with their wealth. Think of how the services they use every day work, such as Google, or how they choose to connect – i.e., a preference for mobile, app-based platforms.

It also needs to distinctly appeal to the user. This means it must be intuitive, involved and individual. The user experience needs to appeal directly to the client, all content should be unique to them and it must be worth their time to use the platform. When it comes to engagement, it’s not just other financial service providers that are the competition. Wealth managers are up against social media and entertainment streaming platforms as well.

Thought also needs to be given to specific functionality – what does your digital platform offer? The Accenture report mentioned above goes some way to calling out the specific requirements from this generation.

For example, 67 percent want a robo component and real-time tracking of transactions, payments and other financial data from their investment manager. A further 66 percent want a self-directed investment portal with advisor access, with 65 percent needing gamification for engagement and to help them learn more about investing. Those requiring social media and sentiment indices in the platform to help with investment decisions is around 62 percent.

Remember, though, that these offerings are not one-size-fits-all – they still require tailoring to the individual.

Using the best of both worlds

This doesn’t mean a complete shift to digital-only services. If a client has significant assets – and particularly as his or her life gets more complicated – a broader advice scale is needed, rather than simply having assets allocated to a handful of ETFs. The interaction of digital and human empathy is the key to effectively servicing these specific needs.

This is hybrid wealth management: offline and online services that work harmoniously together to create a better experience for the client, and greater levels of engagement for the manager. It means a better understanding of clients and therefore leads to more opportunities to expand the share of wallet, impacting the all-important bottom line.

So, how do financial businesses resonate better with millennials? Appoint younger people. Use digital. You can still be full service – helping manage life events like retirement planning, college planning, trusts, wills, parental long-term care planning and the like. But make sure you focus your business model on delivering from a place of empathy both in-person and digitally.

crypto tax
Indirect TaxTax

Understanding your tax obligations in the crypto world

Understanding your tax obligations in the crypto world

By Arianne King, managing partner at London based commercial law firm, Al Bawardi Critchlow

With Bitcoin’s value slipping and reports suggesting that Q1 of 2018 was the worst quarter in its history, it seems the recent wild run on the crypto-scene has come to an end. Yet, digital currencies continue to attract the interest of the governments, investors, commentators and fintech innovators alike.

The reason for this is two-fold. On one hand, the technology that underpins cryptocurrencies – blockchain – holds disruptive potential likened to that of the internet itself. With its transparent, permanent and immutable record keeping, the potential of the technology to secure transactions between multiple parties is hard to argue with.

On the other hand, regulators are increasingly ramping up efforts to establish the legal status of e-money as the technology matures. It is clear that traditional financial institutions and lawmakers plan to get more involved in addressing this and the current lack of regulatory oversight in the UK today.

Mark Carney, Governor of the Bank of England, and others have consistently called for the crypto asset ecosystem to be held to the same standards as the rest of the financial system – and there have been some signs of progress here. Earlier this month, for example, one of the world’s top cryptocurrency exchanges, Coinbase, was granted a licence to operate by the UK’s Financial Conduct Authority (FCA), confirming it had been assessed and met certain anti-money laundering and processing standards, deeming it suitable to acquire a regulated status in the UK.

That said, the way in which cryptocurrency is taxed is fast becoming a burning issue. This is especially the case for current and prospective investors.

 

Understanding your obligations

Worryingly, many investors may not even be aware that they owe tax on their cryptocurrencies today. As in nearly every other aspect of tax, different countries and jurisdictions will have varying guidelines for declaring tax and equally different approaches to tackling evasion. As such, depending on where you are domiciled for tax, you may be breaking the law – or about to.

In the US, tax authorities view the likes of Bitcoin, Ripple and other cryptocurrencies as a form of property, rather than a true currency, and so it may be subject to capital gains tax. Taxpayers are therefore required to declare all cryptocurrency transactions in their annual tax returns, with the applicable tax applied to each deal. Meanwhile, in Germany, Bitcoin is classified like stocks and shares – capital gains tax is applied to profits made within the first year of ownership. After this point, their transaction will fall within the scope of a non-taxable ‘private sale’, exempting them from further taxation.

When it comes to enforcement, however, the US Inland Revenue Service (IRS) takes a much more active role monitoring virtual currencies and managing the infrastructure that enables trading than its European counterparts to date. In February of this year, for example, it assembled a dedicated team of investigators to counter tax evasion in the cryptocurrency industry. It argues that Bitcoin, and others like it, can be used in the same fashion as foreign bank accounts to facilitate tax dodging. It recently compelled Coinbase to send data on 13,000 of its users as part of an investigation of this kind – a move we may see from HMRC here in the UK in the future.

 

Tax in the UK

In Britain, the guidance provided by HMRC about cryptocurrencies is limited to a policy paper from March 2014. That said, while an official framework for cryptocurrency related tax remains forthcoming in the UK, the Treasury’s current regime may still mean that some individual investors are falling foul of compliance with the law as it stands.

Overall, the Revenue looks at the personal circumstances of an individual to inform a decision on whether tax is paid on crypto gains or not. The individual must prove whether they are a hobbyist or a professional investor and they will be taxed accordingly.

First of all, HMRC treats hobbyist traders in the same way that it treats those involved in other speculative activities, like gambling: they are currently exempt from paying tax on gains. This approach is fortunate in that it recognises the inherent volatility of the bitcoin market and means that a personal investor would not be hit with a tax bill for gains subsequently lost because of coin values plummeting.

Alternatively, if HMRC considers that an individual or corporation involved has a professional interest in the industry, then taxes would be payable. This is assessed on a case by case basis so the resulting decision, in this respect, will often be difficult to predict. If liable, profit and loss activity must be reflected in accounts under normal Corporation Tax rules. This is applicable to those involved at all levels of the process – whether trading, mining or operating an exchange and providing supporting services.

 

Where to next?

As with all income and gains generating assets, a tax system for cryptocurrencies will surely emerge – such a system and associated measures would also go some way towards addressing concerns that virtual currencies are still being used to enable fraud, money laundering and finance illicit activities like cybercrime.
The advice is to fully research your situation by contacting HMRC, an accountant or a tax adviser and keeping a full record of any advice given. If it appears that the HMRC are likely to find that your gains are taxable, it would be wise to put aside any gains in a contingency account to cover any tax that might fall due. Despite the decentralised nature of cryptocurrencies and the associated hype about this, they are taxable as financial assets by law in many countries. Ultimately, even in the crypto world, the old adage of  death and taxes still applies.

 

private debt
BankingTransactional and Investment Banking

A better way for investors to capitalise on private debt

A better way for investors to capitalise on private debt

Simone Westerhuis, LGB Investments

As fixed income yields disappoint, secured loan notes issued by growth businesses could be an attractive avenue for investors, whether they be wealthy individuals or family offices, writes Simone Westerhuis, Managing Director, LGB Investments.

Despite the recent rising rate environment, interest rates are still very low by historical standards and as a result private debt has emerged as one of the chief opportunities for investors searching for yield. This is especially true of high net worth individuals (HNWI) and family offices, as, faced with long-term low interest rates, meagre bond returns, poor hedge fund performance and fluctuating equity markets, they have increasingly turned to alternatives: real estate, private equity and – perhaps most strikingly – to the private credit markets to secure the returns they need for their portfolios.

HNWI and family office investors are particularly well positioned to benefit from the growing appetite from businesses for non-bank funding. According to Preqin’s 2017 Global Private Debt report, the average current allocation of a private debt investor stands at 4.7 per cent of assets under management (AUM). Family offices allocate more than double this figure – 10.7 per cent of AUM – to private debt, more than any other type of investor. This, as Preqin notes, can be attributed to “fewer restrictions, increased flexibility and an appetite for higher returns compared to other asset classes”. In contrast to conventional fund managers, HNWIs and family offices are less tightly regulated and view secondary market liquidity as less important.

But as the private debt market has become more popular, its composition has shifted over the past decade. Up until about the mid-2000s, activity was mainly dominated by distressed debt and mezzanine financing. More recently the trend has been towards direct lending.

Marrying small and medium-sized growth businesses with financing from wealthy individuals, family offices and the mass affluent has considerable appeal on both sides. From the growth businesses’ perspective, it bypasses some of the difficulties that come with borrowing from banks that have retrenched in the post-financial crisis climate, making them inflexible and sluggish counterparties. Without the ability to turn to the corporate bond market to raise funds, SMEs are often willing to pay a premium for increased flexibility and speed of execution.

From an investor’s perspective, meanwhile, direct lending can seem a compelling proposition. One of the main advantages is diversification and the prospect of earning uncorrelated returns to the equity markets. At a time when stock markets have produced strong returns for over a decade one may wonder how long this trend could last. The other is the potential for higher yields relative to the public bond markets. Direct lending offers an attractive, steady cash flow in a climate where quantitative easing has driven bond yields down.

But there are also risks that need to be carefully considered. There is, of course, the heightened credit risk that comes from lending to growth businesses, coupled with the fact that that private debt has yet to be tested in an economic downturn. An important consideration is the intermediary or platform that investors use to manage their loan portfolios. While P2P platforms have simplified the distribution process, they could potentially pose a higher default risk to investors who have little insight into the quality of companies they are directly lending to. When a borrower defaults, the investor often finds himself helpless to take any action directly.

Going through investment funds or trusts, meanwhile, may provide more protection against defaults through established debt recovery procedures. But the risks can vary markedly depending, for example, on whether the manager chooses to use leverage to boost returns and cover fees. The key to success will often depend not only on the manager’s ability to analyse risk, but also on its access to deal flow and ability to fix problems when they occur.

LGB Investments has helped develop another variant of the direct lending instrument: secured loan notes. These are secured, fixed-rate instruments with maturities ranging from six months to five years. Issued by SMEs and growth businesses under the terms of a programme, which enables repeated issuance, they often have seniority in a borrower’s capital structure. Most importantly, loan note programmes will have a designated Security Trustee who holds the collateral for all noteholders on trust and will take action on behalf of noteholders when difficulties arise.

To date, the main investors in these secured loan notes have been individual wealthy investors and family offices, although they are also increasingly catching the attention of institutions. There are a number of reasons investors have found these instruments to be attractive. An obvious one is their relatively high yields and short maturities. The notes offer investment returns of around 6-10 per cent per annum, with the interest rate determined by the credit standing of the issuer and investor demand. By contrast, publicly traded corporate bonds typically generate yields of 2-5 per cent in the current climate. Secured loan notes Issues are commonly listed on a recognised stock exchange to take advantage of the Quoted Eurobond Exemption from withholding tax on interest.

We find that another real advantage is that the programmes offer frequent re-investment opportunities and can often accommodate reverse inquiries from investors sitting on cash. Investors have an opportunity to really familiarise themselves with an issuer and can increase their allocation to a name over time. Robust security arrangements help assuage some of the concerns investors to growth businesses might have about taking on excessive credit risk.

Through our Corporate Finance department, LGB & Co. has established secured loan note programmes for 20 mid-market companies raising close to £100 million to date from HNWIs, family offices and institutions. A recent example was the £40m loan note programme for Reward Finance Group Limited, one of the UK’s fastest growing alternative finance providers. Our research suggests there is substantial room for expansion and that the UK’s immediate addressable secured loan note market is worth around £500m.

Investors do need to carefully evaluate the risks of lending to SMEs – whether through secured loan notes or through other instruments – against their investment goals. But as part of a balanced and diversified portfolio, we believe that in an environment where low yields are the norm and alternatives such as hedge funds are underperforming, secured loan notes offer an attractive way to tap into private debt markets.