ALEXANDRA NORTIER: Managing wealth in a virtual future

The global response to the Covid-19 pandemic has spurred unprecedented advances in the application and relevance of technology in our lives.

Beyond the Zoom boom, the resultant pace of technological innovation has introduced virtual concepts such as non-fungible tokens (NFTs), cryptocurrencies and the metaverse into the wealth management lexicon.

It’s early days, but just like the real world exploiting the opportunities these technological advancements will create will require a prudent wealth management strategy and a sensible investment approach. Previous booms have shown us the transformative power of new technologies, but they also provide a cautionary tale of the risks involved.

Cryptocurrencies typically dominate discussions about investment opportunities in virtual assets, due mainly to their ballooning valuations and the ability to trade their volatility. However, despite the unregulated industry carrying numerous risks, traditional asset managers continue to watch the cryptocurrency space with interest as the rapid rise of the metaverse could accelerate the adoption and use of cryptocurrencies in our new world.

The metaverse — or virtual universe — is a burgeoning virtual world that has emerged as a prolific trend in recent months. The rise of the metaverse has created investment opportunities by leveraging concepts like NFTs while opening up new applications for blockchain technology and cryptocurrencies.

Record deals on virtual assets such as “land”, real estate, yachts and NFT purchases have caught the attention of institutional and retail investors alike. For example, a mega (virtual) yacht called Metaflower recently sold in the Sandbox metaverse for a staggering $650,000. In Decentraland, a decentralised 3D virtual reality platform that consists of 90,601 parcels of “land”, investors can use the ethereum-based Mana cryptocurrency to purchase virtual real estate. In these transactions, buyers or investors secure ownership in the form of an NFT.

As more people enter the metaverse a world of parallel realities will emerge in the not too distant future, which will blur the lines between the real and virtual worlds. On the one side we will have the world as we know it with its separate countries, fiat currencies and traditional asset classes in which to invest. On the other, a virtual online reality where different metaverses exist alongside each other, operating on their own blockchains.

Embracing and integrating these new technologies into our daily lives will pose new challenges that require innovative solutions. For example, early technology adopters have already created virtual personas or avatars that serve as their physical representation in the virtual world.

The ability to constantly change this graphic representation of who we are in the virtual world will require new thinking about how financial services providers meet know-your-customer (KYC) requirements to ensure regulatory compliance.

Each metaverse will also likely use its own cryptocurrency to enable inhabitants to operate, transact and invest within those environments. These cryptocurrencies could potentially gain or lose value depending on the trade and economic activities within the relevant metaverse.

In comparison, traditional asset classes such as equities, bonds, listed property and structured investments may seem mundane, especially to the younger generations, who over the coming years will inherit their share of the world’s wealth of about $15-trillion.

However, much like the decision to invest offshore for diversification and hedge against domestic risks, investing in virtual assets will likely create opportunities for asset and wealth managers to meet these strategic risk-mitigation and investment growth objectives in future. By venturing offshore or into the metaverse investors gain access to a broader opportunity set, with options to invest in growth industries and asset classes that are not available in SA.

As the metaverse grows in relevance and further technological advancements enable this brave new world, virtual assets will earn a place alongside conventional investment options such as structured products, physical property, private debt and private equity, hedge funds, and venture capital.

Faced with all of these new investment options, the importance of a wealth manager or adviser who can objectively ascertain and perform extensive due diligence on the array of available investment opportunities will become more critical than ever.

Here, the dot-com boom at the turn of this century is instructive. A number of technology stocks came to market in the late 1990s and for a while, investors enjoyed stellar returns. But the dot-com crash of April 2000 saw fortunes wiped out and many of the darlings of the dot-com sector went out of business: the Nasdaq Composite Index, made up of many of these businesses, lost 75% (or $5-trillion) of its value between March 2000 and October 2002. Pets.com saw its market value fall from $300m to zero in less than a year. Amazon.com shed 96% over a similar period.

However, as we now know, the dot-com crash did not kill off the internet. Online commerce and media are much part of our lives and Amazon.com has become one of the world’s most valuable businesses. If the metaverse and virtual assets are going to be as revolutionary a change as the internet has proven to be, it means there will be winners like Amazon.com but also many losers like Pets.com.

It’s here that the role of the wealth or investment manager will be crucial. Identifying and selecting the most appropriate virtual investment options will become an important part of the investment house’s skill set. However, perhaps more important remains the ability to build a portfolio suitable for the client’s goals and risk tolerance, with the right mix of asset classes and sectors both able to take advantage of the opportunities that arise as well as to navigate volatile times.

• Nortier is joint national wealth management head at Investec Wealth & Investment.