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What You Need to Know About Managing Clients’ Digital Wealth

Some core principles and best practices to consider when managing these technological new asset types.

What a presumptuous proposition—that anyone could know everything there is to know about digital wealth management.

Private clients are overwhelmed by a barrage of new digital influences impacting their financial planning and management decisions—online accounts, crypto assets, art sales via blockchain, electronic wills, crowdfunding for philanthropy, privacy breaches and the list goes on. But there are core principles and best practices to consider when managing these technological new asset types. Our clients need to know what they have, where it is, and how to protect their interests. As advisors, we must guide our clients through the digital wealth management labyrinth.

What do we mean?

A digital asset is an electronic record in which an individual has a right or interest. This is a broad spectrum that includes electronic documents, intellectual property, copyright, electronic mail, digital photographs, audio and video content, social media accounts, virtual assets in gaming worlds, blogs, cryptocurrency and online accounts such as Venmo or PayPal. A typical individual has more than 90 digital accounts, but often does not realize the extent of their digital interests.

How can we manage and preserve digital interests?

Digital interests can be difficult to manage and preserve. Custody and access are key considerations. It is important to begin by creating an inventory of accounts, assets, documents, devices, as well as their associated user names and passwords. Items that wealth managers must keep in a client’s comprehensive digital inventory include:

  • Personal financial software, including banking, bill payment and investments
  • Credit cards and debt servicing sites,
  • Insurance information,
  • Email and messaging accounts,
  • Utilities,
  • Loyalty programs, including airline miles and hotel rewards,
  • Online shopping accounts,
  • Digital media accounts,
  • Domain names, and
  • Virtual assets such as cryptocurrency.

Virtual assets such as cryptocurrency present unique challenges. Some may recall old-fashioned bearer bonds. Ownership and the associated value were attributed to the person in physical possession of the bonds. If the bearer bonds were lost, so was the value. Cryptocurrency presents a new type of digital bearer asset. Typically, they are only accessible using a private key – a piece of code that is theoretically held by the owner exclusively. If the key is lost, so are the assets and their associated value.

As clients adopt a growing number of digital interests, the issue of maintaining access in the event of disability or death is becoming a prevalent issue. Among the best practices for protecting digital interests in these events is determining whether an agent or executor can access accounts. This permission must be articulated in the governing Terms of Service Agreements. Be aware that violating these terms might result in penalties under the Computer Fraud and Abuse Act. Additionally, wealth managers should determine whether accounts terminate upon death, or if an account is “memorialized” at the user’s death (for example, their Facebook profile). In the latter event, one must identify a digital heir (for example, an inactive account manager on Google or a legacy contact on Facebook). Although there is a movement to “go paperless”, it may be advisable to opt to receive annual comprehensive paper account statements as a hard copy record of accounts and assets.

With the assistance of wealth managers, clients should review and, as necessary, update their estate plans to include specific provisions for the disposition of digital interests. This may include naming a digital executor or trustee to administer digital devices and assets. As of July 31, 2019, 46 states have enacted the “Revised Uniform Fiduciary Access to Digital Assets Act” (RUFADAAA). This important legislation affirms an agent or executor’s right to access their digital accounts. Clients should also be encouraged to maintain a current list of their passwords and answers to frequently asked security questions to enable their agent or executor to access authorized accounts.

We are also seeing a rise in legal e-documents, including electronic wills. Florida recently became the second of only two states in the U.S. to adopt electronic legal document legislation that includes wills. The new Florida law allows notaries to affix their seal and signature to wills that are not signed in their physical presence, provided they witness the testator’s signature via live, two-way video links. Likewise, witnesses may not need to be physically present with the testator, one another, or the notary. As of January 1, 2020, Florida electronic wills can be created, executed, witnessed, notarized, and stored online. This is a significant shift from the status quo of having wills signed in the lawyer’s office and stored in a vault at a nearby bank, and we expect more states to follow suit over time.

Be aware of legal limitations and tax matters

Knowledge of applicable legal limitations and tax rules is important for safeguarding clients’ assets. By way of example, the Florida electronic wills statute automatically voids an electronic will signed by a “vulnerable adult” if the witnesses are not physically present. While this provision is intended to be protective, a voided will is likely to result in intestacy, which is contrary to public policy.

As for tax matters, there are many misunderstood nuances. A payment using cryptocurrency will likely be considered an exchange of an asset for federal tax purposes, requiring the associated reporting of basis, value and any associated gain or loss.

The world has gone digital, and the impact on private client wealth planning and management is pervasive.  While there are many opportunities to take advantage of in this new landscape, there are many pitfalls to avoid also.

Suzanne Shier, JD, LLM is Chief Wealth Planning & Tax Strategist with Northern Trust | Wealth Planning Advisory Services.
TAGS: Technology
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