Preventing Losses In Wealth Transfers: Tackling Information Asymmetry

Den Lelin 11 July 2024

Preventing Losses In Wealth Transfers: Tackling Information Asymmetry

The author of this article says that unequal or inaccurate information creates an imbalance, typically disadvantageous to one party. In asset transfers, this often involves key attributes such as valuation, condition, and ownership status. This is where blockchain technology may provide a solution.

The author of this article addresses the one-sided nature of how informationso the writer saysis understood in today’s economy. To put it in more abstract terms, he means information asymmetry. The writer is Den Lelin, research and strategy director at  Owner.One, a private encrypted digital vault for secure storage and just-in-time family asset and capital data transfers. The firm is based in the United Arab Emirates. Lelin argues that blockchain technology can help deal with this asymmetry problem. 

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Transferring capital is a crucial moment where a lot of money can be either saved or lost. Each year, billions of dollars are involved in these transfers. Asset transfers suffer major financial losses because one party knows more about the assets than the other (information asymmetry). This gap in information can lead to incorrect valuations, hidden debts, and bad decisions, resulting in potential global losses of hundreds of billions. These issues can cause potential global losses amounting to hundreds of billions. 

Understanding information asymmetry
Unequal or inaccurate information creates an imbalance, typically disadvantageous to one party. In asset transfers, this often involves key attributes such as valuation, condition, and ownership status.  

Consider this: almost a quarter of transactions among family members face significant financial setbacks due to undisclosed issues, leading to global losses potentially running into billions of dollars. 

This isn't just about minor oversights; some capital owners deliberately withhold critical information about asset conditions to avoid conflicts or taxes, bordering on fraud. In the US, owners must legally disclose material defects such as outstanding debts or legal issues, as these affect asset value. However, many underreport or fail to disclose these issues, leading to costly litigation and financial losses for unsuspecting beneficiaries. This raises ethical questions about asset transfer integrity. Should there be stricter penalties for nondisclosure? The lack of transparency in asset transfers is serious, causing financial harm and eroding market trust.

Impact of information asymmetry
The main impact of information asymmetry is seen in the significant financial losses it causes and the decision-making challenges.

Incorrect asset valuations lead to overpayments or underselling, with inflated property valuations burdening new owners with unexpected repair costs. With $84 trillion expected to transfer from Baby Boomers to heirs, even minor valuation errors can cause substantial financial harm.

Decision-making is also hindered, leading to disputes and poor financial choices. Only four in 10 American adults have a will or living trust, and about 64 per cent of Americans do not discuss inheritance plans, fostering misinformed decisions. Heirs may struggle with complex assets without clear information or documentation.

Causes of asymmetry
Uneven asset information arises from inadequate documentation, complex assets, and hidden information. Only 46 per cent of Americans maintain detailed asset records, leading to significant financial discrepancies. Complex financial instruments and business interests require specialised knowledge, often resulting in valuation errors. Intentionally withholding information exacerbates this issue, manipulating asset values and causing financial losses. Many heirs feel unprepared for managing inherited wealth, with only 42 per cent feeling comfortable, which worsens financial outcomes and trust.

Mitigating information asymmetry
Comprehensive documentation, transparent communication, and technological advancements help address information asymmetry and major losses during capital transfers.
Nobody wants their legacy overshadowed by confusion and conflict. Heirs discovering hidden debts or valuable assets lost due to incomplete records causes unnecessary drama. To prevent this, maintaining thorough and updated documentation is crucial. Detailed records of an asset's history, value, and condition, once properly organised, are easier to keep current. This helps prevent significant financial losses, which can reach almost a third of the asset's market value due to hidden liabilities and inaccuracies.
Nearly half of family inheritance disputes stem from misinformation or lack of information about asset attributes. Therefore, transparency and smooth communication are essential. This ensures that all parties are on the same page, making transitions fairer and smoother. Without these measures, family members may face unexpected surprises and legal battles.
Modern technology also offers a variety of tools to address information asymmetry.
Blockchain ensures that all parties access the same reliable, immutable information, preventing disputes over transaction history and increasing trust among participants. Implementing blockchain technology in asset transfers has been found to reduce transaction discrepancies, showcasing its potential in mitigating information asymmetry. 

Smart contracts automate agreements, such as real estate sales, executing terms only when conditions are met, which is beneficial for ensuring compliance and reducing the need for intermediaries. 

Predictive analytics offer insights into asset performance when all necessary data is accurate and in place. 

Advanced encryption secures sensitive data, such as financial records and personal identification information, thus increasing security. 

User-friendly platforms, such as property management systems and financial planning tools, provide intuitive interfaces, making information accessible to everyone, from tech-savvy investors to first-time buyers.

Mitigating risks tied to information gaps in capital transfers is like navigating a maze blindfolded – but using technology and maintaining meticulous documentation may help. These steps improve transparency, ensuring that asset transactions align with goals while minimising financial losses and disputes. Despite challenges, maintaining clarity and efficiency is crucial in dealing with the modern complexities of asset management and capital transfer.

By fostering trust and reducing uncertainty through these methods, smoother transitions and fair outcomes are facilitated for all parties involved in the transfer process. Ultimately, transparency isn't just for windows – it's essential for ensuring equitable results for everyone involved in the transfer process.

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