Capturing Synergies in an Evolving Family Office Landscape
The wealth planning needs of high and ultra-high net worth families have changed beyond recognition in recent decades. The attractiveness of vanilla trust vehicles has waned as families seek vehicles that better meet their more sophisticated needs.
Today, the requirements of families can be complex, often global and increasingly digital with families often behaving as if they are institutions in their own right. They invariably have multiple cross-border business interests, different generations are taking a much more active interest in family affairs, and financial and lifestyle objectives are increasingly diverse and intertwined.
These are the ‘internal drivers’ that are proactively shaping family office behaviours.
At the same time, the investment, tax and commercial environment families are operating in has become more and more complex. Geopolitics is creating uncertainty and volatility, whilst international regulation and tax are impacting investment and structuring decisions.
These are the ‘external drivers’ that family offices are having to react to.
These internal and external forces are, of course, hugely pertinent to the infrastructures that support families and family offices too. For the advisers and service providers (and the IFCs that house them) that are smart and alive to the implications of this evolution, there are real opportunities to capitalise on the institutionalisation of the family office and capture the resulting synergies between ‘traditional’ wealth management and institutional investment.
One of the most powerful forces shaping the family office space is the globalisation of family activity with wealth moving more rapidly around the world as families become increasingly active in their investment strategies.
As the Knight Frank Wealth Report 2019 highlights, for instance, 36 per cent of UHNWIs now hold a second passport, up from 34 per cent last year, with 26 per cent planning to emigrate permanently, up from 21 per cent, reflecting a growing propensity to take an interest in multiple locations.
At the same time, family offices are moving increasingly into alternative investments as they look to diversify their risk portfolios. The latest Family Wealth Report’s Family Office Focus found that family offices now have an aggregated 53 per cent exposure to alternatives with 39 per cent of advisers globally saying that their UHNW clients had increased their private equity holdings in the past year. In addition, the Global Family Office Report 2018 found that half of family offices intend to invest more in direct investments, namely private equity, this year.
And philanthropic activities (up 29 per cent in 2018 globally amongst HNWIs according to Knight Frank); co-investment with other families; and international business ventures are increasingly common features of the modern family –significantly, over a third (39 per cent) of family offices project that when the next generation takes control of their families’ wealth, they will increase their allocation to sustainable investing (Global Family Office Report).
Regulation and Uncertainty
All this, though, is happening against an increasingly complex regulatory backdrop, with fragmented regional approaches to regulation and rafts of reporting requirements, including the Common Reporting Standard (CRS) and FATCA, impacting family offices with cross-border interests.
The indications are that family offices are still grappling with these issues. In particular, there is a real tension between the desire to comply with requirements on the one hand, and the desire to resist intrusion into their privacy as a family on the other. According to Hubbis, three-quarters of families in the Middle East will only adapt to the new world of transparency ‘slowly and painfully’.
Geopolitical uncertainty is a big factor too – 68 per cent of wealth advisers globally think that the political and economic environment will make it harder for their clients to protect and create wealth this year in their home country. That rises to 72 per cent in the Middle East (Knight Frank Wealth Report 2019).
And from an operational perspective, family offices are spending a fifth of working hours on manual processes on average as they struggle with generic software for accounting and investment analysis (Family Wealth Report).
There’s no doubt that the ambitions of family offices are more sophisticated today - but to achieve these ambitions and respond to external pressures there is still a clear reliance on third party expertise and a need for institutional-grade support.
Whilst ‘traditional’ wealth management expertise remains key for IFCs supporting family offices, the diverse expertise they have developed in areas beyond private wealth could provide opportunities to capture synergies in complementary areas too – specifically alternative investments, regulatory compliance, and digital support.
Guernsey and Jersey, for example, have developed formidable experience in alternative fund structuring. When combined, both jurisdictions today service funds valued at more than £0.6trn, enabling investors around the world to put their capital to work in private equity, infrastructure, venture capital and real estate funds, whilst both have also placed a real emphasis on growing their green and wider environmental, social and corporate governance (ESG) credentials - all precisely the areas family offices are looking at.
And this experience is heavily weighted towards institutional investors i.e. pension funds, sovereign wealth funds etc. That level of experience will resonate well with family offices.
Meanwhile, IFCs like the Crown Dependencies and Overseas Territories (CDOTs) have vast experience when it comes to navigating global regulatory obligations and managing cross-border reporting through CRS and FATCA. New substance rules in the CDOTs, in tandem with recognition from authorities such as the OECD, EU, IMF and World Bank, have also created strong, robust platforms that will appeal to family offices looking for locations that can demonstrate good governance and provide an attractive ecosystem for growth.
IFCs that are clearly committed to growing cutting-edge digital sectors will also reinforce that they understand that a successful family office must also consider the technological needs and the cultural values of the next generation – being able to deliver more efficient, automated, on-demand and remote services and advising on cutting-edge areas like AI and blockchain will become more and more important.
The evolution of the family office towards demanding institutional levels of service and infrastructure means that there is now more than ever a need for high quality expertise that can deliver global, multi-disciplinary and digital support. Those IFCs that take a holistic approach, recognise the synergies between traditional family wealth management and cutting edge global investment, and successfully bring them together, will have a bright future.
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April 2019 / Brexit - Trick or Treat?
March 2019 / Brexit: Deal or No Deal
The streets of London were packed this weekend with hundreds of thousands of Remain marchers, determined to make their voices heard.
Mrs May has returned from Brussels without the 30th June extension she had hoped for, and instead must make do with 22nd May if her deal is passed in the House of Commons, and 12th April if not.
Fearing another defeat, the PM's Deputy David Lidington was reported to be engaged in a last ditch attempt over the weekend to build a cross party consensus between a no deal and the withdrawal agreement concluded with the EU.
Press reports have speculated on whether or not Mrs May can carry on, having lost the confidence of key Ministers and the European Council. Her searing midweek intervention, laying blame squarely at the feet of British MPs, appears to have misfired. MPs are after all the only people who could vote her deal through.
Can the House of Commons come up with a solution?
Parliament continues to be divided over the terms of the Brexit deal with the backdrop of a majority of MPs originally voting Remain. Rejecting no deal was relatively straightforward. Saying yes to something, and agreeing the detail is another matter entirely.
Deposing Mrs May will be no easy task with the 1922 committee unable to facilitate a leadership challenge until December 2019, and the fixed term Parliament Act providing a strong shield against Corbyn led calls for an election.
Despite losing out to Oliver Letwin’s indicative vote initiative Mrs May will only step down during the Brexit process if she chooses to. Meantime binary votes on different orders of preference will be a complex and difficult process.
Irrespective of who is PM or whether or not Parliament takes the driving seat, any revisions to the withdrawal agreement need to be acceptable to EU Leaders, who have indicated limited appetite for change.
What happens next?
29th March is no longer in play and the period to the 12th April could see a no deal confirmed simply by default through the passage of time. Alternatively, a new House of Commons consensus may emerge, but with no certainty that the EU will agree it.
What is in the withdrawal agreement?
When faced with the extraordinary quantum of information generated over the 1,000 plus days since article 50 was triggered, it's easy to lose sight of the terms of the withdrawal agreement. Ploughing through its 599 pages, not to mention the additional 26 pages in the political declaration, is a daunting task.
Withdrawal Agreement – what are the key points of interest?
When considering the agreement it's important to remember these are withdrawal terms and not the future trade deal. You can find a detailed but accessible summary here.
There are Brexit implications for the devolved administrations, and the Crown Dependencies and Overseas Territories (CDOTs). As the Withdrawal Agreement 'key points' graphic above indicates, they haven’t been forgotten.
Citizens' rights to stay are clearly important as is a stable transition, and it's been confirmed that the common travel area within Britain will continue. In the case of the Crown Dependencies, industries such as fisheries and farming need new solutions.
However, it is UK manufacturing and supply chains that have the most to fear from a no deal crash-out. With the CDOTs largely focused on financial services and not being major manufacturing centres, this should not be a significant concern for them.
The CDOTs governments have been proactively engaged throughout the Brexit process and comprehensive information is available on their Brexit strategies on their official websites.
Examples can be see in the following links published by the Governments of Jersey and Guernsey.
Third country services are unaffected by Brexit
Economies in the CDOTs are heavily skewed to financial services with access to the EU through individual bilateral agreements negotiated sector by sector on an equivalence basis. They are classified as third countries for market access purposes. This means that their legislation, regulation, and investor protection rules must all be assessed as substantially equivalent by the EU before market access is granted.
Equivalence status means that approved third country regimes receive protections through the EU single market rules:-
“In a second step, the Maastricht Treaty, which entered into force in 1994, introduced the free movement of capital as a Treaty freedom. Today, Article 63 TFEU prohibits all restrictions on the movement of capital and payments between Member States, as well as between Member States and third countries.”
Source: EU Parliament
Alternative funds are one of the primary CDOTs' financial services activities in EU markets.
And the CDOTs have the infrastructure in place to enable investment flows to continue seamlessly through tried-and-tested private placement routes into the EU. Whilst there may be a second order impact from any economic slowdown, the CDOTs financial and related professional services market access to Europe is unaffected by Brexit. They continue to provide an attractive safe harbour for promoters through uncertain times.
Estimates of the economic impact of deal or no deal scenarios vary greatly. Whilst many options will be proposed in the indicative votes, there are realistically only four main scenarios: deal, no deal, no Brexit or a longer delay.
In our view, each of these would have a different economic outcome in a range of plus 1.50% to minus 0.5% of GDP in 2019, depending on how hard or soft the Brexit experience. The worst case scenario of no deal would, we believe, trigger a short sharp recession. However, with the British economy currently the strongest in the G7, media predictions of an economic catastrophe are unlikely to materialise.
The CDOTs are part of the British family and a good neighbour to Europe; they are important investment partners to both sides of the Brexit equation. They continue to support and engage constructively as Britain and the EU search for a fair and equitable outcome.
As facilitators of hundreds of billions of internationally mobile capital, the CDOTs will continue to work together with their British and EU partners to build a better future, by providing the essential long term investment needed to develop jobs, growth and prosperity.
As this week unfolds, the shifting sands of the Brexit deal or no deal situation will intensify. Please look out for a further update on our blog during next week.
February 2019 / A middle ground for globalisation
Rewind a year to Davos 2018, and the antagonistic dynamic between protectionism on the one hand and globalisation on the other was a clear theme.
Back then, German Chancellor Angela Merkel pronounced that ‘protectionism is not the answer’ to a prosperous future for global markets, whilst Indian Prime Minister Narendra Modi concurred, suggesting that resisting globalisation is one of the three biggest threats to global economic success.
A year doesn’t seem to have made much of a difference – in fact, fast forward to Davos this year, and if anything the temperature has been notched up yet again. Although the theme of Davos this year was “Globalisation 4.0: Shaping a Global Architecture in the Age of the Fourth Industrial Revolution”, in reality, globalisation was still in the dock.
Rather than fronting an unequivocal endorsement of globalisation as a force shaping a desirable future, Davos this year succeeded in sparking debates around the impact globalisation may or may not have on inequality, climate change, migration and tax. Those attending were cast as elite private jet-setters, detached from the ‘man on the street’, and as the champions of big businesses. President Trump, Prime Minister May and President Macron weren’t even there, leaving Japan and Germany to fight globalisation’s corner.
Challenging the assumptions around globalisation is understandable, because it impacts us all – what we buy, how we buy it, how we interact with each other, where we work, and there’s no doubt that having proper discussions around globalisation is an absolutely vital part of modern economics, politics and society. It involves complex questions that do not just revolve around trade, but impact on culture and society too.
Overall, the impact of globalisation is fairly poorly understood. Globalisation is often accused of benefitting the wealthy at the expense of the poor and yes, its impact on the wealthy is greater than on the poorest in society.
However, it is still the case that globalisation has helped pull millions of people out of poverty; it has provided jobs and employment; and it has provided opportunity for those who might not otherwise have had any. A World Bank study, for instance, has suggested that the number of people in developing countries living in extreme poverty has fallen from more than 50% in 1981 to 21% in 2010, despite a 60% increase in the population in the developing world.
It’s also vital that we have proper discussions about what the alternative means for each and every one of us. Protectionism and global fragmentation is a very real trend too – Capital Economics and the World Trade Organisation note that global trade-restrictive measures have more than tripled since 2010, whist HSBC’s latest global Trade Navigator survey found that 63% of firms think governments are becoming more protective of their home economies. But what does this all mean for our future livelihoods, career prospects and the cost of goods and services?
Again, these are complex questions – but it is all relevant to international finance centres. In fact, I would contend that IFCs have a key role to play in all this.
The world today is very much one of dichotomies – remain and leave; populism and globalisation; rich and poor; small business and multinationals – with proponents of each constantly shouting at each other through Twitter and other fora.
For the forward-thinking IFC, it strikes me that there’s a really crucial role here that goes beyond being passive conduits of international capital. As neutral centres, there’s also an opportunity - an obligation even - for IFCs to play more of a proactive, mediatory role, that can champion a new form of globalisation, promote inclusivity, and provide some balance, impartiality, rationality amongst the noise.
I’d even go as far as to say that, if IFCs don’t realise this opportunity, be bold, assert their value, and start asking themselves questions about what this new role means and how they can provide some middle ground that can encourage global collaboration, debate, and cooperation, they may well find themselves steamrollered by the big hitters in both corners.
And with IFCs providing trillions of dollars of inward investment to support the lives of millions of people around the world, helping to finance the construction of schools, roads and hospitals in countries in all corners of the globe, and doing so in a way that ensures public and private sector capital is put to work in the most efficient way possible, I think for IFCs to not be part of this future would be to the detriment of everyone.
Geoff Cook, Consultant