With the rising trend in the numbers of individuals and families with significant wealth, one aspect of their affairs which is attracting wider attention is the advice they need to assist them in managing the transition of family wealth to the next generation.
This wealth may be being generated through an entrepreneur’s successful building of a new business, the evolving operations of a family business first developed by an earlier generation, an individual’s managerial success or in many other ways. Each situation is unique, but there will almost certainly be considerations arising around how to transfer the wealth to the next generation which the independent financial advisor can and arguably should be assisting with.
As with most aspects of providing advice, at the heart of it is the need to become intimately familiar with each family’s goals and aspirations. Do all or most members of the family think of the family as a single multi-generational enterprise, where the current generation is custodian of the family’s well-being for the benefit of future generations, and hopes to see that ethos, as well as the family patrimony, passed on to succeeding generations? Or does the family view each member as an individual, and the fulfillment of each individual’s personal aspirations as the paramount goal? The key is in exploring and understanding the drivers from the perspective of each family member.
An added complication occurs when some members of the family take up residence abroad. Is this a permanent move or temporary? is it connected to the family "business" or not ? Some consequences will flow, if only at the basic level of taking into account the tax regime affecting the overseas family member, but they may be more far-reaching if the family’s plans around "succession planning" are impacted. At the highest level, the financial advisor’s role would seem to be to bring sound advice, a breadth of vision based on experience and a degree of objectivity to reconciling the needs of the different family members and the different generations. At this level, there is no particular financial product or service in mind: the focus is on objectives and desired outcomes, identifying where there are apparent incompatibilities, and helping the different family members think through and articulate what they really want to achieve as the family prepares for its wealth to pass from one generation to the next.
This reflection will, however, lead to consideration of specific products and services. At this level, the independent financial adviser can deliver even more by way of added value by leveraging his or her relationships with international wealth management service providers. The first task here is identifying service providers who are experienced in working in partnership with financial advisers, who know how to respect the lines of demarcation in dealing with clients, and who share the same client-focused philosophy. By drawing on ideas and solutions which the international service provider has accumulated through experience in dealing with other client situations, the financial adviser can enrich his or her own experience and pool of ideas, to the benefit of all involved.
The most obvious of product/service requirements in the context of multigenerational planning probably centers on wills, issues of probate in an international context, and the use of structures – trusts, foundations, insurance and annuity wrappers, and so on. Again, close relationships with appropriate international service providers can have advantages. For example, traditional trusts have a valid role to play in many cases, and the international wealth management firm based in one of the key offshore trust centers, such as Guernsey, Jersey or Bermuda, can contribute not only a specific technical trust expertise plus the benefits of a high-quality, tax-neutral location, but also the experience of handling exactly the kinds of generational-transfer issues which the financial adviser is dealing with.
In this context, Private Trust Companies (PTCs) represent a potentially useful variation on the theme of trusts when the family wealth is particularly substantial and where controlling interests in significant family businesses may be involved. The financial adviser can play the critical role in designing Private Trust Company structure. This will include consideration as to which jurisdiction and which international trust provider to use (Bermuda has a long track record in this area and the Bahamas have recently introduced a new legislative framework for PTCs, but they can also be successfully established in other jurisdictions, for example in Guernsey); which members of the family should be directors of the PTC; and which other close family advisers should be asked to be board members.
Other structural options may lend themselves particularly well to a partnership approach between the financial adviser and a selected international wealth management specialist. Protected Cell Companies (PCCs) – a Guernsey specialty but also available in other jurisdictions - offer some specific advantages, allowing each family member’s individual investment strategy to be pursued within their own cell, respecting the tax and other issues flowing from their different geographic residences, but still keeping the whole under a "family enterprise" roof. The latter includes a board structure for the PCC, where appropriate family members can participate in the governance of the structure.
The boards of certain structures, including PTCs and PCCs, can also play a useful part in the construction of an overall "family governance" framework, when this is one of the key elements the financial adviser is working to create for and with the family.
A close working partnership with an international wealth management services provider also has obvious benefits in terms of filling some of the investment product needs that will be identified once asset allocation and stock selection issues are tackled. Less obvious is the benefit the "offshore" service provider represents in providing a "geographically neutral" asset allocation and stock selection environment. Whereas investment specialists in the main centres – New York, London, even Switzerland – may tend to view economic and other investment trends from the standpoint of the center they are based in, investment managers based in the smaller offshore centres are less likely to have a "bias" in this sense. For advisers aiming to create an overall investment strategy that works well for family members now possibly living all across the Americas, Europe, Australia or Asia, this "neutrality" in investment perspective permits closer tailoring to each family’s specific objectives.
In summary, as the independent financial adviser becomes increasingly involved in helping families design "family governance" approaches and handling the transition of family wealth to the next generation, a close working arrangement with likeminded international wealth management service providers can assist the financial adviser in both designing and then delivering skillful, experienced-based solutions for their clients, to the benefit of all the parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.