Worldwide: Wealth Structuring 20:20 - 2015

Welcome to the second edition of Wealth Structuring 20:20, an Appleby publication that aims to highlight the issues impacting high net worth individuals in today's global financial environment, and to discuss the challenges and opportunities facing this elite group.

INTRODUCTION

Over the following pages we consider the many ways in which cross-border wealth management has been forced to adapt to a new and uncertain world in the wake of the global financial crisis. As the global tax landscape becomes more complex, high net worth individuals' (HNWI) capital flows take on new motivations. In this edition of Wealth Structuring 20:20 we consider some of those, including the search for safe harbours and capital security.

Families themselves are becoming more diverse, more international and more complex in terms of their wealth challenges. There is a growing acceptance that family governance is needed in many instances, that motivating children of means requires more than cursory consideration to avoid so-called "affluenza", and that the management of personal assets must increasingly extend into the digital realm, to consider the value of assets such as social media profiles, online accounts and digital photos.

Finally, we look at some of the developments in the field of wealth management, considering the opportunities that arise from investing in healthcare, the trend toward "impact investing", the growth of premium insurance financing, and the unique needs and issues faced by rich professional athletes.

The wealthy population is a cohort that continues to grow, with CapGemini's World Wealth Report 2014 highlighting an expansion in the ranks of HNWIs of nearly two million individuals in 2013. That 15% growth rate was the second largest increase recorded in this present century. North America and Asia-Pacific continue to lead the way, with Japan's HNWI population in particular witnessing significant growth.

HNWI wealth is expected to reach another record of USD64.3 trillion by 2016, representing 22% growth over 2013 and almost USD12 trillion in new wealth. It is the Asia-Pacific region that will front that increase, with a predicted 9.8% compound annual growth rate. The report predicted Asia-Pacific would have the largest HNWI population by the end of 2014, and the most wealth by the end of 2015.

In nearly all countries, the recent growth of private wealth has been driven by the strong recovery in global stock markets that began in the second half of 2012. A report from the Boston Consulting Group (BCG), Global Wealth 2014, shows the amount of private wealth held in equities grew by 28%, with increases in bonds (4.1%) and cash and deposits (8.8%) much slimmer. As a result, asset allocations shifted considerably toward a higher share of equities.

BCG also highlights the growing volume of private wealth booked across borders, up more than 10% to USD8.9 trillion in 2013. Offshore wealth, defined by BCG as assets booked in a country where the investor has no legal residence or tax domicile, is expected to grow at a solid annual rate of 6.8%, reaching USD12.4 trillion by the end of 2018.

For now Switzerland remains the most popular offshore destination, despite facing heavy pressure because of its significant exposure to assets originating in the developed economies, where government actions to repatriate funds are making the most impact. The Swiss market is also being challenged by the rise of Singapore and Hong Kong, which currently account for 16% of global offshore assets. They are predicted to grow at 10.2% and 11.3% a year, respectively, through to 2018, and when combined will account for 20% of global offshore assets.

The range of individuals looking to participate in cross-border wealth structures continues to grow, fuelled by the desire to diversify assets internationally, mitigate security concerns and ensure confidentiality. And yet the swathe of regulatory and fiscal legislation in recent years puts the pressure on international financial centres to demonstrate they are ahead of the curve.

While the ranks of the world's HNWIs continue to swell, they do so against a backdrop of increasing complexity in global wealth management.

We hope that our articles on the following pages address some of the most pressing issues, and provide useful food for thought.

WEALTH SEEKS OUT SAFE HARBOURS

Times have changed when it comes to the global movement of capital by wealthy individuals. No longer are the geographical decisions that underpin global money management driven purely by tax; today the watchwords are capital security, and ensuring wealth can be safely transferred to the next generation.

For those fortunate enough to have made significant new wealth in the uncertain world of the past decade, jurisdictional choices are now based on protecting assets in volatile times.

Geoff Cook, the CEO of Jersey Finance, which works to promote that jurisdiction worldwide, says: "When it comes to jurisdictional decisions, wealthy individuals and their families, especially in emerging markets, are increasingly looking for politically neutral, stable and well-regulated jurisdictions that can demonstrate substance, expertise and a rational response to transparency."

He adds: "In Jersey's experience, the trust structure is becoming increasingly accepted in new geographical markets. This is being driven less and less by tax considerations, but rather by its ability to offer asset protection and security thanks to strong, tried and tested legislation and robust regulatory frameworks."

For many high net worth families, the concerns go beyond capital security and also reach in to personal security too.

These concerns impact the way money is moving around offshore and onshore financial centres, as does the clampdown on tax loopholes globally, and the growth of information sharing between fiscal authorities.

Jay Rosenbaum, a partner with the law firm Nixon Peabody in Boston and leader of the firm's international private clients team, says it has been noticeable in his US business. He says: "On the inbound side, families or groups of wealthy individuals who might otherwise have avoided the US for tax reasons are now finding it a great destination for moving family members or capital, for security reasons. Transparency in the system, political security and access to investment vehicles in a safe regulatory environment are all factors coming into play in a way that's very interesting."

The range of people interested in cross-border wealth structures continues to grow, with many increasingly keen to diversify their assets internationally and looking for efficient structures by which to do so. Often their concerns are centred around governance and succession planning.

Farah Ballands, partner and global practice group head of fiduciary and administration services at Appleby, says: "There is no single type of individual interested in safe harbours - it largely boils down to attitude to risk. Where protecting wealth is a focus for future generations, safe harbours are a theme for wealthy families, especially where the geographic basis of the family is diverse. This is definitely high on the agenda in more conservative cultures, for example in Asia, seeking vehicles and jurisdictions that are regarded as consistently more mature, highly rated, and resilient to political and economic risk."

Tried and tested

Guernsey is a jurisdiction that has proven to be one beneficiary as the wealthy seek out markets where there is long term political and economic stability, the solid rule of law, a tried and tested legal framework and a truly independent judiciary. Dominic Wheatley, Chief Executive of Guernsey Finance, says: "Guernsey offers all of those features but is far more than just an incorporation centre. The island has the necessary infrastructure and expertise to provide a full and bespoke service, which enables long term wealth management planning."

In Bermuda, Ross Webber, CEO of the Bermuda Business Development Agency, says: "Due to its history of stability, rule of law and proven track record, Bermuda remains very popular for safeguarding the assets of high net worth individuals accumulated over many decades and, in several cases, centuries. Recently, however, Bermuda has also proven attractive to 'new money'. The growing sophistication (and wealth) of industry executives, entrepreneurs (particularly from the oil and gas and technology sectors), and speculators has produced a new market of clientele for the island."

He adds: "Bermuda has earned a reputation of being clean, transparent and renowned for its appropriately robust regulation. As the world moves further towards greater transparency and compliance, Bermuda's practical and pragmatic approach will continue to provide confidence to investors seeking to accumulate long term capital in a safe, stable and yet commercially sensible jurisdiction."

The onus is now on international financial centres (IFCs) to demonstrate that they are ahead of the curve where developments in regulation and transparency are concerned, as well as showing they can balance the drive towards transparency with the rights of individuals to expect confidentiality.

Here, tax developments are pushing the wealthy towards markets where they know they won't fall foul of the regulators. Cook in Jersey says: "A consistent concern we hear in overseas markets is in respect of tax disclosure, which is leading to investors more carefully scrutinising their offshore structuring arrangements. Certain IFCs will find it difficult to demonstrate appropriate substance - some banks in China are refusing to open accounts for structures based in certain IFCs, for instance - whereas Jersey, with its broad and deep finance industry and infrastructure, is well placed."

Highly rated jurisdictions

Rosenbaum says an overarching theme is simply a move toward diversification of exposure as a means to mitigate risk. He says: "We see families looking to invest in different places around the world, and looking to invest based on perceived stability and perceived security, whether that's in US-issued debt instruments such as corporate or treasury bonds, real estate or secure stocks."

There are other common themes around what exactly meets the criteria of a 'safe' jurisdiction.

Ballands says: "Confidentiality is a key factor for many clients, but they accept that in order to place their wealth in highly-regulated jurisdictions, there is an increasing element of transparency required. This has become very much a fact of life, and now more so with the advent of FATCA."

"Offshore Financial Centres such as the Crown Dependencies, Cayman, Bermuda and the BVI are recognised globally by international bodies such as the OECD and the Financial Action Task Force through its peer review process as having implemented the highest standards of regulation and legislation, transparency and compliance. These jurisdictions have continued to rank positively in the Global Financial Centres Index. Their position as the world's leading offshore funds, insurance and company jurisdictions respectively is testament to the security achieved for their clients."

"Cost can also be a factor, with the relative costs of investing offshore versus onshore being key for certain clients in the last few years. However, the majority of people looking to secure their wealth are prepared to pay a reasonable cost for it, if they receive an effective and efficient service."

The days when taxation was the primary concern of a cross-border family are long gone. Today, jurisdictions have more to prove, but those with history and track record look set to win out.

To read this Report in full, please click here.

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.

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