Wealth management in Switzerland is evolving with investment fund solutions for private clients. Matthew Feargrieve and Jonathan Vanderkar, Partners in Appleby's Zurich office, explain why.
In addition to its primary characteristic as the jurisdiction of choice for private banking, Switzerland is growing in significance as a centre of fund management. The country boasts around 15% of global assets under management, making it the third largest global centre of asset management after North America and the United Kingdom. In this light it is perhaps not surprising that there is a growing fusion between the traditionally separate spheres of bank-led wealth management and professional fund management. The growing development of private investment funds (aka 'private label funds') by banks and family offices in Switzerland as alternative tools of wealth management are increasingly complementary to the more conventional techniques of wealth management which revolve around trust structures.
Trusts and their manifold structural variations are the established tools of wealth planning, preservation and consolidation. The trust provides the means of retaining control over asset management, ensures confidentiality of ownership, permits family advisers a degree of oversight and management of the assets, ring-fences assets from other asset classes and - perhaps most importantly - enables a bespoke, self-managed investment product delivering better value than arm's-length products offered by professional managers.
There is a downside, however. The trust is effectively an Anglo-Saxon product, not widely or truly understood in non-English speaking, civil law jurisdictions. A trust can be a highly complex creature that is not widely intelligible to clients or their professional advisers. The notion of surrendering control of assets to a third party is anathema to some clients. A trust entails the maintenance of salaried trustees, many of whom lack the legal and professional ability to carry out or oversee active management (as distinct from passive holding) of assets. And a trust is quintessentially a very private creature, not capable of wider funding or investment.
Enter the private investment fund. The realisation has dawned on banks, family offices and professional managers in Switzerland that the primary benefits conferred by the trust can be replicated, often at a lower cost and without compromising autonomy, confidentiality or tax integrity, by using a vanilla investment fund.
The fund will be structured as a private company limited by redeemable, participating shares that will be held by the client or nominated family members. A special purpose management company, owned by the family office and staffed with trusted advisers, will frequently retain corporate control of the fund through a holding of voting, non-participating shares. Assets are monetised or otherwise housed in the fund, thereby becoming 'portfolio assets' which are then actively managed. As the value of the portfolio assets fluctuates, so does the value of the participating shares, which will have a net asset value (assuming the portfolio assets are capable of a market-to-market valuation) or other book value. The management company, whether run by the family's advisers or independent managers, may be paid a fee based on asset values and/or increments thereof. The product is typically indistinguishable, to the outside eye, from a professionally managed investment fund.
The use by private clients of a private investment fund solution is influenced by the following additional drivers:
- Facilitates the client's overall control of investment strategy
- Reserves to client the power to remove and replace non-performing investment managers and control their fees
- Avoids liquidity management and insolvency risks associated with arm's-length investment products
- Enables pooling of discrete classes of family assets, and their division amongst family members
- Provides the means of opening the fund to outside investment, in order to grow assets and charge third-party investors commercial fees.
Banks and professional managers in Switzerland are increasingly being asked to implement this type of product for private clients, either in addition or as an alternative to the conventional suite of trust solutions. From the bank's perspective, the structure is effectively a white-labelled product, being effectively owned and controlled by the family investors, bearing a name of their choice and serviced on an arm's-length basis by the bank custody and administration units. The 'private label fund' thereby opens up for banks revenue streams not typically available to them under traditional trust structures.
Investment funds of this type are established predominantly in the Cayman Islands, as well as the British Virgin Islands and Bermuda, thanks largely to the tax neutrality and the breadth of seasoned professionals afforded by those jurisdictions. EU domiciles such as Luxembourg are increasing in popularity with European clients, but are generally less flexible and more costly than the traditional 'offshore' jurisdictions.
Financial and legal professional advisers in Switzerland, including Appleby as the leading provider of offshore legal, fiduciary and administrative services to private clients, anticipate that the use of the private investment fund as a central tool of wealth management will continue to grow in popularity.
Originally published in Blue Skies Business
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