In an interview with the Institute of Chartered Accountants of Scotland, Richard Joynt, Executive Director - Private Client and qualified chartered accountant (CA) sheds light on some of the evolving trends dictating the direction of the family wealth industry.
For the first time in seven years, the global high-net-worth-individuals (HNWI) population and wealth declined. At 0.3% and 3% respectively, the decline can be attributed to both slowing equity markets and a slowing global economy, fuelled in part by geopolitical and trade concerns.
Critical in supporting and advising high-net-worth (HNW) and ultra-high-net-worth (UHNW) families, chartered accountants are facing new, disruptive challenges across the wealth management sector...
What do chartered accountants need to know when advising on family issues such as inheritance and investing the family's capital?
This is a really broad issue. Although at first it might seem like a perfect hunting ground for technical legal, tax and regulatory issues, the starting point should almost always be "what is the family's mission and what do the family want to achieve, in this generation and beyond?". This is one of the ways that family offices can help in intergenerational wealth planning. Succession planning is a sensitive issue, having a family office can professionalise the way that communications are handled between family members and provides a "safe place" for family members to ask questions regarding their likely inheritance position.
After many years of assisting HNW families, I would say that one issue above all remains key in preserving the family's wealth and investing it for the long term for further appreciation. This is avoiding conflict - there is nothing as destructive to family wealth as a long, drawn-out financial dispute. This is far more damaging than mediocre performance of one's discretionary investment portfolio, or paying/avoiding taxes on gains.
What is new in tax, the law and best practice, from pensions freedoms through to the rise of the family office?
Tax, legal and regulatory frameworks are constantly evolving, and CAs who are advising clients clearly need to be aware of the current landscape. However, we cannot all be subject matter specialists and so it is crucial to understand where generalist advice is suitable and where a technical viewpoint must be sought. For instance, in the current landscape "substance" is a hot topic - international finance centres such as Jersey are being asked to evidence how their client who operate certain types of businesses can show they have sufficient substance in that country. Where the situation is clear cut (i.e. it is obvious that a certain type of client company does not meet the criteria) then we might easily advise our clients on this. However, where it is subject to interpretation specialist advice must be sought. This theme is a general one across all new laws and regulations - the world is becoming more complex all the time and any significant activity (such as the establishment of a family office, a big growth area) must be properly advised.
What do CAs need to be aware of in this context, when advising people with sophisticated financial arrangements, e.g. overlaps between business and personal assets, what can their clients do when seeking to pass assets of the business on to clients?
Good business practice in any jurisdiction or family is to have full separation of family and business assets. A family member taking informal loans from the family business for personal expenditure usually (in my experience) leads to problems. This can give rise to tax issues or even more soft issues (employees of the business feeling resentful that the corporate is being taken advantage of, like a family 'piggy bank'). If the business then has liquidity issues, how is it to recover the monies previously loaned to family members? Have the Board acted appropriately in allowing such a situation to develop? A full separation will also allow a private business to be acquired by an external buyer one day - very few external buyers want to acquire a business which overlaps with the family finances.
Is there any new regulation that CAs might need to be aware of re-advising families (especially HNW), for example around inheritance, saving for children, pensions flexibility, divorce and matrimonial change?
Plenty! There are changes in all these areas, in every jurisdiction, and more change is bound to come. The divorce courts are setting new precedents very regularly - only a few years ago pre-nuptial arrangements were considered to be largely irrelevant in the UK, whereas now they can be upheld by the courts if done in a thoughtful and fair manner. Any new CA will feel armed with all the knowledge they have gained recently through their qualification - but that is only the beginning. The CPD requirement that the Institute has is not just there as a compliance measure - to be a good business adviser CAs need to be educated on a wide variety of business issues, issues which are regularly changing.
What are the latest trends in the family office and wealthy family space? Is there any disruption to the way things have been done because of intergenerational differences, for example the millennial generation?
The next generation definitely want to see their wealth information all consolidated in one place, on their devices (iPhones/iPads etc.). They find the current way of reporting (account by account, country by country) to be defunct. This brings security risk - having all that information in one place, if compromised, gives those who would misuse such data a golden opportunity - but it also brings great business opportunity. Generally, traditional banks and investment houses have systems which were not designed for such holistic reporting - therefore those that are able to do it in the future must have a distinct competitive advantage.
Are people wary of the more 'exotic' schemes and what are they looking for nowadays?
Yes. Exotic schemes are largely dead - and with good reason. Anything that is designed to apply, not to a specific family set of circumstances, but to help a sizeable group of individuals 'get around' laws or regulations is against the modern themes of transparency and compliance. Any such 'scheme' will normally fall foul of the UK General Anti-Avoidance Rule ('GAAR') and there are similar laws in other territories to prevent such usage.
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