The idea of red tape actually simplifying the task of wealth management is given short shrift by the firm, while it reflects on how cross-border and inter-generational wealth transfer issues help to drive its business.

Rising levels of red tape in financial services and cross-border affairs of wealthy individuals put a premium on advisors able to come up with smart solutions.

And a player arguing that it is able to handle the job is US/Luxembourg-headquartered Lombard International Assurance. Although some might argue regulations have chopped out some products and services and created a simpler industry, Jurgen Vanhoenacker argued recently that new rules such as MiFID II and the European Union’s data protection rules add to complexity.

“I haven’t seen any regulation at my time at Lombard International that has simplified work,” Vanhoenacker told this publication in a recent interview. 

“In our industry, we have a number of smaller or mid-sized players who I think will really struggle with this increased cost of regulation. Operational costs are being pushed up. The pressure on the margin in the business is only getting bigger. At Lombard, we need to constantly have people and systems internally and externally keeping an eye on what is happening in the background on a regulatory perspective, and also integrate it as well with all the operational processes (e.g. admin and reporting),” he continued.

Regulatory changes have increased financial institutions’ costs, not made them more efficient, so data suggests. According to a 2017 Duff & Phelps report, regulatory costs could more than double over the next five years. The report found firms typically spend four per cent of their total revenue on compliance, but that could rise to 10 per cent by 2022. In 2017, Boston Consulting Group said that pre-tax margins at global wealth managers had fallen from 33 basis points in 2007 to 22.4bp in 2016, which is due to compliance costs.

“Being a sales director and head of wealth structuring, I above all need to make sure I can integrating these new regulations into the business development and sales process. Concrete impact is very often the increased number of documents to explain and sign, additional verifications to make, and controls on our partners and clients,” Vanhoenacker said. “At the same time, we like to maintain an excellent customer experience. This is sometimes proving difficult with the new regulations coming in, but there are ways to do that and digitalisation is a great opportunity here,” he said.

The list of rules on Lombard’s table is long this year. Vanhoenacker said its regulatory chores include Packaged Retail and Insurance-based Investment Products (PRIIPs), which are designed to make investment products easy to compare and more transparent via the issue of a standardised short form disclosure document. The Insurance Distribution Directive (IDD), in another case, aims to ensure consistent prudential standards for intermediaries as well as raise conduct standards, improve consumer protection and effective competition. General Data Protection Regulation (GDPR), effective from 25 May, is supposed to put citizens back in charge of their personal data and to unify data regulation within the European Union. 

Cross-border banking
As the world continues to become globalised, the standard high net worth and ultra-high net worth client starts to become a complicated international wealth holders.

According to Scorpio Partnership, the consultancy, 41 per cent of high net worth clients have children, who relocated to study, work or live, and 23 per cent of HNW clients have relocated in the past 15 years to live or work.

Whether it is relatives such as children based thousands of miles away, or having property in different locations around the world, international affairs can create wrinkles that need ironing out for HNW and UHNW individuals. Vanhoenacker discussed the issues surrounding international clients.

“Many of our HNW clients by the nature have a cross-border reality whether this is from a family, business or wealth perspective,” said Vanhoenacker. “And some of them are not conscious as to the issues of having wealth and assets covering multiple jurisdictions,” he said.

“At the same time, there is still a certain degree of unawareness to the events when the principal client may no longer be around, and what will happen with these assets in terms of protection and transfer to the next generation. There is still a fair bit of education that needs to be done in the advisory community with these people. I don’t think many of these people have realised yet the full ramifications of globalised wealth, and there is still a huge amount of opportunity for advisory firms to help these clients on the learning curve on what they need or can to do,” he said.  

“Most advisors are still very focused on one particular jurisdiction, and not many see the issues of cross-border. This creates an opportunity for a firm like Lombard International. It is challenging for a high net worth person holding wealth in multiple jurisdictions, and it ultimately means that these assets need to be subject to different pieces of legislation, whether it’s reporting, tax or inheritance provisions,” Vanhoenacker said.

“These make it quite complicated. We do have clients who try and consolidate their assets across multiple jurisdictions, we have clients who want to preserve the geographical diversification but want a more effective planning. It also depends on the type of assets (e.g. bank accounts or equities), banking may be a little easier than real estate across three or four different countries,” he said. 

Lombard International Assurance is one of a handful of firms that use insurance-based wealth structuring products to protect assets, sometimes in a way that is effective across borders, with examples such as private placement life insurance. This publication has in recent years spoken to this firm, along with the likes of Vie and Swiss Life, about the role insurance should play in the wealth managers’ toolbox. PPLI has been defined as products blending a life insurance policy with a separately managed investment portfolio. As such, they can be useful to high net worth individuals who want more sophisticated structures; the insurance structure comes with various tax advantages (these vary depending on jurisdictions); income and capital gains will accrue free from tax and the death benefit is not subject to inheritance or estate tax. PPLI policies may in certain circumstances allow policyholders some access to their capital within the fund while they are alive.

Wealth transfer
The wealth transfer is repeatedly a topic of conversation within the sector, as a reported $30 trillion is set to move from the older generations to the younger generations. 

This means families and clients will have to plan for the generational shift. However, during its Wealth Transfer Report 2017, RBC Wealth Management  found only 54 per cent of clients have a will, 32 per cent have done nothing so far, and 26 per cent have a full plan in place. 

It pays to act early on wealth planning, Vanhoenacker said.

“I would say one golden rule on planning for wealth transfer, from my experience, is to start as early as possible,” said Vanhoenacker. “We still do come across a number of cases each year where the patriarchy starts way too late with the succession planning. And they end up chasing the impossible. The sooner they start planning for it and reflecting on the wealth structure, and in the event they won’t be there, the sooner we can assess whether we can provide a solution or not for these people,” he continued.

“But overall too many start too late i.e. they only start that thinking in their sixties or even seventies. If you are a successful business person, and for instance you have children abroad or you invest in a real estate project in another place, as of that moment you should trigger a thinking process of what should happen in the event that you are no longer there. Sometimes there is a bit of culture issue as well.

Saying to a wealthy 70 year-old entrepreneur in one country that they may die is sometimes a bit more challenging than to go to a young entrepreneur in another country where culturally this topic is much more open for that type of discussion.”

Ready to inherit
There has been discussion on whether the next generation are ready to inherit such large quantities of wealth.

In RBC WM’s 2017 report, it found that 27 per cent of respondents did not think inheritors were ready for the money. This was a recurring theme during a UBS report in February 2018, which found 21 per cent of business owners thought their family members were not qualified to take over the business. And in 2012, a study by the National Endowment for Financial Education in the US said only eight per cent of Millennials had extensive financial knowledge.

The head of wealth structuring discussed how mature one should be when inheriting a large amount of money.

“There’s obviously an element of how mature you are as a person to receive significant wealth as part of an inheritance,” Vanhoenacker said. “And again what is significant for one may not be the same for the other. It depends on age, background, education and family values. That’s the most important issue. You have these classic stories of people having inherited a lot of money, who don’t stay with us and we hear five years later that the money is gone. This again is a key concern of some of our clients, how they can protect their wealth for future generations. There may be options that allow the money to be transferred depending on a number of criteria, and even sometimes we have seen the patriarch skip a generation because their children have already been taken care of, and the client wants the grandchildren to have the wealth,” he said.

Tax crackdown
So-called tax havens have been under pressure, with the Panama Papers and Paradise Papers leaks keeping certain jurisdictions in the public eye – to the dismay of some practitioners worried about protections of legitimate privacy. 

As an example of the pressure, in July 2017, HMRC, the UK tax authority, said it had collected a record £29 billion from its crackdown on tax evasion and avoidance and organised crime. And in October, HMRC said it defeated a tax avoidance scheme used by wealthy individuals to reduce their tax bills, which the department expects to protect £325 million ($456 million) in unpaid tax.

With this crackdown continuing, Vanhoenacker discussed whether the authorities’ net closing on tax havens and loopholes will seize to exist in the future.

“I think the trend will only continue,” said Vanhoenacker. “Some may believe that at one stage governments or tax authorities will calm down and be flexible, but I don’t think this will never happen again. We all know the big demographic challenges in terms of pensions and fair taxes. Also, the public opinion, and for the right reasons, keep the pressure on the governments to continue with that process,” he said.

“This is in essence a positive element. In a transparent world, you really need to bring the expertise to the table to really work on a fully compliant plan for some of these high net worth individuals so they can do the right thing for the right reasons. Many people have regularised their financial affairs because they realised the world has changed and now are reaching out to Lombard International for proper and legitimate wealth planning solutions,” he added.