Wealthy individuals are spread around the world as never before, AND HAVE a whole host of different demands to boot – which means private client firms are having to work hard to keep up
What do Chinese property moguls, Middle Eastern families and African mining magnates have in common? Not a huge amount, you’d think. One common factor is that the Channel Islands are now doing business with high-net-worth individuals and families from across the planet. That said, they all have vastly different requirements and concerns. So if you’re trying to define the ‘average’ private client these days, you’ll have a hard time.
Go back 30 years, though, before the technological boom helped the financial world to globalise, and things looked a lot different.
Back then, most Channel Island clients were linked to the UK in some way. There was also far less regulation, affairs were simpler, and structures held fewer assets. It’d be normal to look after trusts with as little as £500,000 in investments and cash, for example. In short, everything felt a lot more… local.
Few readers will need telling that the field has opened up massively in the period since then. While the UK has continually tightened its tax legislation, making it increasingly difficult for UK residents to use offshore trusts for tax reasons, this has simply prompted service providers to cast
their client net wider.
At the same time, wealth has shifted away from the US and Europe, with areas like the Middle East, Russia, Latin America and Asia coming to the fore. China has just overtaken the US as having the most dollar billionaires in the world, while the country also boasts around two million millionaires.
“When I started out, no one was claiming Middle East or Asian expertise on their CV,” says Catherine Grum, Head of Family Office UK at KPMG, who joined the financial services industry in 2003. “The whole industry has become much more internationally focused over the past 15 years.
"And, of course, it’s become far easier to work with global clients with the advent of the internet. Back then, we were still sending letters as the main form of correspondence, even though we had email.”
Things have moved on – and not just in the demise of the Post Office. Clients’ requirements have changed massively too. “It’s the value of the assets that’s so astonishing,” says Roger Bolan, Director at Intertrust. “The wealthy are really very wealthy. London property is still the obvious asset class they invest in, but while this was predominantly residential, now it’s also hotels, offices and developments.”
With interest rates remaining low since 2008, many have added alternative assets such as art, yachts and planes, and private equity and venture capital investments to their portfolio.
This spread only makes everything even more challenging for service providers. “In the early days, smaller independent trust companies thrived,” says Paul Fauvel, Private Client Director at Zedra.
“The shift to a more global client has made it difficult for these firms – clients now expect you to be able to tap into and provide services in a number of other jurisdictions, and to be connected to all the areas that affect them.”
Succession planning
There are other factors to deal with. While the UK’s had trust structures for generations, for the majority of clients from Asia, the Middle East, Russia and Latin America, succession planning is an unfamiliar task, because their wealth is relatively new. Providers have to educate clients in how Channel Island structures work, and how the means of protecting their wealth matches their expectations.
There’s also a desire for confidentiality on the part of the client and, increasingly, a need for transparency on the part of the regulator. With the introduction of directives such as the Common Reporting Standard and anti-money laundering rules, knowing your client (KYC) has become more important than ever.
The modern client has to get used to this extra level of transparency. “When we ask for extra due diligence, they don’t take umbrage, but they do often go: ‘Oh, do I really have to produce all this?’,” says Bolan.
With all this wealth kicking about, and the Channel Islands’ oft-touted reputation in private wealth management and expertise in regulations – especially when many clients are based in less stable jurisdictions and seek a safe haven for their assets – it’s no surprise that their services should be in high demand. According to Capital Economics, Jersey now holds £400bn in trusts established by private individuals, for example.
But there’s one area of private wealth that’s slated for particularly strong growth – the family office. As their assets increase in scale and complexity and become a sprawling web, busy and wealthy families require ever more specialised professional help to co-ordinate it all, often calling on these standalone legal set-ups.
“With the proliferation of multi-millionaires and billionaires in recent years, the greater economies of scale afford their families the opportunity to have their wealth administered in one place,” says Fauvel.
“This allows them increased flexibility and the tailoring of the services – from wealth and estate planning, to trustee, legal and investment services.”
While many families will have a standalone family office, not every family will be able to afford it. “It’s common for entrepreneurs to lean on someone inside the business to help build a property portfolio, manage trust structures or help with tax,” says Grum. “But as it all gets more complex, they outgrow the embedded approach and swap for a full family office.”
Grum believes this progression will grow to be even more common in future. But, again, there’s still a huge amount of education to be done around family offices when it comes to this new private clientele.
“From a succession point of view, we’ve seen a rapid catch-up in intent in Asia, if not in execution,” says Iain Johns, Head of Private Client Services at JTC Group. Last year, JTC partnered China’s Noah Holdings when it established a trust company in Jersey, a watershed moment for the Channel Islands as regards mainland Chinese business.
“We’ve seen more sophistication and a flight to quality in the services clients demand,” says Johns. “But it’s not about them being ready to set up a family office now. It’s: ‘Tell us why we need one’.”
Compliance issues
Yet there are other hurdles to overcome. The ever-increasing cost of compliance is likely to mean the smaller structures that dominated the early years of the Channel Islands private wealth market will die out, leaving fewer, larger family office-type structures thriving.
These providers can expect to encounter a younger generation of wealthy people who, thanks to the internet, may be more informed than their forebears – for good and for ill.
“The next generation will Google their queries first, so advisers will have a very different kind of interaction with them,” says Grum. “More and more, clients will come with a basic level of knowledge, but that can do more harm than good, as complex situations can become massively oversimplified.”
Perhaps the biggest shift, however, is that clients increasingly demand constant instant access to their affairs as they move freely around the world. With providers used to showing the highest standard of administration and being adept at regulation, client servicing and relationships, that’s no longer good enough. You have to move with the times.
“We need to show a commitment to technology,” says Johns. “Clients want to be able to look at their tablet and see how much they’re worth, their KYC, their succession handling, their will and their insurance policies – all in one place.
“Yes, they need providers to be nimble and flexible, and fully compliant and transparent, but that’s just the baseline now. Competing these days is about being alive to the technology.”
There’s an old adage around wealth, that one generation creates it and the next enjoys it, but by the time it gets to the third generation it’s all gone. Yet there’s no logical reason that has to be the case. While the ‘average’ private client may be rather elusive these days, their ultimate goal couldn’t be more clear.