There"s no escaping the fact that the global economic landscape is far from stable - add international politics into the mix and the picture for wealth management becomes even more unpredictable
These are truly turbulent times. From the rise of Isis in Syria and Iraq, diplomatic tensions between Saudi Arabia and Iran, the impact of the refugee crisis on Europe, Russia"s faltering economy and China"s ongoing spat with Japan, it"s difficult to recall a period when the world"s political future looked so uniformly uncertain.
It"s as if everyone got together and decided that climate change, peak oil and a population explosion just didn"t provide enough of an existential question mark on their own.
But the picture is arguably even more complex for anyone involved in financial services - some of the world"s most unstable regions are also among its richest. Any football fan will be able to give you chapter and verse on the spending power of Russian oligarchs, while the Africa Wealth Report has revealed that Africa has 165,000 dollar millionaires, with combined holdings of $860bn.
And for a snapshot of the vast wealth in the Middle East, just look at the prizes being bought by its most wealthy residents - Middle Eastern investors bought at least £5.9bn of UK property in the first 11 months of 2015, according to Real Capital Analytics. And Qatar"s sovereign wealth fund alone went and snapped up the Berkeley and Claridge"s hotels for more than £600 million each.
These splurges highlight an important lesson - all that wealth doesn"t magic the instability away. Many in the Middle East remember how quickly Kuwaiti bank accounts were frozen during the Iraqi invasion, while those in oil-producing nations are now fretting over the potential impact of tumbling oil prices. At the same time, many Russians are wondering what will happen to its shrinking economy under the continued cloud of sanctions, as President Putin"s promise to deliver ever-increasing living standards continues to falter.
In the face of such uncertainty, wealthy people in these regions often look to stable overseas investments - and increasingly to trusts and private wealth vehicles - to protect their assets."Middle Eastern investors" interest in Europe is more about keeping assets safe these days, rather than market opportunities," says Geoff Cook, CEO of Jersey Finance. "You have this period of political instability with Syria, Isis, migrant flows, Saudi issues and Iran - the whole situation has caused concerns. And so we see spikes in interest in having assets in safe places like Jersey, with the end destination the UK or a safe European state."
Seeking shelter
As Cook suggests, political instability in those countries can produce huge opportunity for jurisdictions like the Channel Islands. The traditionally cautious families of the Middle East, for example, are now behaving markedly differently in their dealings with the islands" financial services companies.
According to one Channel Islands-based wealth management provider, wealthy families in Saudi Arabia are now willing to organise trust structures in half the time it used to take. Instead of getting all their assets into a holding company structure before putting a trust over the top, they"ll now set up the trust structure first and get half the assets in straight away, in case any instability does develop.
Yet such turmoil also creates obvious downsides to conducting business, and not just in the Middle East. If a region such as Africa, also rife with political conflict, suffers a political crisis - a coup, perhaps, or a fight with another superpower - it can have a massive impact on both inward and outward investment.
"You can more or less plot the success of an investment destination along lines of political stability, rule of law and contract certainty," says Cook. "At the extreme end, in places like Eritrea, you get no international interest: it"s unstable, there"s war and there"s terror. The most stable are South Africa, Nigeria or the East African trio of Uganda, Kenya and Tanzania, and most international investment is focused on these countries. If you"re investing somewhere, you want to be sure you"ll get your money out, and that no one will appropriate your assets or rely on you to be throwing bribes at the government there."
Indeed, one of reasons why Africa isn"t getting the investment it warrants is that investors feel the risk there is too high. Amid all the instability, there"s always the extra question of why the assets are being moved out.
"As a law firm your money isn"t at risk, but your reputation is," says Nicholas Davies, Partner at Collas Crill. "We have to abide by a code of practice and show that we understand the sources of wealth in a given transaction, and conduct heightened due diligence for these countries. It"s not just a case of checking passports and bank statements - dealing with Russia, the Middle East or African countries requires full due diligence. And if they"re not prepared for this, it"s an obvious red flag and rather suggests it"s not the type of business we want."
Knowing your client can be particularly challenging in periods of instability, as someone who"s deemed acceptable under one regime can suddenly be blacklisted by its replacement. When it comes to Russia, you don"t even need a change in regime for the sands to shift. Your client could be a friend of Putin one week and not the next, so you may find yourself holding assets for people on which Russia now has freezing orders. Channel Islands trust companies have apparently been known to set up structures for Russian clients, only for Russia to say that those people are being investigated and find themselves frozen too.
Closer to home
Yet Russia"s instability is again driving other business in terms of structuring. One Channel Islands wealth management provider reiterates the point that while 50 per cent of its new business with Russians used to be driven by tax considerations, that"s now down to only 25 per cent, as people seek a stable jurisdiction to keep their wealth safe for future generations.
While it may be natural to look to the horizon when discussing such instability, these issues aren"t always so far from home. Take the political wrangling over the EU and Brexit, which has bred an uncertainty that"s perhaps worse than dealing with instability. Brexit brings many questions - not only whether the UK will leave Europe, but what will happen to the area"s economy, and to the passporting potential of Channel Islands funds, for example, if it does.
"Uncertainty is almost the worst thing," says Cook. "In a bad situation you can always take steps to mitigate the risk and structure your investments. Many investors and private equity houses will work in high-risk areas like Russia as long as they can conduct a risk management assessment. But if dealing with an unknown, they won"t make commitments.
"Brexit is a complete unknown - no one"s ever come out of a big bloc like that - and if you"re about to buy some prime commercial real estate or infrastructure, you don"t want the immediate possibility of a 30 per cent collapse in value. So people are stopping and piling up their cash until the referendum"s out of the way. Uncertainty is the worst thing in investment terms. People just don"t know, so they don"t act."
One of today"s biggest question marks hangs over something far less dramatic than Middle Eastern terror or an African coup, but potentially just as destructive - what if Donald Trump became US President? Could his divisive rhetoric really damage the global economy?
We have it on good authority that Trump sends his Middle Eastern contacts Happy New Year texts, so perhaps his chest-thumping is just a ploy to get into the White House, rather than a policy he"d actually pursue in reality. Which would mean we could strike one item from the long list of threats, at least.