Over recent years, IFAs have begun to successfully challenge the stranglehold that private banks have held in the high-net-worth client market.
These clients were traditionally offered a bespoke banking and asset management service but as demand for wider product selection and specialist financial planning increased, they turned more towards IFAs for advice. This trend into higher-level investment clients could be set to extend further into the area of family offices.
Family offices were first established over 100 years ago as perhaps the ultimate in bespoke wealth management. Where the collective members of very wealthy families held assets of over, for example, £500m, it became more cost-effective for them to manage their assets by employing their own fund managers, tax advisers, legal advisers and accountants. Effectively, the management of their wealth became a business in itself.
The range of assets in which they invest is typically much wider than that available to other investors and includes not only equities, fixed interest and property but also development land, forestry and commodities held directly rather than through collective schemes. Non-correlation extends not only to asset classes but also to geography with land and property investments held across a range of countries. The family investment horizon is invariably 20 or 30 years because the concerns are always about preserving the wealth for future generations.
Family offices have developed significantly over the last few decades. Historically, they were single-family offices dealing with only one family’s assets.
More recently, the concept of multiple family offices has come to the fore. This is where a group of families come together to set up a mutual family office. MFOs have allowed families with assets of less than £500m to achieve similar savings and personalisation of their asset management as SFOs.
Another development has been the emergence of commercial multiple family offices where an advisory firm provides a range of services to a number of families of significant wealth.
It is easy to assume that such wealthy clients are looking for the latest and best in asset management and the greatest tax efficiency at the keenest price. In fact, these are issues which, though important, are a long way down the list of concerns.
The foremost concern is about the security of the asset so the balance sheets and credit ratings of the investment house or deposit-taker are vital. After this, one of the most dominant thoughts in family offices is the need to preserve the wealth for future generations.
There is a saying in the States: “Shirt sleeves to shirt sleeves in three generations.” This refers to the situation where the first generation works hard and accumulates significant wealth. In turn, this is squandered by the following generation, leaving the third generation to roll up their shirt sleeves to rebuild the family wealth.
Other issues such as tax are also a concern but, with very lengthy investment horizons, the needs of the families are not the same as most clients.
Typically, a private bank customer is concerned about the efficiency of their tax situation, looking to make the most of allowances, reliefs and so on. They will have an eye on whether capital gains tax or income tax vehicles are preferred as well as the inheritance tax consequences on death or gifting.
Family offices are more concerned about having non-correlated assets from a tax point of view.
This is a growing concern in the current climate of fiscal tightening where governments round the world are looking at targeting the very wealthy. With many families having used trusts extensively in the past to protect assets for future generations, there are risks that these trusts will be targeted in future for higher tax treatment simply because they are seen as elitist. France recently announced a new move to tax trusts more aggressively.
Over the last few years, there has been greater interest shown in achieving non-correlated tax treatment of assets. Perhaps surprisingly this has involved life assurance investments.
The much maligned insurance bond provides a home for investments which may be taxed above or below the rates charged on assets taxed to capital gains tax.
From a family office perspective, the fact that it is taxed differently is the key. To have some assets taxed to income tax, as well as some taxed to CGT, is attractive, especially when conjecturing what the fiscal regime will be in 20 or 30 years.
Family offices are invariably spread, or will be spread in the future, over a number of different jurisdictions. The portability of investment vehicles becomes a major concern in this regard, with questions being asked about the tax treatment not only in the home country but also in the destination country.
Offshore insurance bonds are being looked to, especially as providers increasingly supply tax updates on the treatment of these products in different countries.
Not every adviser is going to be leaping into the family office market but, with the retail distribution review, it is inevitable that investment vehicles will stay in place longer with greater persistency. Advisers will want to start thinking about how this affects their clients and there will be lessons to be learned from how family offices approach their wealth.