Financial planners and wealth managers often find themselves working with clients from complex family structures and there are some challenges that can arise from this
by Ritchie Bann
Global blended families – couples with their own children and children from previous relationships, spread across the globe – add a layer of complexity for financial planners and wealth managers. This brings plenty of interesting challenges, some of which we’ll discuss in this article, while also looking at the role that CFPTM professionals, certified to a global standard of excellence in financial planning, can play in helping these families achieve their goals.
“Blended families can take on many structures,” says Farida Hassanali CFP™ APP Chartered FCSI, a financial planner at Paradigm Norton. “We find that drawing a family tree can help capture the nuances of each relationship.”
Questions to consider when advising such families may include: Should the education of and provision for the newest children take priority, or can there also be assistance for the older offspring, not least in terms of college fees and house purchases? How can the different jurisdictional issues be navigated? What are the implications for inheritance?
“We always encourage clients to be open and honest with new and previous partners and their children, especially if they are old enough to understand,” says Farida. “Blended families can create a lot of emotions around how best to manage finances. Our role should be to help clients be practical where possible.”
Globalisation the driverGlobal families are a by-product of globalisation, with workers heading to far-flung lands in search of opportunity. According to data from the World Bank, world trade as a percentage of global output increased from 27.32% in 1970 to 59.36% in 2018. But the movement of people to live and work outside their home countries is at least equally noteworthy. The EU’s statistics branch, Eurostat, reports that, in 2018, 3.9% of EU citizens of working age were living outside their country of citizenship.
"It’s always best to ensure clients receive the appropriate advice from an expert in the relevant territory"
Worldwide, according to a July 2018 report by market research, consulting and publishing company Finaccord, the total number of expatriates amounted to about 66.2 million in 2017, a figure that has grown at a compound annual rate of 5.8% since 2013, when expatriate numbers were estimated to be 52.8 million. Finaccord predicts that by 2021, the number will reach around 87.5 million, although it remains to be seen what effects the ongoing Covid-19 crisis will have on this forecast.
Compliance across multiple marketsNicholas Khan-Roper, Chartered FCSI, chief investment officer for a family office in Dubai, says: “In tackling the key challenges that global blended families pose for wealth managers and financial planners, liquidity is of critical importance. The answer is to always keep substantial cash balances.”
In parallel with this increase in the number of blended households across the developed world is the practice of high-net-worth families – defined in Capgemini’s World wealth report 2019 as “those having investable assets of US$1m or more, excluding primary residence, collectibles, consumables and consumer durables” – to base themselves in one location, but with their investment arms set up in financial centres such as Zurich, Tokyo, London, Sydney or New York.
Steve Sokić, who leads IQ-EQ’s private wealth segment worldwide, says that “as soon as family members and assets cross borders, a family’s wealth becomes exposed to different regimes – be it local regulation, residency rules, creditor exposure, property and succession law, marital regimes or tax systems – all of which need to be considered.”
He continues: “And no two markets are ever the same. This can, and most often does, have a knock-on effect in terms of asset preservation, protection and succession. Where wealthy families are spread across multiple countries and their wealth is also invested in multiple places, more complexity is added – and this, in turn, increases their risk exposure. While there is no ‘one size fits all’ in regard to mitigation, at a very high level, one common and prudent approach for these families is to adopt more of a governance focus and to centralise and structure their wealth in a reputable tax-neutral jurisdiction with a proper regulator, financial and legal infrastructure, and support. With such a global holding platform established, attention can turn to ensuring compliance and mitigating any risks associated with the legal and regulatory nuances of each country in which family members and/or assets are located.”
"By partnering with other CFP professionals, the client can get a more joined-up outcome"
Certain countries, too, can prove more problematic than others for wealth managers and financial advisers. The US, for one, is renowned for its tax complications and difficulties. Within its Internal Revenue Service (IRS) is a Taxpayer Advocate Service, which, as the name suggests, stands up for the recipients of the IRS’s demands. In July 2019, the body released a ‘Taxpayer Roadmap’, like that of an underground or railway system, which highlights the “complexity of tax administration [in the US], with its connections and overlaps and repetitions between stages”.
“Different countries can have vastly different requirements,” Farida Hassanali says. “It’s always best to ensure clients receive the appropriate advice from an expert in the relevant territory.”
Reciprocal arrangements with firms on the ground in other countries can sometimes offer a convenient way for clients to access location-specific advice through a single channel. “Broadly speaking, it’s tax and legal advice that’s the important thing to undertake locally,” says Nick Reeves CFP™ Chartered MCSI, head of UK wealth planning at Deutsche Bank. “We can usually help the client to coordinate the wealth management relationship centrally from London.”
Phil Billingham CFP™ Chartered MCSI, director at Perceptive Planning, agrees that reciprocal arrangements can benefit clients, highlighting the global value of the CFP certification: “By definition, these clients need expertise in more than one environment or jurisdiction. We have found that by partnering with other CFP professionals in Australia or South Africa, for example, the client can get a much more joined-up outcome, which is more robust as a result.”
Financial planners should never go above and beyond their own expertise and what their private indemnity insurance covers. Otherwise they risk falling foul of regulatory requirements in other countries.
Keeping inheritance within bloodlinesTrusts, both offshore and onshore, are mechanisms that are typically used for holding wealth for these blended families. Other vehicles, such as family investment companies and open-ended investment companies, as well as private foundations and private funds within families, can also be appropriate, depending on the circumstances.
UK accountancy firm Saffery Champness has published a tax factsheet regarding family investment companies, and an article published in The Review in January 2019 also takes an in-depth look at such vehicles. “Really, the aim is to separate control of the assets from the beneficial owner,” Nick Reeves explains. “The head of the family typically wants to move assets on through the generations without relinquishing control. Traditionally, trusts have fulfilled this purpose. However, as taxes on trusts have become more punitive in recent years, we are seeing an increase in the use of corporate vehicles to achieve the same ends.”
Life interest trusts can also be used to keep wealth within bloodlines, especially when there’s been a divorce. “A mother or father may have a new partner for whom they may want to provide an income, but a life interest trust stops any new partner inheriting the family’s money outright,” Nick says. “Ultimately, on the death of both, the assets will revert to the children. It’s an old-fashioned way of doing things in many ways, but it’s still effective.”
In thinking about the interests of children from previous relationships, divorced parents need to consider whether prenuptial agreements with their new partners are the right mechanism to use, especially if significant assets are at stake. As Steve Sokić says, “you have to be sensitive to, and understand, family dynamics at all times.”
"Plan for life events, not money events"
Tensions, and worse, can emerge over inheritance issues, and there are sometimes cultural and religious differences to be navigated, along with variations in law. In England and Wales, for example, people are free to leave their assets to whomever they like, while in France, by contrast, the law is very specific as to which family members get what percentage of the estate. Islamic law contains aspects of both approaches, in which someone has discretion to make personal bequests but a set proportion must go to family members such as spouses and children – they cannot be cut out of the will.
The great wealth transferThe biggest wealth transfer in history is currently under way. Insurer Sanlam estimates in its 2018 report The generation game that £1.2tn will be inherited by millennials over the next three decades – this predicted cascade of assets down the generations is also highlighted in the Q1 2019 edition of The Review.
This handing on of assets to millennials is also a factor in the rise of philanthropy and of environmental, social and governance investing. It’s beginning to shake up wealth management as we know it. Reasonable returns are still sought, but younger investors now want to know what impact their investments are having.
A survey conducted in August 2019 by asset manager American Century Investments reveals that the appeal of impact investing increased to 56% in 2019 in the US across all age categories, compared with 49% in 2018 and 32% in 2016. However, interest in impact investing is particularly high among millennials: it appeals to some 72% of millennials in the US, while in the UK this figure stands at 65% for millennials, compared with an all category average of 59%.
Nicholas Khan-Roper says: “Most people look for low- or medium-risk investments, but they need to remember that, rather like a pension fund, they need to be able to meet their liabilities in terms of being able to fund their lifestyles.”
Any advice should be supportive, relevant and appropriate. Phil Billingham says that Perceptive Planning employs two key strategies to cater to global blended families: simplification and flexibility. “The challenge is that, while regulators, tax authorities and often advisers see their situation as unusual, or even exotic, for the families themselves their situation is normal. It’s what they are living with. For us, the seemingly normal ‘offshore’ or ‘expat’ approach of using complex solutions is counterintuitive. These people have enough complexity in their lives, so we seek to simplify wherever we can.”
Phil’s clients are ‘world citizens’ (see cisi.org/worldcitizens), and the mantra when advising them is, he says, to ‘expect the unexpected’. This is where flexibility comes to the fore. “They may well move jurisdiction again – there are all sorts of reasons why where they happen to live today may not be where they live tomorrow. So we employ flexibility and simplicity as far as we can. Always set up any arrangement with more than an eye on how you may change or exit from it – so no exit penalties or charges, be careful about allowing ‘pregnant gains’, watch your currency exposure, especially where you have assets and liabilities in separate countries from each other. In short, plan for life events, not money events.”
Whether you are dealing with a traditional nuclear family or one with burgeoning numbers that’s spreading to the four corners of the world, advice over wealth shouldn’t really differ. “Ultimately, it will always come back to what they are looking to achieve and how best to achieve that,” Steve says. “It’s the first question we ask all our clients. It’s just with globally minded and blended families the answers are a little bit more three-dimensional.”
Before the current pandemic, the pace of globalisation showed little sign of easing. The coming years will reveal the full effects of the virus on the globalisation trend, but it appears likely that this new world of cross-border wealth and asset structuring is here to stay in the long term.
This article was originally published in the June 2020 flipbook edition of The Review.
The full flipbook edition is now available online.
All CISI members, excluding student members, are eligible to receive a hard copy of the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting 'Yes'.
Once you have read the flipbook edition, keep coming back to the digital edition of The Review, which is updated regularly with news, features and comment about the Institute and the financial services sector.