Gone are the ‘old days’ of Asia, was the prevailing view of the experts assembled at the Hubbis ‘Structures’ round table in December. The ‘old’ days in Asia saw structures such as BVIs and other largely offshore vehicles created predominantly to cloak wealth, but those days are gone. Europe and the US are pushing out their compliance requirements worldwide, urging governments in Asia to raise their game to ‘first world’ standards. Accordingly, wealth managers in Asia need to persuade their clients that they require proper, professional advice for tax mitigation, privacy and wealth transition.
CRS and tech as game changers
“The Common Reporting Standard and technology innovation are both great game changers,” explained one expert at the panel discussion. “And we believe they both provide terrific opportunity. Why? Because it has historically been tough to convince clients to pay up for advisory fees. But both CRS and technology – data management and extrapolation - make fee based advice more valued now.”
In a tougher regulatory world and one where our digital footprints appear largely indelible, the theory is that tight, professionally honed structures are the way forward. Moreover, many of the younger generation, those either making or inheriting the wealth today and tomorrow in Asia, often prefer compliance to fear. Educated in the leading institutions around the world they also increasingly like the idea of social recognition via philanthropy, rather than notoriety through deceit.
“Clients need proper advice these days,” explained one banker. “They should not just jump at the first opportunity that comes to them. For example, is Taiwan a safe jurisdiction because they did not sign up to CRS? Not in our view, because people who open and transact there will likely be considered as ‘high-risk’ clients when they return to the CRS jurisdictions, making it very difficult to come back into the mainstream jurisdictions.”
Transparency and compliance
He continued: “I believe clients are increasingly looking for honest discussions, which 95% of the time in the past clients in Asia have not been asking for or not getting. It is essential to give them honest and factual views and give them viable, compliant options. But, the question remains - will the clients pay the fees for that initial advice which gives a proper holistic review of their position? Realistically, it is difficult, as only clients above a certain threshold can afford that.”
The smaller Asian wealth clients – those of USD20 million in assets or below - might only be able to afford structures that are efficient for wealth ownership and wealth transition, one panel member explained, while the large clients, some of them worth hundreds of millions or billions, have the easy buying power to acquire the right advice.
“This means that we have to work to convince the average HNW clients that when they look at their assets they should budget for their investment advisors, their wealth advisors, their structuring and legal advisors and so forth.” And that is far from easy.
CRS, as one of the identifiable key game changers in the wealth industry, affects two types of clients. First, those who have already got structures in place need to understand what it means, they need to understand where their entity is, how their entities are classified, how they are reported, and what that means in terms of future exposure.
For this group of clients there is often a tremendous amount of remediation required to bring them onside and if necessary to disclose themselves to their tax authorities before it is done for them.
New clients, new motivation = the right structures
“I think many of them are still in denial on where the direction is,” said one wealth adviser. “They need to listen when one explains to them, in no uncertain terms, that it will become transparent, the reality will emerge, so what are they going to do about it.”
Second, the new clients who do not yet have structures need to fully appreciate that the ‘old ways’ of doing things have now been thrown out of the window. Said one banker: “The old way of spreading assets around in multiple jurisdictions with multiple touch points, hiding assets in simple structures, are now gone forever, we think.”
Concentration rather than fragmentation
“The direction today is to concentrate assets, concentrate jurisdictions, so that you reduce the touch points and you control the information – information that will surely come to the surface, sooner or later - and so you know who the information is going to go to, and can carefully assess what the impact could be.”
Wealth clients can no longer jump jurisdictional ship as easily as before, in a world made smaller by financial and ‘homeland security’ compliance. “For the larger wealth clients there is tremendous planning to be done there from a residency point of view,” explained one expert, “in that they have got to use residency now as their primary planning focus and they are going to need to look and evaluate their structures accordingly. So, for new clients there is a tremendous scope for tax advice.”
Wealth waves rolling to the Mid-shore
Singapore and Hong Kong have been the biggest beneficiaries as more transparent and compliant structures have gradually gained sway. “BVIs are not dead by any stretch of imagination,” explained one lawyer, “For example, when we set up trust structures it often makes more sense to put an offshore company under a trust structure. But the mitigating factor nowadays is compliance and therefore I think the trend is to use more and more mid-shore.”
“BVI structures,” added another wealth professional, “are nowadays adopted for succession planning, not avoidance. There may be some angles of tax optimisation and estate planning perhaps, but not as in the old days for tax avoidance by the founder and later generations. I would say 90% of the trust in the 1980s and ‘90s were sold not for tax mitigation and succession planning but for tax avoidance. CRS is the game changer and many more people are now saying I will have it all in my own name and be transparent.”
Compliance translates to opportunity
CRS is, some believe, creating a more level playing field now in terms of substance in all structuring, in all jurisdictions. “For the roughly 2500 structures that we manage we are in fact increasing the margins and profitability on those clients by 20% or more year on year for the restructuring and the review of those structures,” claimed one banker present. “For example, does a structure meet the requirements of a family across several jurisdictions holding a wide variety of financial and non-financial assets? These and other issues are vital considerations.”
Ultimately the wealth firms are trying to achieve a trusted advisor status wherever they are, with the individual rather than the business, and certainly that’s what families are aspiring to meet. That person can then be at the centre of the spider’s web making sure that they can go to the right people to get the right advice.
Bigger might not be better
There is a school of thought that argues that independent wealth advisers are in a better shape to deal with bespoke structures in the current and anticipated global financial and regulatory environments. For example, there is a trend towards major banks withdrawing from the trust business.
Moreover, there are pressures from high for RMs to produce results in the bigger wealth firms and banks. “Most wealth management banks focus on how to achieve profits and oftentimes seem to convert their wealth planners into universal life insurance sales people,” noted one expert. “This means a client dealing with a RM or wealth planner in a private bank nowadays is not only facing the conflict of where the banks have their own trust companies, if they still do, but is sitting down with a banker who is often plotting how to make their targets by selling products that might not be relevant.”
“We on the other hand,” said another wealth adviser, “do not like to construct a toolbox of structures and products to offer clients. We prefer not to limit our universe, we prefer to understand the clients first and come back to them with ideas. We are advisers first and foremost, not sales people.”
Banks increasingly wary of trust roles
“As a generalisation,” said another expert, “a bank wealth planner seldom has sufficient knowledge of the diverse options available across so many jurisdictions around the world. Moreover, those who work for banks with their own trust companies are almost forced to try and use their own trust company. Having a holistic platform of solutions is very important to be able to deliver results for the client and that is where the more independent advisers can win out.”
When the advisory industry structures solutions, it must increasingly try to ensure the governance element has been thought through properly. Moreover, considering the wealth transition and inclusion for current and future generations a family charter is not some kind of ‘superman’ solution, it is what the family members decide in relation to the decision-making process that is going to make you honour the rules of the game.
And exit options must always be incorporated, because it is not possible to put a diverse range of people together – even if family members – and expect them to always get along together. “Accordingly,” explained one panellist, “when I am meeting clients to look at their existing structure I like to revisit why we set them up in that way to begin with and just to test whether it still works.”
Simplicity? Yes please…
Nowadays, simplicity seems to be something that clients respond to better than in the past. “Clients often come to us with very elaborate schemes, but usually they do not understand it fully and secondly will it be relevant in a year or two, or rendered completely worthless,” noted one banker.
“So, we as a firm gravitate towards something understandable and sustainable. The main message we give our clients is surely you must pay some tax and sleep at night rather than go to the ends of the earth to avoid paying. This is especially true is low tax markets like Singapore.”
Mid-shore sees a lot of the larger structures set up in recent years as private trust companies, not as trusts to avoid tax. “The clients are setting these up for a sustainable reason and I think that trend will continue, whether the structure is a family office or a private trust company or whatever they want to label it.”
The PTC [Private Trust Company] is the popular product in Singapore and Hong Kong for Asian families that are seeking to achieve the benefits of having a trust own the family wealth, with some modest tax advantages and with some semblance of control.
But clients need to appreciate their limitations. “There are important considerations to consider,” said one expert, “for example the role of the fiduciary as administrator. This is not a trustee telling the clients what to do, the fiduciary is waiting to be told what to do by the client. We see many clients who have PTCs, but they soon realise they need an independent party on the board or in advisory capacity to make sure it all works, that the family is engaged and so on.”
Whatever the structure chosen by the client – and some argue that the best starting point for successful wealth transition is the Will – the wealth adviser of today, and tomorrow, needs a deep understanding of options and must be able to examine in depth what the client needs.
“We need to explain to them the pros and cons of different solutions and then between us find the sweet spot that they are comfortable with. Any solution must be culturally acceptable to the client from a control and management point of view and must be able to withstand regulatory inspection, if ever challenged.”
The wealth industry in Asia has long been driven by relationships and quite often by ‘bonhomie’. To survive and prosper the industry must further professionalise to deliver the clients and the shareholders their due returns. Thankfully, the industry is thinking deeply about these challenges and working out how to overcome them.
The Hubbis Survey, December 2017: Are ‘Structures’ Still in Favour in Asia?
Is there as compelling a rationale for special purpose structures to hold Asian family wealth as there used to be? To find out, Hubbis late last year polled a broad array of wealth management experts and we found that the answer was a resounding ‘yes’.
Yet the picture is not as one dimensional as in previous decades. The Common Reporting Standard (CRS) along with other regulatory initiatives around the globe have all but obliterated the central, historic motivation of the concealing of wealth. Today, the motivating drivers appear to be wealth transitioning, estate privacy and multi-generational family governance.
In the current environment, trusts and foundations continue to find favour. Mid-shore structures in Singapore and Hong Kong offer growing appeal for Asian families – while providing some tax advantages, they also adhere to international standards on tax transparency. These mid-shore options also offer broad-based, consistent and reliable banking and financial sectors.
Offshore structures, for example the BVI, once the favoured cloak of Asian wealth, remain viable on a case-by-case basis, but are less in favour because of the negative legacy associations.
Here is what we discovered.
Is there still a move towards corporate (structures) vehicles to hold private wealth?
- For larger portfolios (roughly, in excess of $10m) the answer is yes. Below that, the costs are not really justified, whilst the ‘hassle’ factor in opening accounts in the name of a corporate structure (FATCA and MIFID ii compliance) is very onerous.
- Yes, for tax efficiency and corporate governance
- The trend has reversed due to CRS - structures are now only really necessary for succession planning.
- For large investors trust/holding company structures are still in practice.
- For certain investments a corporate structure is an advantage. Additionally, the privacy factor remains very important, while blackmail, kidnapping, extortion and other criminal activities endue in this world.
- The size of assets matter, especially for US estate duties exposure for estates exceeding certain sizes/values.
- Yes, but the reason for the structures is purely to hold assets in a confidential manner within the remit of local laws and regulations.
Are the existing ‘structures’ you have in place today for your clients still relevant?
- Yes, for offshore holding companies, less so for trusts set up decades ago.
- Yes, but it depends upon the ultimate objective of beneficiaries.
- Yes, for succession planning/estate planning
- Old style offshore structures are out dated.
- Yes, but evolving as the clientele ages.
- Yes. Clients who were trying to hide assets from their local jurisdictions have reduced interest in setting up structures [due to CRS] but the larger number of clients have perfectly legitimate reasons for setting up the structures and for them they remain relevant.
- Succession planning.
- Avoiding complications from probate, as well as proper multi-generational planning.
- Estate planning, asset protection.
- Transparency, compliance and control.
- The necessity of passing wealth to next generations without going through probate, while the Will is a transparent vehicle that the public can get access to.
- Only for succession planning/estate planning.
- Clients are motivated by asset protection, and some family and/or corporate governance over distribution.
- Estate planning, confidentiality.
- Compliant tax and legal optimisation.
- To build an institutional custodial infrastructure at a reasonable cost outside a private bank.
- To ring fence the wealth and for succession planning.
- From an inheritance point of view, most of those structures still make sense.
- Flexibility for holding and transmission of assets, confidentiality with transparency (which are, we believe, not contradictory).
- Tax planning and Generation handover, to stand the test of time
- Protection and ease of succession for cross border assets
- Estate planning and continuity of investment management.
- Transparency, client asset protection, tax efficiency and cheaper leverage (provided the client is large enough).
What structures will be most relevant and effective in the future?
- Trusts and foundations
- Well designed and implemented trust structures (rather than the cookie-cutter approach of the ‘old’ days). This can be achieved in conjunction with a family office setup.
- A combination of Will, Lasting Power of Attorney (Living Will) and Trust with a holding vehicle, but of course it depends on each client’s personal circumstances.
- Simple structures, not too many layers.
- Singapore trust or corporate structures.
- Trusts, foundations, onshore companies.
- Tax efficient on- and mid-shore structures.
- Private funds will be in vogue.
- Compliant structures which pool family wealth in a manner which is transparent and secure. The Private Family Trust, Private Trust Companies and Private Funds are three such examples.
- BVI personal investment holding companies.
- Trusts as a tool for estate planning, holding companies to hold assets and so forth will remain relevant.
Are you more interested in Singapore or Hong Kong (mid-shore) structures today, rather than offshore jurisdictions such as the BVI. And why?
- Whilst some of the UHNW are certainly looking more to Hong Kong and Singapore companies, the reality is that they are too expensive for many simple holding arrangements, so the cheap offshore companies will continue to have an important role in providing an inexpensive, largely tax neutral asset holding vehicle.
- Yes. Singapore Trust law is based on global best practices and has the advantage of being in the same time zone as our Asian clients.
- Yes. Because they are more efficient with a stronger regulatory framework.
- Yes, due to transparency and accountability.
- Yes. Singapore is a respectable jurisdiction with easy to understand and follow regulatory frameworks and rules. The BVI, though popular in the past due to its light touch on regulation and reporting, has had its advantages largely erased due to CRS and MiFID 2.
- For Singapore clients, Singapore structures are fine. However, they are substantially more expensive than the traditional offshore options.
- Yes, Singapore structures because of the general relative peace-of-mind that Singapore offers and the stability of Singapore’s regulatory and legislative landscape.
- Yes, Singapore is the preferred jurisdiction. I do not hear much of BVI structures today.
- Yes, both Singapore and Hong Kong. Regulation is making it easier to set up the structures in a tax efficient manner.
- The public has been made to believe all BVIs are ‘bad’, while Singapore and Hong Kong companies have a better reputation.
- Yes, Singapore, especially with the up-coming Singapore Variable Capital Company (S-VACC) legislation and its (anticipated) tax exemption regime.
- Both remain relevant. I feel it is more a question of geographical relevance than a pure mid-shore vs offshore argument.
- Yes, both are much more transparent and cleaner, but both need to update their fund regulations to [fully] benefit.
- There is today an unnecessary taint to the BVI option, for example local banks in Singapore do not open accounts for BVI companies easily.