world of private clients 2020

PRIVATE CLIENT SERVICES

WORLD OF PRIVATE CLIENTS

NOVEMBER 2020

CONTENTS

FOREWORD: JUDICIOUS DECISION-MAKING AMIDST CHANGE

WORLD OF PRIVATE CLIENTS

OUR RESEARCH

2020 AND COVID-19: DISRUPTION AND DECISION-MAKING

NOVEMBER 2020

1. TRANSPARENCY X The direction of travel is clear and understood X Privacy concerns persist and deepen 2. RELOCATION X Competing concerns X Navigating public policy and political unrest

3. FAMILY &GENERATIONALWEALTH X New values, legacy and risk X The succession planning struggle

4. THE ADVISER OF THE FUTURE X Understanding, trust and a 360° perspective

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 2

FOREWORD: THOUGHTFUL DECISION MAKING AMIDST CHANGE

Private clients have always had to find a careful balance of risk and opportunity in the face of uncertainty and change. This year this has become more true than ever. Wealthy individuals and their advisers face a new, more complex global landscape. Longstanding generational changes, huge economic upheaval and new socio- cultural thinking have collided to create an unprecedented global challenge. We are sure that almost every one of us has been personally affected by the events of this year. In many respects, 2020 represents a perfect storm of short and long-term disruption. The seismic effects of COVID-19 continue to rock the global economy. Meanwhile, our research shows that generational change is driving new attitudes to the role private wealth and its responsibilities in delivering beneficial social and environmental outcomes.

X How wealthy individuals are placing more weight on socio-political stability and lifestyle factors in relocation strategies X How new generations are driving an increased focus on environmental, social and governance (ESG) issues and philanthropy despite some scepticism around rhetoric versus impact X How wealth owners are frequently the source of their own problems when it comes to succession planning X Why the HNWI community expect their advisers become more agile, more multi-skilled and more technologically-savvy This is the first instalment of an ongoing initiative to provide actionable intelligence that helps wealthy individuals and their advisers confidently plan and implement successful strategies. Our ongoing research will track how the challenges and opportunities they face evolve over time. We hope that you find this report insightful and useful as you prepare for the future. We also hope that next 12 to 18 months are more positive and bring us recovery, renewed growth and prosperity.

UNDERSTANDING THE SHIFTING LANDSCAPE AROUND US Against this tumultuous backdrop, we have undertaken in-depth research in order to best understand how wealthy individuals and their advisers are meeting this myriad of challenges and preparing for what the next 12 months may bring. The research, underpinned by quantitative and qualitative analysis in more than 25 jurisdictions, has given us invaluable insights that we are delighted to be able to share with you. These include: X How an initial wait-and-see attitude to COVID-19 and trends is giving way to detailed and actionable plans X The extent to which increases in international taxation are expected X How wealth is seeking more diverse portfolios and new investment opportunities X How the competing demands of transparency and privacy and reputation management are coming to a head

wendy walton head of global private client services | bdo uk

To succeed in our business and personal lives, we must understand and adapt to change, all the while retaining clarity around our principles and long-term objectives. We feel that the need for thoughtful decision-making and being mindful of how best to adapt has never been greater.

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 3

OUR RESEARCH | KEY FINDINGS AT A GLANCE

OUR RESEARCH

BDO’s World of Private Clients research programme was launched to provide a forensic understanding of sentiment among the global private client community. In particular, we have sought to understand how private clients, next generation wealth holders and the professional advisory community are seeking to navigate the plethora of short-, medium- and long-term risks and opportunities that define the global economy. While initiatives aimed at better understanding the trends driving the private wealth landscape have come before, never has such research been conducted at a time that is so drastically defined by the radical upheaval and cultural and economic reset that we see today. A sea-change is upon us, which is both impacting, and being impacted by, the wealthy. The volume, variety and velocity of change warrant a deeper exploration of both its underlying drivers and its future implications. The actions that wealth owners

SURVEY RESPONDENT AND INTERVIEWEE OCCUPATION

private client / hnwi 49%

private client: next generation / family member 4% member or employee of family business 8%

take now will define the private client landscape for years to come and influence everything from regulation through to wider societal trends that develop in tandem with economic recovery. Through quantitative and qualitative inspection and analysis of where we are today, and what brought us here, we will be better equipped with the understanding and foresight to navigate the road ahead. As part of our research, we conducted an online survey to gather the views of 350+ private clients and professional advisers across 16 jurisdictions globally. We also undertook more than 25 in-depth qualitative interviews with wealth owners, the next generation and intermediaries from key private client hubs including Australia, Cyprus, Hong Kong, Singapore, Switzerland, the UK and US. To help encourage the open sharing of thoughts and insights, interviewees were informed that they would be quoted anonymously in this report.

SURVEY RESPONDENT AND INTERVIEWEE LOCATION

other 8%

professional adviser to family office / hnwi community 32%

sweden

ireland

netherlands luxembourg switzerland

canada

belarus

austria

france monaco

liechtenstein

greece montenegro

usa

azerbajan

spain

malta

cyprus

afghanistan

china

bahamas

anguilla

cayman islands

bvi

antigua & barbuda

philippines

grenada

panama

malaysia singapore

trinidad & tobago

australia

south africa

new zealand

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 4

OUR RESEARCH | KEY FINDINGS AT A GLANCE

OUR RESEARCH: OUR KEY FINDINGS AT A GLANCE

OUR GLOBAL SURVEY OF MORE THAN 350 PRIVATE CLIENTS AND PROFESSIONAL ADVISERS YIELDED A NUMBER OF KEY TAKEAWAYS

Following the impact of COVID-19, 57.2% of survey respondents expect significant or judicious alterations to wealth strategies. Less than 9% expect no change

70.8% believe HNWIs are moderately or very concerned about the privacy and safety

92.4% of respondents believe concern for personal or family reputation is critical when making decisions around tax structuring and compliance, with 59.2% saying it either “moderately” or “very much” impacts their decision-making

79.6% of respondents identified political stability as the primary criteria in HNWI relocation decision- making, ahead of lifestyle ( 72% ) and tax landscape ( 64.8% ).

63.2% of respondents said economic, political and social instability will very much ( 17.2% ) or moderately ( 46% ) prompt a trend towards HNWI relocation over the next 12 months.

Respondents were split over the extent to which rhetoric around the importance of ethical investing is typically matched by concrete investment, with 49.6% (moderately) and 40.8% (not particularly) respectively.

69.2% of respondents said the need to diversify investments amidst economic uncertainty is the principle factor driving changing attitudes to legacy among HNWI families, ahead of new Next Gen attitudes to social responsibility and philanthropy ( 48% )

risks posed by tax transparency and

reporting requirements. A mere 2.4% are ‘not at all concerned’

100%

50%

25%

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 5

2020 AND COVID-19 (01) | 2020 AND COVID-19 (02)

DISRUPTION AND DECISION-MAKING 2020 AND COVID-19

GRAPHIC 1:

Political and social unrest continues to foment, not least in relation to racial justice, gender equality and ethical capitalism, serving only to further heighten scrutiny of wealth holders. Indeed, shifting attitudes to

2020 has delivered a radical shock to the global economy, described to us by one investment management professional as an “existential jolt”

Stock market commentators have been quick to caution against underestimating the impact of COVID-19. In March 2020, Standard Life Aberdeen Chief Executive Keith Skeoch told CityWire that while we had reached “peak panic” in relation to the pandemic, peak pessimism was still to come. The prospect of increasing tax burdens is also toward the top of the agenda (Graphic 3) and we are already seeing such concerns materialise, with proposals for the introduction, or raising, of wealth tax levies around the world. Canada and New Zealand are among those actively considering tax policy changes while, in the US, the 2020 election has been underpinned by conversations around the correct and acceptable level of taxation for the nation. In response, and presumably in an attempt to mitigate these concerns, our survey data shows that HNWI priorities for the coming 12-18 months are dominated by seeking new growth and investment opportunities (cited in Graphic 2 as a top three priority by 66.8% of respondents) and by de- risking portfolios and mitigating against disruptions (53.2%).

TOWHAT EXTENT HAS COVID-19 AND THE LOCKDOWN RECESSION FORCED ALTERATIONS TO HNWI WEALTH PLANNING STRATEGIES OVER THE COMING 12 TO 18 MONTHS? PLEASE CHOOSE ONE ANSWER.

representing a “global heart attack”. The seismic effects of COVID-19 and the global lockdown recession are still to be fully understood by us, no matter which jurisdiction we are based in. It is nevertheless anticipated that the road to economic recovery will include tax policies built upon the expectation that those who can pay more, should pay more.

wealth are playing out at a global, national, local, community and family level. Private clients must respond appropriately. More than ever, careful decision-making is paramount. Wealth owners must identify the threats and opportunities, establish

“Shifting attitudes to wealth are playing out at global, national, local, community and family level. Private clients must respond appropriately.”

44%

34%

their priorities in response to emerging concerns, and make sensible alterations to long-term strategies. Our survey reveals that COVID-19 is causing HNWIs to rethink planning strategies in some way, shape or form, according to a majority of respondents (57.2% are planning either significant or judicious alterations, while less than 9% plan to do ‘nothing at all’). But what, specifically, is causing concern? Graphic 3 highlights that the cooling investment climate is a worry for most (63.2%).

There is an acknowledgement, as one wealth management director told us, that “changes stemming from COVID-19 will be higher taxation and that there will be a drive for the wealthy to contribute more”. Non-compliance is being met increasingly with punitive measures, not least in the court of public opinion. One corporate services provider told us how they urge wealth owners to assess how high the risk of becoming “cannon fodder” is. “Wealth being shoved in people’s faces won’t go down well”, they added.

13%

very much / significant alterations

moderately / judicious alterations where necessary

not particularly / minor alterations

not at all / no change

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 6

2020 AND COVID-19 (01) | 2020 AND COVID-19 (02)

DISRUPTION AND DECISION-MAKING 2020 AND COVID-19

WHAT DO YOU EXPECT HNWI PRIORITIES TO BE OVER THE COMING 12 TO 18 MONTHS? (RESPONDENTS WERE ASKED TO SELECT UP TO THREE ANSWERS ON CERTAIN SURVEY QUESTIONS. AS A RESULT, PERCENTAGES DO NOT SUM TO 100 ON ALL GRAPHICS IN THIS REPORT.) GRAPHIC 2:

GRAPHIC 3:

These findings reveal two competing strategies: on the one hand wealth owners are actively looking for the positive growth opportunities that may emerge from uncertainty, while others are choosing a more defensive strategy, focused on de-risking and diversifying to protect existing assets. Succession planning also scored highly, likely as a combined result of incumbent wealth owners being more aware of their own mortality, along with the time that lockdown has afforded people to address administrative details around legacy and succession. Some of us have spent far more time with our close families during 2020 than expected, and some of us have been separated by extensive distance and differing time zones. Have HNWIs also faced the same challenges and has this affected their planning in any way? It is clear that there is no one road to follow, and individual circumstance rules, but four broad areas of focus emerge and our research explores the nuance of these dominant themes through those lenses: Transparency, Relocation, Generational Wealth and The Adviser of the Future.

WHICHOF THE FOLLOWING ASPECTS OF COVID-19 AND THE LOCKDOWN RECESSION ARE CAUSING THE GREATEST CONCERN FOR HNWIS ANDWEALTH PLANNERS? PLEASE SELECT A MAXIMUM OF THREE ANSWERS.

67%

‘OTHER’ TOP PRIORITIES INCLUDE:

cooling economic and investment climate

X Documenting key business processes X Further tax mitigation pending increases in tax rates X safe place to hole up if it happens again X efficient structuring X Maintaining sufficient liquidity to deal with threats and opportunities X Managing explosive growth

X none of the above X keep calm and carry on X Tax Residency X Overall Risk Management X managing private businesses risks and opportunities X BDO testing questions X Any of the above depending on individual circumstances

63%

53%

prospect of increasing tax burdens

57%

46%

asset protection/ security of cash assets

48%

current (and longer term) travel restrictions

44%

26%

supply chain disruption

22%

23%

prolonging uncertainty around global real estate markets reputational risk from heightened public and media scrutiny of hnwis

21%

14%

10%

de-risking portfolios / mitigating against disruptions

seeking new growth / investment opportunities

ensuring continued regulatory compliance

succession planning

educating the next generation onwealth management

safeguarding reputation and privacy, including against cyber and physical threats

legacy and / or philanthropic efforts (in general)

legacy and / or philanthropic efforts specific to covid-19 and its aftermath

other

OTHERS INCLUDE:

X Uncertainty X Managing explosive growth X Impact on business assets

X Global conflict and increased protectionism X Uncertainty

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 7

THE DIRECTION OF TRAVEL IS CLEAR AND UNDERSTOOD | PRIVACY CONCERNS PERSIST AND DEEPEN

NOVEMBER 2020

PRIVATE CLIENT SERVICES

TRANSPARENCY

THE DIRECTION OF TRAVEL IS CLEAR AND UNDERSTOOD | PRIVACY CONCERNS PERSIST AND DEEPEN

THE DIRECTION OF TRAVEL IS CLEAR AND UNDERSTOOD TRANSPARENCY

GRAPHIC 4:

The transparency agenda has been central to private client planning for some time.

paramount, but this brings new complexities which wealth owners are still expected to navigate and structure their affairs within.

One UK adviser compares the approach to traffic in London: “you introduce all these regulations, but the result is that traffic is slower”. The tipping point may be closer than one might think. Specifically, concerns over the EU Directive DAC6 on mandatory reporting of cross-border arrangements persist, with one Swiss professional adviser observing that, while the need for tax transparency is well-understood, “there has to be a line in the sand and DAC6 is a huge burden”.

HOWCONCERNED ARE HNWIS AROUND POTENTIAL PRIVACY AND SAFETY RISKS POSED BY TAX TRANSPARENCY AND INTERNATIONAL REPORTING REQUIREMENTS?

Our research reveals a clear understanding and acceptance that transparency requirements are not only here to stay, but set only to strengthen, broaden and deepen. The new reality for private

How, then, are private clients managing their tax strategies to guarantee compliance? Tax regulation is particularly complex, and tax competition between countries looking to attract investment and stimulate economic activity post-pandemic can seem at odds with the punitive measures

“There is a clear understanding that

38%

transparency requirements are set only to strengthen, broaden and deepen”

32%

27%

and sanctions agreed internationally. In some cases, this scenario has prompted a flight to conservatism on the part of wealth owners. There is an appetite for ensuring compliance, to stave off unwelcome surprises later down the line. As one legal adviser points out, “nobody wants another Panama Papers”. We are fast approaching the transparency horizon, beyond which regulation may become onerous, excessive and counterproductive. Wealth management professionals hope that regulation will speed up with time and technology, as there is a need to “remove the grit in the system and get past endless box-checking”.

individuals is that information sharing is more sophisticated, more thorough and more immediate than ever. ‘Real time’ has replaced ‘on request’ and the default setting is disclosure. Globalisation and technology have created an increasingly borderless world for business and individuals. Despite a lag, authorities have gradually been catching up, creating frameworks for inter- jurisdictional cooperation and collaboration. International harmonisation ensures compliance is

very much so

moderately

not particularly / no different to previously

not at all

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 9

THE DIRECTION OF TRAVEL IS CLEAR AND UNDERSTOOD | PRIVACY CONCERNS PERSIST AND DEEPEN

THE DIRECTIONOF TRAVEL IS CLEAR AND UNDERSTOOD TRANSPARENCY

GRAPHIC 5:

However, there is a downside to transparency – and privacy is the main price that is paid. The CRS has mechanisms to safeguard the secure transfer of data, but these procedures continue to be tested and must keep pace with technological advances to ensure leaks do not occur. Another APAC-based fiduciary says the problem comes when information is publicly available, either by design or by virtue of leaks, which “creates a sense of unease when data is floating about in the open”. This gives rise to associated concerns around physical safety, for example where information falls into the hands of criminal actors. Our research shows that 70.8% believe HNWIs are moderately or very concerned about the privacy and safety risks posed by tax transparency and reporting requirements (Graphic 4). A mere 2.4% are “not at all” concerned about such risks. “When you consider personal safety, does the public really need to know?” asks one Hong Kong based trusts and family office services provider, who has also worked in North America. This is echoed by a European trusts and fiduciary structures specialist who asserts that “shaming in the press is wholly wrong”.

Nonetheless, public scrutiny and the reputational risks of being thrust into the media spotlight or court of public opinion must be considered. A majority of HNWIs take issue with the public nature of certain transparency requirements, and the vast spectrum of new stakeholders that creates. Public beneficial ownership registers have questionable benefit, says one intermediary who believes such mechanisms are “fundamentally wrong” and may constitute a “breach of human rights”. Unfortunately, complying with the letter of the law guarantees nothing. While matters of law should be cut and dry, HNWIs must also decide what level of explanation or justification they attach to their structures, in the face of public interest and access. This is reflected by 92.4% of respondents factoring in concern for personal or family reputation when making decisions around tax structuring and compliance, with 59.2% saying it either “moderately” or “very much” impacts their decision-making (Graphic 5). “There is no objection to disclosing information, per se, but there are objections depending on the audience,” summarises one lawyer. Reputational concerns, therefore, are now a defining factor in HNWI decision-making.

PRIVACY CONCERNS PERSIST AND DEEPEN Hailed as an unequivocal good by authorities and regulators, the reality is that transparency is a double-edged sword. Our research reveals the extent to which private clients harbour concerns around information falling into unscrupulous – or merely untrained – hands. Remaining compliant with tax and regulatory authorities is both expected and accepted. “Clearly, there is a need for authority access,” says one corporate lawyer in Cyprus. With the OECD-led Common Reporting Standard (CRS) overseeing information exchanges since 2017, individuals are accustomed to the automatic exchange of information between authorities in participating countries (those that are on the CRS’ ‘reportable jurisdictions’ list). Such measures have contributed to a reduction of deposits to offshore jurisdictions and estimates from the UK’s ‘No Safe Havens’ 2019 report suggest that automatic information exchange now covers 90% of global GDP. But despite signs of the initiative’s effectiveness, campaigners in some jurisdictions want transparency to go further still.

TOWHAT EXTENT HAS CONCERN FOR PROTECTING PERSONAL & FAMILY REPUTATION BECOME A DEFINING FACTOR IN DECISIONS AROUND TAX STRUCTURING AND COMPLIANCE?

38%

34%

21%

very much so

moderately

not particularly / no different to previously

not at all

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 10

COMPETING CONCERNS | NAVIGATING PUBLIC POLICY AND POLITICAL UNREST | LONGER TERMTRAJECTORY, SHORT TERM DISRUPTION | CONCLUSION

PRIVATE CLIENT SERVICES RELOCATION

NOVEMBER 2020

COMPETING CONCERNS | NAVIGATING PUBLIC POLICY AND POLITICAL UNREST | LONGER TERMTRAJECTORY, SHORT TERM DISRUPTION | CONCLUSION

COMPETING CONCERNS RELOCATION

HOW IMPORTANT ARE THE FOLLOWING TO HNWIS IF ANDWHEN SELECTING A NEW JURISDICTIONTO RELOCATE TO? PLEASE SELECT A MAXIMUM OF THREE ANSWERS. GRAPHIC 6:

The mix of decision-making drivers for physical and capital relocation has always been complex and contingent upon personal preference, cultural nuance, risk appetite, and lifestyle priorities. Acknowledging what is going on in the wider world is relevant now more than ever, and in the new wealth paradigm, our research identifies that stability remains the most influential of the many factors driving behaviour. Local ties and national identity can dictate a lack of movement for some; lifestyle priorities may lie behind a single relocation; while those that choose to move for business opportunities or tax advantages which are less predictable and can change year-on-year, may be in a constant state of relocation. The consensus view is that taxation is always one consideration, with 64.8% of survey respondents identifying the domestic tax landscape as an influencing factor (Graphic 6). But rarely, if ever, is it the main consideration.

investment opportunities 23%

personal reputational factors 9%

100%

50%

25%

political stability 80%

lifestyle and culture 72%

domestic tax landscape 65%

20%

other 4%

education system

‘OTHER’ FACTORS INCLUDE:

“Stability trumps low rates,” explains one legal adviser, while another asset manager warns that “if you move purely for tax, you might well find yourself moving back again before long”.

Beyond broad agreement on stability (identified in Graphic 6 by 79.6% of respondents as a key factor to consider if selecting a new jurisdiction), context is king. Those with children will typically value strong education, with a stable socio-political environment.

X Don’t have experience of this X Not planning to move X Ability to travel X No inclination to change jurisdiction at all

X Location of kids and friends X Health Care systems in place X International Tax meaning how does the domestic tax regime ‘look’ on an international level

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 12

COMPETING CONCERNS | NAVIGATING PUBLIC POLICY AND POLITICAL UNREST | LONGER TERMTRAJECTORY, SHORT TERM DISRUPTION | CONCLUSION

COMPETING CONCERNS RELOCATION

Those with business interests will value stability along with a reputation as a financial, technology or investment centre with a strong labour market. The events of 2020 have potentially thrown new players into the mix of popular relocation destinations, as global crisis has shone a light on truly stable jurisdictions with strong leadership figures and well-coordinated crisis responses. One Singapore-based wealth management expert notes, for example, that “New Zealand and Australia may grow in attraction as places to invest and locate”. In many ways the travel restrictions imposed in 2020 have caused focus to shift back to family ties and local connections. Comfort, confidence, and security have joined ‘stability’ as watchwords. Capital location may be less of an issue in a globalised world, while for human relocation, a Channel Islands-based relocation expert observes that “more exotic destinations may be less attractive as the focus is on quality, across infrastructure, healthcare, social, political and legal systems where people feel comfortable and confident”.

to ‘vote with their feet’ and relocate in response to tax and public policy reforms. This can be relocation away from a given jurisdiction because of unfavourable policy changes, or relocation to a jurisdiction because of favourable incentives. The imposition of various forms of wealth tax and high levels of income taxation have seen French wealth owners seek residency elsewhere over the years despite their homeland’s lifestyle attractions. Governments understandably need to recoup revenues in the face of recession, but “nobody has made a wealth tax work,” observes one private office financial planning specialist. With tax hikes expected in many jurisdictions as they seek to recoup funds invested in COVID-related support schemes, questions around relocation may once again rise to the fore. A Swiss adviser points out that in Europe, “Portugal, and to a lesser extent Italy, have grown in popularity”. New tax systems for HNWIs in both jurisdictions, in tandem with the lifestyle choices offered in terms of climate, cuisine and leisure activity, could prove attractive as global recession deepens. With lifestyle and culture identified by 72% as a dominant relocation determinant, and tax by 64.8% (Graphic 6), jurisdictions that marry both will likely entice.

THEVIEW FROM SINGAPORE KYLIE LUO | Head of Private Client Services, BDO Singapore

This year, theworldwas facedwith one of theworst health, economic and social crises it has ever experienced. Here in Singapore, we have seen theGovernment introduce the Resilience Budget, the Solidarity Budget, the Fortitude Budget and Ministerial Statements to complement the Budget for 2020 and to address the rapidly evolving COVID-19 pandemic and its impact on Singapore’s economy and society. Through great national effort, the number of cases has remained low and the country is also gradually opening up its borders and allowing travellers to enter. In the midst of every crisis lies great opportunity and by demonstrating resilience in the face of the pandemic, Singapore has shown itself to be an attractive jurisdiction for both individuals and corporates. Our teams here in Singapore have assisted more than 300 families from all around the world with the set-up of tax efficient structures, with a major increase in 2020 despite the circumstances.

the effective functioning – of wealth taxes and shows how taxation can serve as both a push and a pull factor. Public policy is a behaviour-influencing tool. Sometimes the influences are specific, direct and targeted; other times the influence and impact may be unintended or unforeseen. Regardless of the policy motivation, wealthy individuals are able

NAVIGATING PUBLIC POLICY AND POLITICAL UNREST From a wealth preservation perspective, how is tax policy changing wealth owner priorities when it comes to protecting capital and assets? Our research reveals expectations – but also scepticism around

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 13

COMPETING CONCERNS | NAVIGATING PUBLIC POLICY AND POLITICAL UNREST | LONGER TERMTRAJECTORY, SHORT TERM DISRUPTION | CONCLUSION

COMPETING CONCERNS RELOCATION

GRAPHIC 7:

LONGER-TERMTRAJECTORY, SHORT-TERM DISRUPTION

WILL ECONOMIC, POLITICAL AND SOCIAL INSTABILITY IN KEY JURISDICTIONS PROMPT A TREND TOWARDS HNWI RELOCATION (OF ASSETS AND / OR RESIDENCE) OVER THE NEXT 12 MONTHS? PLEASE CHOOSE ONE ANSWER.

THEVIEW FROM NORTH AMERICA JEFF KANE | National Managing Partner, BDO US

Alongside tax policy-driven decisions, it is clear that recent socio-political events have had the potential to throw relocation priorities into the air, particularly given the premium placed on safety and stability by private clients. As one investment manager points out, “2008 was about money and financial security” whereas the COVID-19 pandemic “has been more profound, prompting questions like ‘are my family and I safe?’”. As some semblance of normality returns, the impact of health and social justice crises is becoming clearer. While the ubiquitous nature of the coronavirus means that relocation destinations have not yet been too drastically influenced – “no country is immune to it,” says a European lawyer – the different approaches of leadership figures in both navigating the pandemic and subsequently bolstering the treasury may provide wealth owners food for thought. In many ways, the core decision remains the same: what do you want and need from your physical base, versus those other things you are happy to travel

Theworldwas a very different placewhenwe started this study. However, the situationwe have been thrust into on a global level has sharpened the thoughts of many of respondents and perhaps even accelerated their plans. While at this time there are still many restrictions on travel between countries, that does not necessarily impact the potential for future opportunity and growth. Despite the unfortunate number of COVID-19 cases in the U.S., the country has historically been very resilient in the long term from a business perspective and we expect it to be able to remain on this trajectory. There is certainly potential for taxes to increase in order to pay for some of the stimulus enacted and the changing political landscape will have its impact. However, our clients have continued to preserve and are, against a backdrop of change and uncertainty, very engaged in planning the future of their family wealth enterprise.

46%

32%

17%

for? Do you fly in and out – rather than relocate – for healthcare, golf courses and beaches, for example? Social unrest is a more divisive issue and this varies significantly from country-to-country.

Our data shows that on top of political stability being the dominant relocation driver, only 4.8% of respondents said that economic, political and social instability is ‘not at all’ prompting a trend towards relocation (Graphic 7).

very much so

moderately

not particularly / no different to previously

not at all

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 14

COMPETING CONCERNS | NAVIGATING PUBLIC POLICY AND POLITICAL UNREST | LONGER TERMTRAJECTORY, SHORT TERM DISRUPTION | CONCLUSION

COMPETING CONCERNS RELOCATION

The result in some cases is a temporary flight of investment while investors wait to see how events unfold, before potentially returning to markets they know well. The Asia-Pacific region provides examples of this in action. “If you look at the flight of Chinese money, international investment left but is steadily returning; it has moved past ‘wait-and-see’,” says one APAC lawyer, while an asset manager points out that “Hong Kong may have lost some of its lustre, but the financial system remains strong”. Capital aside, physical relocation from Hong Kong to the UK, in particular, may increase under a new visa option that will allow holders of British national overseas (BNO) status and their immediate families to apply for entry visas from January 2021. The figures in Graphic 7 suggest that, as initial responses turn into more concrete action plans, further relocation activity should be expected. Henley & Partners, a residency and citizenship planning firm, said it saw an almost 50% increase in the number of applications for new nationality during the six months to June 2020.

THEVIEW FROMTHE UK WENDY WALTON | Head of Global Private Client Services, BDO Global

“Nobody has made a wealth tax work.”

The US State Department suffered “months of near- paralysis and a long climb from a deep backlog” according to the Los Angeles Times, to the extent that it could prioritise only “life or death” requests. A similar story has unfolded in the UK, which has seen a 172% increase in passport applications from last year, while Baroness Williams revealed in response to a parliamentary written question in July that the applications backlog had reached more than 400,000. Conversely, the Australian Passport Office has seen a 67% reduction in passports issued compared with 2018-2019. August 2020 saw 14,300 citizens depart Australia, while the number of departing travellers in August 2019 was 828,000. In the face of travel restrictions, many Australians are not seeking to renew their expired or expiring passports, indicating that future relocation activity involving Australia is more likely to be inbound, rather than outbound.

xxx

The firm’s chairman was quoted as saying that “investment migration has shifted from being about living the life you want in terms of holidays and business travel to a more holistic vision that includes healthcare and safety”.

Meanwhile, passport application backlogs have piled up in many countries during the pandemic, indicating that individuals are at the very least assessing their options with a view to possible relocation.

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 15

PRIVATE CLIENT SERVICES

FAMILY & GENERATIONAL WEALTH

NOVEMBER 2020

NEWVALUES, LEGACY AND RISK FAMILY & GENERATIONAL WEALTH

With the economy under strain and social justice in the spotlight, social attitudes to wealth are changing. The next generation

Culturally divergent approaches to wealth have always been visible, to greater or lesser degrees, with one philanthropy expert observing that, traditionally,

owners may not know what an internet-less world looks like. The results are manifold but include a greater awareness of what is going on elsewhere in the world. For the wealthy, this can create both introspective thoughts about their own role in society as well as feelings of guilt about the wealth gap. “Next generation guilt draws them to beneficiary- led solutions,” says the social impact adviser. “They take an entrepreneurial approach and see wealth as a tool, not an identity.” This sentiment shift creates challenges for both current and future wealth owners, and impacts everything from investment portfolios and reputation, through to legacy and succession planning. “The wealthy are conscious of giving back and not just taking – they understand the social importance of that,” adds a wealth manager. There is a key balance to be struck involving reputation and perception management.

The media serves as a daily reminder of how quickly this can go off-kilter if it is not carefully managed. “You don’t want to be vilified by the press,” says one

there has been “an admiration of wealth creation in the US, where wealth is trumpeted more than in Europe, where things are more discreet”. We must add to this cultural nuance an acknowledgement that new generations today view, and react to, wealth in different ways.

UK lawyer, while a fintech data intelligence consultant identifies private clients’ top two concerns as governance and reputational risk. “A good reputation can take years to build but can be lost overnight,” they note.

is also more socially conscious and values- driven, so wealth creation must be handled more delicately than ever before, while environmental, social and governance (ESG) considerations form a key

“Millennials have an attitude towealth that borders on the uncomfortable.”

“A good reputation can take years to build but can be lost overnight.”

One social impact adviser describes millennial attitudes to wealth as “bordering on the uncomfortable” and there is increasingly a desire to engage with wealth in a different way. “Next gen wants to hold business and previous generations to a standard of embedding values into actions,” they explain. Authenticity of approach is vital, and the next generation wants people to “walk the walk in their for-profit decision-making”. A huge, standardising force in this generational shift is the combined impact of globalisation, technology and social media. The next generation of wealth

pillar of private client investment strategies. The traditional bar-bell approach, with philanthropy acting as a counterbalance for wealth creation activities, has evolved. The goal is now to align wealth creation with the same values that drive the family’s philanthropy. In many sectors we are seeing the onset of economic recession leading to the exacerbation of trends that were pre-existing. Economic ill-health simply serves to throw these issues into sharper contrast. So, too, with wealth.

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 17

NEWVALUES, LEGACY AND RISK FAMILY & GENERATIONAL WEALTH

GRAPHIC 8:

Climate change and the environment, where the visible impact is clearer to see, have been joined by a renewed interest in governance issues, for instance in the wake of multinational fast-fashion retailers being found to fall short of ethical standards around working practices despite having positive ESG ratings. Such instances of potential inconsistency have prompted initiatives to define disclosure standards (such as the Task Force on Climate Related Financial Disclosures). The surge in popularity of green finance has also led to the International Organisation of Securities Commissions formulating a framework to harmonise rules and guidance on disclosing sustainability risks. ESG as a focus area is here to stay. However, our data shows that scepticism remains among private clients, with 56% agreeing that ESG- related action matches rhetoric, while 44% believe a gap remains (Graphic 8). The forward trajectory, though, is undeniable, as evidenced by providers continuing to launch and refine ESG funds. “It takes a great deal of effort and money to launch new funds,” says one banking executive. “Firms don’t do it for a laugh or because it’s a passing trend.”

Investor appetite may initially have been driven by next generation attitudes, but there is a growing realisation that this is not only a beneficial way of investing for ‘good’, but also a sensible part of portfolio diversification. “There’s a place in any portfolio for sustainable and responsible investing,” says a corporate administration and family office solutions specialist. Beyond diversification, investment performance is also an attracting force. “Many are willing to see a sacrifice in financials for perceived social return,” says a social impact adviser. But as the market for impact and social investment grows, returns “are at or near market levels”. As education around this area improves, the movement towards a values-driven existence, where social and financial return are linked to the same set of values, will continue apace. As risk and reward become clearer – and performance is better tested over time – investors will not be able to ignore the opportunity. “It’s a great investment option when you look at long-term performance, and does some good at the same time; that’s a pretty compelling proposition,” says one investment management professional.

EXPECTED, OR EXCEPTIONAL? QUESTIONS LINGER OVER ESG AND IMPACT With wealth inequality now a routine part of public discourse amid economic, health and social crises, the question of whether there is an onus on the wealthy to ‘do good’ in the world is a common one. Philanthropy has been the primary vehicle for achieving this, but there is increasingly a view that social impact should be more directly tied to wealth creation and preservation itself. Social impact comes in many forms, and the private client community is well-placed to deliver maximum impact, given the resources at its disposal and its dominance of investment markets. Rocket-boosters have been placed behind the ESG movement, with one wealth management professional noting that ESG offers are now a staple part of the investment landscape, rather than a “small tributary off the main river”. “It’s like going to a restaurant these days and seeing vegan options appearing on menus where you wouldn’t expect to see them.”

TOWHAT EXTENT IS RHETORIC AROUND THE IMPORTANCE OF ETHICAL INVESTING TYPICALLY MATCHED BY CONCRETE ACTION AND INVESTMENT? PLEASE CHOOSE ONE ANSWER.

50%

41%

very much so

moderately

not particularly / no different to previously

not at all

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 18

NEWVALUES, LEGACY AND RISK FAMILY & GENERATIONAL WEALTH

GRAPHIC 9:

Our research shows no clear consensus on COVID-19 heightening social pressure on HNWIs to engage in philanthropy, with only 12.4% saying the virus ‘very much’ heightened pressure to give more (Graphic 9). A majority (80%) combined to say social pressure was ‘moderately’ heightened (39.6%) or ‘no different to previously (40%). However, research from Candid and the Center for Disaster Philanthropy shows around $12 billion worth of philanthropic giving in the first half of 2020, outstripping donations made for any other disaster on record, so it is happening regardless of any perceived ‘pressure’. BDO UK’s recent publication, PrivateView on Philanthropy, takes a closer look at philanthropy in times of uncertainty, particularly this year. Reassuringly, and as has been seen with the adoption of certain technological solutions mid-pandemic, crisis-mode administration and bureaucracy has kicked in. This reduction in red tape means the lag time between pledge and impact is shortened. While some due diligence processes and governance frameworks will return, or be retrofitted, this streamlined approach must continue post-pandemic. The appetite is there; process must not serve as an off-putting factor.

Next generation interest in philanthropy is unsurprising. It can be a good method for financial engagement and education, by putting the focus on people, rather than on money. Philanthropy can “bring humanity to wealth” notes one consultant. As with transparency, however, philanthropy may be a double-edged sword. With a spotlight on the wealth gap, people are both aware of, and angry about, wealth inequality. In some instances, public cynicism takes over and there can be “a negative perception that the uber-wealthy are dictating policy via philanthropy,” says one philanthropy consultant. This may leave philanthropists in a “no- win situation” and is a reminder that while the focus is rightly on outcome and impact, not on optics, a role may remain for reputation management. Crises often breed surges in philanthropy this is evident on a worldwide scale with COVID-19. Philanthropy has already seen activity targeted at helping communities and health systems cope with the immediate threat of coronavirus, while the sector will also play a vital role in mitigating some of the longer-term economic fallout.

PHILANTHROPY TRANSFORMED? Alongside moves to better reconcile financial performance and social benefit through ESG investing, there remains a role for distinct philanthropic efforts. Whether through charitable giving, establishing foundations, or setting up donor advised funds that integrate with existing wealth management plans, wealth owners have a number of tools through which to pursue philanthropy. Again, inter-generational forces come into play. If sceptics previously regarded charitable giving as a cathartic act, they now see a far more engaged approach motivated by not only the theoretical notion of ‘doing good’, but by achieving tangible impact. “It’s no longer a once-a-year cheque to the RNLI [UK charitable organisation, the Royal National Lifeboat Institution],” says one financial planner who has worked in multiple jurisdictions including Switzerland and the UK. “The next generation is more hands-on, whether through fundraising, sitting on boards or being actively involved in the businesses themselves.”

HAS COVID-19 HEIGHTENED SOCIAL PRESSURE ON HNWIS TO ENGAGE MORE IN ETHICAL AND PHILANTHROPIC INVESTMENT ACTIVITIES THAT DELIVER SOCIAL BENEFIT OUTCOMES? PLEASE CHOOSE ONE ANSWER.

39% 40%

12%

very much so

moderately

not particularly / no different to previously

not at all

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 19

NEWVALUES, LEGACY AND RISK FAMILY & GENERATIONAL WEALTH

WHAT FACTORS ARE DRIVING NEWAND CHANGING ATTITUDES TO LEGACY AMONG HNWI FAMILIES? PLEASE SELECT A MAXIMUM OF TWO ANSWERS. GRAPHIC 10:

New values dictate the route forward that the next generation is forging, and diversification away from the inherited business or asset portfolio is far more common as a result. This impacts traditional structure of many family offices. “The current private client structure is siloed. Millennials hate hierarchy; they ask questions to challenge authority,” says one impact investment specialist, who believes this is because “they have seen authorities let them down”. Fundamentally, the markers of success have changed. Impact sits alongside, and in some cases above, profit in the pecking order. Next generation often “see failure as an opportunity to learn, whereas the traditional private client landscape does not tolerate failure,” adds the impact investment consultant. A ‘succeed at all costs’ mentality is no longer lauded and celebrated, instead being replaced by a willingness to learn through falling short. Incumbent wealth owners must understand the motivations of the next generation, and acknowledge that passing on wealth may need to be done completely and alongside the relinquishment of strategy oversight, even if this means successors risk undoing the work of the generation(s) before them.

THE IMPACT ON LEGACY The values-driven investment approach as an accompaniment to distinct philanthropic giving is a prime example of how the character traits of the next generation tend to lead their approach when it comes to wealth management. Our research shows this also has implications for legacy and succession planning discussions, with 48% saying that changing (next gen-driven) attitudes to social responsibility and philanthropy are driving new attitudes to legacy among wealthy families (Graphic 10). Younger generations’ desire to positively impact the world started the departure from status quo legacy thinking and current socio-economic conditions have accelerated this trend. Our research shows that, even where next generation is not the driving force for change, attitudes to legacy are still shifting. Graphic 10 indicates that more than two-thirds (69.2%) say this stems from the need to diversify investment portfolios amidst economic uncertainty. Another intergenerational trend is that individuality is more frequently triumphing over traditionalism.

18%

100%

heightening risks to family reputation (from increased media and public scrutiny)

50%

48%

25%

need to diversify

investment portfolios amidst economic uncertainty globally

69%

changing (next generation) attitudes to social responsibility and philanthropy

27% 6%

increasing commercial opportunity in impact investing

other

‘OTHER’ FACTORS INCLUDE:

X Inflationary pressures/social instability/unemployment X Political environment may become very unfavorable for business and HN worth clients X Tax benefits X Leveraging opportunity via technology and innovation X Inheritance taxes

X Protecting the planet X Educating the next generation about their options X More QE means we should double the value of our retirement home X X understanding the world post covid

As one family office adviser observes, “even if next gen hits the buffers, they will have learnt something along the way”.

WORLD OF PRIVATE CLIENTS | NOVEMBER 2020 20

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