Wealth management’s aversion to complexity was evident to Robert Paul long before he entered the industry.
In a previous role as an independent financial advisor, he would see every few months UK-based US citizens come through his door. And every time, given the onerous reporting and logistical requirements placed on U.S. investors abroad, they would be turned away. “We couldn’t deal with them,” he says.
Now, Paul runs the U.S. Family Office business at London & Capital, which looks after the wealth of U.S. citizens or green card holders who work outside of the country. The unit can also manage the wealth of foreign nationals working in the U.S., as well as certain offshore structures. “Basically anyone that needs to file a U.S. tax return,” he explains.
This focus on cross-border clients is underpinned by the company’s tenet on wealthy families; in the modern world, they rarely stay still.
“We have a view that most wealthy families are transient,” Paul explains. “They move for work, education and other reasons. As a result, they tend to have pots of assets spread out and siloed in different countries.” Research indicates that wealthy people are becoming increasingly mobile as well. According to Henley & Partners, the immigration consultancy, around 125,000 high-net-worth individuals are forecast to migrate to another country and stay for longer than six months in 2023.
Yet while more wealthy people are spreading out across more geographies, many of their money managers are doing the opposite. In the last decade, household names such as Morgan Stanley and Bank of America Merrill Lynch have exited European wealth management to focus more on domestic U.S. clients. For international families, with assets located in several countries across the globe, this has led to plenty of headaches. “Ultimately, many banks and wealth managers are now built to deal with domestic money for their domestic clients,” he explains. “However, for families who have pots in London and New York, for example, they have to think about how the New York pot is viewed by the UK, and how the London pot is viewed by the U.S. “
Year founded: 1986
AuM: $4.6 billlion
As of 30 September 2022
When dealing across borders, these issues can prove hugely detrimental, as factors such as tax, international regulation and foreign exchange come into play.
“The biggest problem our clients face never changes: ‘How is my wealth globally affected by whatever the current situation is, wherever foreign exchange markets are moving, and whatever the tax and regulatory environment are?’,” Paul explains. “You can have the best investments in the world, but if you don’t think about it with regard to how the currency, tax and reporting inlay, it is irrelevant.”
Events this year may bring this into stark relief for many wealthy families. The U.S. dollar has gained against most currencies, and with sterling by almost a fifth. For Americans living in the UK, who still have a U.S dollar denominated investments back home, this could have unintended consequences.
“At the end of the calendar year, their investment managers are going to offset losses and gains, and if they live in the UK and pay tax on the arising basis, that loss in U.S. dollars is going to be a gain in sterling,” says Paul. “And they will get walloped with tax bills, not for doing anything wrong, but for not being cognisant of the situation.”
Paul has been working through these issues with international U.S. families for nearly a decade, having joined London & Capital in 2013. Potential clients at the time were struggling to come to terms with U.S. institutions pulling away from them giving their residence, and for the firm, getting up to speed quickly with the problems these people were facing was imperative. “It was an incredible learning experience,” admits Paul. “We picked up on many issues that affect multinational clients and families by being forced to learn about them by having international American families.”
Looking ahead, wealth management as an industry is going to have to get to grips with these growing complexities; according to UBS, the greatest transfer of wealth in history is expected to occur in the next two decades, with some $80 trillion expected to pass between generations in the U.S. alone. Yet with this in mind, the major worries around this are not investments themselves. According to the UBS survey, the main two concerns are that the transfer of wealth is done smoothly, and also in a tax-optimal way. “For wealthy families, it’s about planning for the future, and things such as tax and reporting. It’s more than just the investments,” Paul says. “It’s all the bits on the outside.”
Increasing London & Capital’s ability to manage this complexity is part of the reason why, in June, the firm agreed to sell a majority stake in itself to the U.S. PE house Lovell Minnick Partners. One of the key objectives is expanding and enhancing its offering. London & Capital already has experience doing this recently, partnering with Moonfare to help bring private market solutions to its clients, and the investment is aimed at accelerating developments like this further. “What we’ve learned is that as we’ve broadened the proposition, more and more families have found it attractive,” Paul says. For more on Moonfare’s partnership with London & Capital, see How Moonfare makes private equity markets easy, below.
Another strategic priority for the business is to help the firm expand its offering to European multinational families, having opened up its first mainland Europe office in Barcelona earlier this year. Underpinning this goal is the belief that the firm’s current work with UK-based U.S. families can be translated to the European multinationals market – with the right backing. “We understand the framework that these families want,” he says.
In Paul’s mind, the Lovell Minnick deal is timed well as the wealth management industry arrives at an inflection point. Rising rates, inflation and geopolitical uncertainty have made the investment landscape especially volatile, following a long period of monetary easing that helped to expand wealth. Simultaneously, the transfer of an unprecedented amount of capital from one generation to the next in the coming years will bring advisors face to face with a more complex base of families and custodians. Being able to deal with these disruptions isn’t an option anymore – it’s vital.
Otherwise, it is easy to see inert family offices being left behind. “Wealth has increased significantly, personal wealth has increased significantly, and every aspect of the industry has benefited from that,” according to Paul. “Now, it needs to innovate, and I like to believe that we are grabbing more market share now because we are trying to innovate.”
Private markets are becoming an increasingly important part of a family office toolkit, offering a potential high-returning home for excess capital while other aspects of the portfolio take care of present-day income. According to our Family Office survey, which polled 55 family offices globally, 58% of SFOs are planning to increase allocations to the asset class over the next two years.
Doing this internally, however, is hard, risky and can be very expensive. For Paul, this is where Moonfare came in. “We wanted some way to get deal flow and avoid the historic challenges of private markets investments, which is the access and amount of paperwork.”
In Paul’s mind, Moonfare’s partnership with L&C is beneficial for two key reasons, one of which is providing access to top-tier managers they wouldn’t otherwise have. “The ability to outsource the deal flow [to Moonfare] gives us access to much better deal flow than we otherwise could have, and allows us to put our slant on it in terms of the funds we have access to.”
The platform, meanwhile, is positioned well to meet the needs of multinational families dealing regularly with cross-border paperwork. “The more I looked at the platform, it became even more valuable based on my experience of what families struggle with,” he says. “Allowing clients to see asset allocation, capital calls and other paperwork digitally is hugely valuable to us and our families.”
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