The Trends post lockdown

Post lockdown there will be changes. Already there is a growing trend amongst Private Client Professionals to focus on clients. Gone are the days of extensive travel face to face meetings and packed events halls.

We have all seen how effective digital technology has been to connect us wherever we are – but now we need to use this technology to serve our clients better – which is what I call a Culture of Care; care for clients, care for colleagues and care for contacts.

Even if we would like to get back to how it was, it is not going to happen. Lockdown has been a massive exposure of the wastefulness of most marketing initiatives– and as lockdown eases, boardrooms will want to focus on how to cut wasteful marketing costs to increase profits

In this blog I look into my crystal ball based on my research for my book ‘Reimaging the role of the Private Client Professional’ post lockdown and put forward some ideas as to how I think this could happen.

The pre-lockdown way of working had many flaws; lengthy commutes, technical superiority, unacceptably high lockup days, poor client feedback, extensive travel to other offices to meet colleagues and prospective clients, huge marketing budgets with poor monitoring and a low Return on Investment.

In the beginning of my book ‘Reimagining the Role of the Private Client Industry’ post lockdown I give the example of Mr Hartley who thirty plus years ago used to go to his Club, every day, for a boozy lunch to ‘win business’. This type of ‘marketing behaviour’ is now a thing of the past – most professionals rarely leave the office for lunch let alone drink alcohol in the middle of the working day and I believe that in less than five years extensive travel, attending events and visiting colleagues across the globe will be considerably cut down.

My recommendation for all private client professionals is to focus first on the experience of the Client – this is where the opportunity lies.  

In a survey I carried out with some professionals from a range of financial services firms, 100% of clients asked for more feedback from their private client professionals. Furthermore, the average lock up days for the payment of fees (where there was discretion) was 183 days – which means that the client is delaying payment for up to half a year, - this usually indicates a dissatisfaction as to service provided.

Both these concerns can now easily be fixed given the digital advancement in sophisticated Client Relationship Management Systems. It also means that teams can work together without being in the same office and can be accessed by the client in real time – so the team and the clients can get accurate up to date information as to who is doing what, what progress is being made and how much it is going to cost.

Private client professionals should also focus on building trust with their clients. In my book I go into how to build trust. In essence it boils down to looking at the wider concerns of the client and finding solutions which invariably mean making good and considerate professional recommendations.  

I was speaking to a private client professional recently who said ‘I always give property work to Chris’ and ‘US work to Joe’. What sort of property work; development contracts, conveyancing, rights to light, enfranchisement, and all US work; what sort of work and where? Firms spend considerable time and cost in recruiting and training their staff but next to no time in making sure the professionals know what other professionals even within the same firm are doing in different departments so they can make well considered recommendations let alone from different disciplines across their network.

Marketing departments have improved a lot in recent years’, but it wasn’t long ago when they were referred to as the ‘guardian of the firm’s logo’ and the ‘publisher of the firm’s brochures.’  New business in most case is still expected to be won by the professionals who are also expected to do the work and are given little or no training in what to do, so they adopt tribal learning which is to do what everyone else does – jump onto aeroplanes, attend events and pick up business cards which are then put into a drawer and rarely looked at again.

In a survey I carried out some years ago on private client professionals 80% said their efforts at winning business had only a 10% return on investment, and yet most had significant marketing spend.

In the past year during lockdown financial services firms have proved to themselves that a lot of their office overheads is a waste of money, their marketing spend has been futile and the opportunity to focus back on the clients using digital technology is an opportunity which Caroline’s Club can assist you with. 

If the mood of the era is grasped and possibly even encouraged by governments to relocate professionals north – leaving only meeting rooms in London we could see a totally different working landscape in a very short space of time 

I set up Caroline’s Club post lockdown because I saw lockdown as an opportunity; the time was right. It builds on my extensive research over many years on how to use psychologically proven techniques to bring business back into networking rather than leaving it to wasteful (albeit enjoyable) social chit chat- using education, aggregation, gifts and client stories which will not only win trust, but foster a Culture of Care, care for clients, care for contacts and care for colleagues, this builds trust, gets bills paid and reduces overheads

If you would like to find out more simply register here

If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here where you can see what we are up to and if you would like to join simply upgrade your membership.

Gary Lineker

Match of the day presenter Gary Lineker has found himself the wrong side of HMRC with a potential tax bill of £4.9million.

Lineker, a former footballer who made 80 appearances for England, has been accused by HMRC of falsely declaring himself to be a freelancer in his role as a TV presenter rather than declaring his role as an employee.

This case is a typical example of the strategy adopted by HMRC to target celebrities with high profile cases to put others off the idea of trying to save tax.

But it has not always worked.

TV presenters Kaye Adams, Lorraine Kelly and Helen Fospero as well as IT consultant Richard Alcock all won their cases against HMRC , but Eamonn Holmes lost his case, though he is appealing.

The former football legend hosts Match of the Day on the BBC and BT Sport’s Champions League coverage.

Lineker and his then wife Danielle Bux set up a limited liability company ‘Gary Lineker Media’ to contract out the services of Lineker to third parties such as the BBC. The BBC then pays for Lineker’s services to his company which pays tax at 19% rather than to Lineker direct which who would then have to pay a higher rate of income tax and national insurance.

HMRC claims that Lineker owes income tax of £3,621,735.90 and national insurance contributions of £1,313,755.38.

The dispute centres around the interpretation of IR35 rules which were introduced in 2000 to crack down on people declaring themselves to be self employed when in substance they were employed.

They apply if a worker, Lineker, provides their services to a client, the BBC through an intermediary Gary Lineker Media, but would be classed as an employee if they were contracted directly.

These rules are called ‘off-payroll working rules’ and will apply on a contract-by-contract basis. Then contracts with the businesses such as the BBC for his services. The BBC then pays the limited liability company which then pays Lineker and what he does not require stays in the company with a tax rate of 19% rather than being taxed at Lineker’s top rate of income tax.

If you would like to find out more simply register here

If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here where you can see what we are up to and if you would like to join simply upgrade your membership.

Paying for Covid

Biden’s plans to rewrite global tax rules introduced by Treasury Secretary Janet Yellen are the biggest shake up in world taxation for over 20 years – they are truly ambitious and if successful will be remarkable. 

The plans are for a new global model for taxing multinationals based on sales in a given country, rather than profits, and the second is to make it impossible to benefit from the shift of profits to low tax jurisdictions by setting global minimum levels for corporate tax. 

Currently most US multi nationals end up paying less than 8% corporate tax due to adroit tax planning by shifting profits to low-tax jurisdictions.

But will countries agree – after all each country treats its right to raise taxes and the manner in which it does it – its national or sovereign right? What is the tools Biden can use to get his plans accepted globally?

His timing was lucky, but impeccable; there has never been a better time to announce global tax changes designed to tax multi-national organizations a ‘proper’ rate of tax from which every country can benefit.

But how will it work – I do not have a crystal ball but …

International tax planning for multinationals varies from one business to another, but a common form of tax planning is to transfer the intellectual property (IP) such as the right to use the name ‘Starbucks’ a global brand, to a company resident in a low tax jurisdiction such as Ireland where the tax rate is 12.5%. The company in Ireland then charges the other companies in the group in high tax jurisdictions a fee for using this IP, thereby creating a tax- deductible expense in the high tax jurisdictions and shifting the profit to Ireland a low tax jurisdiction. 

Biden’s proposal is that the taxation of multi-national businesses should not be taxed on profits but on sales in each country and will introduce a global minimum corporate tax rate which has been suggested as 21%.

I am guessing that the way it would operate would be similar to the way double tax treaties work – which is that the high tax jurisdiction would have primary taxing rights up to the minimum corporate tax rate with a deduction for taxation in the low tax jurisdiction. This will remove the incentive of multi-national organizations to transfer IP to countries such as Ireland and the Netherlands because there would be no incentive to do so. Of course, the devil is in the detail – what will be the minimum corporate tax rate and how flexible can a country be to introduce exemptions and reliefs which could again make it attractive to multi nationals

The response from Ireland’s Finance Minister Paschal Donohoe was to say, ‘Momentum has been building towards reaching a consensus on how to better tax multinational companies’, but he then goes on to say that other countries ‘must have regard for the long established Irish corporate tax rate of 12.5%’ which is ‘a fair rate’ and one that is ‘within the ambit of healthy tax competition’.  Turkeys don’t vote for Christmas.

So how can Biden put pressure on countries which attract business into their country through favourable tax planning – it has been done before!

 Biden’s proposal is aimed at the 130 + OECD countries

The OECD (Organization for Economic and Cultural Development) is an international organization which works to build better policies for better lives.

It’s goal is to shape policies that foster prosperity, equality, opportunity and well-being for all. 

It works with governments, policy makers and citizens to build evidence based international standards and then sets about inspecting countries to see how well they comply with those standards.

In a report issued in 2000 the OECD identified a number of jurisdictions as tax havens against a series of objective criteria it had established. All these jurisdictions subsequently made commitments to comply and were ‘blacklisted’ until they did.

The US has also been successful in introducing global reporting and transparency. In 2010 it introduced the Foreign Account Compliance Act (FATCA) which required all non-US financial institutions to search their records for customers who were US citizens or who held a green card and who were chargeable to US taxation. Any financial institution with such a customer the was then obliged to report to the US Department of the Treasury, the name of the customer, amount in the account and any transactions. FATCA was designed to give the IRS the information they needed to catch US tax cheats.

The primary mechanism for enforcing non-US financial institutions to report was a punitive withholding on all US assets held by such institutions of up to 30%.

It was widely thought that such financial institutions would divest themselves of their US assets and US clients, but much to everyone’s surprise financial institutions across the globe invested in the compliance necessary to meet these obligations.

Forbes estimated that the cost of compliance was roughly US$ 8 billion a year, approximately ten times the amount estimated revenue raised for the IRS.

The US is still the largest economy in the world (just) and recent history would suggest that when it demands compliance the world would complies – we will soon find out whether this remains to be the case – but one thing is clear – this change could make a significant difference to the amount of tax collected by the world’s countries coffers at the expense of who..

If you are a private client professional and would like to network with others in our Club simply register for https://carolines.club. As from next month we will be having more than one meeting, by popular demand in in the morning and one in the afternoon so that our friends in the West can comfortably join us

GFOS provides legal services for family offices and is a specialist in Family Governance to protect the family wealth from loss. She is supported by Caroline’s Club a network of private client professionals across the globe who provide a wide range of services for wealthy clients.

If you would like to find out more simply register here

If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here where you can see what we are up to and if you would like to join simply upgrade your membership.

Come off it - it's greed

Family Offices have been in the press recently following the frenzied fire sale that wiped over $35 billion off global stocks. It was triggered when Goldman Sachs and Morgan Stanley started ‘dumping’ multibillion-dollar positions in US and Chinese stocks.

It later transpired that Archegos Capital a family office managing the wealth of former hedge fund manager Bill Hwang had failed a ‘margin call’ – a demand to put up more collateral against its trades. Goldman Sachs and Morgan Stanley were spooked and started to sell all the investments Archegos had with them and came out unscathed leaving Credit Suisse and Nomura to take the full effect of the downfall Both banks have admitted that they would probably lose billions of dollars which could wipe out their profits for the year.

The Financial Times says ‘Regulators are already bristling. Dan Berkovitz at the US Commodity Trading Commission said oversight of family offices ‘must be strengthened’ noting that they ‘can wreak havoc on our financial markets’’

True - but I am not sure that is the right way to go

According to business school Insead last year, the number of single-family offices had grown by 38% between 2017 and 2019, to reach more than 7,000. On average Family Offices each have $1.6billion under management, which often includes art collections, yachts and private jets. Most will have more than one office in strategic locations such as Singapore, Luxembourg and London.

Assets under management at family offices stood at some $5.9trillion in 2019, whereas the hedge fund industry has only $3.6 trillion. But whereas the hedge fund industry is regulated, Family Offices are not – they can do just about what they like!!! 

Family Offices like Hedge Funds can use leverage – which means they can borrow money to invest. The logic is simple enough, if you put £100 deposit to buy a £1,000 investment which goes up to £1,200 your £100 has made £200 which is a return of 200%, but if the £1,000 goes down by £200 your investment of £100 is wiped out

Archegos was able to build huge positions through ‘total return swaps’. These are ‘derivatives’ – which means the value is in the contract with the bank which pays out if an investment goes up or down – a bit like informed gambling - but does not affect the investment itself which remains unaffected.

The borrower keeps an eye on his lending and if he suspects the deals are getting too risky – can ask for a larger deposit – which is a ‘margin call’. In the case of Archegos, it failed to meet the margin call, Goldman Sachs and Morgan Stanley got spooked and set about liquidating all the investments it held on behalf of Archegos to cover their exposure, but Credit Suisse and Nomura were not so lucky and took the full effect of the downturn.

Most family offices I have worked with are nothing like Archegos. They are set up by Founders of business empires which either continue to run the business and the family assets or who have sold their business and want to control the investments of the family rather than to entrust them to banks or asset managers. Most family offices are risk averse – which means the fear of losing money far outweighs the benefit of making more – their returns may not be stellar, but they are not at high risk of losing money either.

There are some Family Offices which were not formed to manage the profits of a business but have come out of former hedge funds – Archegos was one of these later types.

Bill Hwang was a fund manager with the legendary Tiger Management hedge fund, but in 2012 he was convicted of insider trading.

Undeterred he bounced back to form Archegos and despite his well-documented ‘dodgy’ past, many big banks were keen to loan him money as ‘prime brokers’.

 All financial institutions are obliged to ‘know their client’ and would have on record Bill Hwang’s past record, but despite this big names in the banking world were keen to lend him money and continued to do so even when the deals he was doing looked extreme.  

Archegos was a frequent trader Hwang was a very profitable client – but its activities were excessive for a hedge fund, let alone a family office keen to preserve capital, This should have triggered alarm bells -and something should have been done to stop him.

In my opinion therefore the regulation of family offices is not necessary. There are already obligations on financial institutions to ‘know their client’ but what may be necessary is to police what large banking institutions are doing when profitable clients are taking on too much risk.

GFOS provides legal services for family offices and is a specialist in Family Governance to protect the family wealth from loss. She is supported by Caroline’s Club a network of private client professionals across the globe who provide a wide range of services for wealthy clients.

If you would like to find out more simply register here

If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here where you can see what we are up to and if you would like to join simply upgrade your membership.

Shocking!

The Woodford scandal which has come to light in recent weeks, is a shocking abuse of trust. The Financial Conduct Authority in the UK was set up to protect the vulnerable, but it does not monitor ‘best buy lists’ on self-managed platforms which have become popular in recent years. By not monitoring these lists – they are open to abuse -funds would appear to be on the list chosen more by which charges the platform the least, rather than the best performers.

Neil Woodford was a star investor for 26 years at Perpetual (later Invesco Perpetual). By the early 2010’s working out of Henley upon Thames, Woodford was the best well known stock picker. In 2014, he left Invesco to set up his own investment management firm Woodford Investment Management and within months of setting up his firm had £5billion under management.

But investment management is an art not a science and not every fund manager gets it right every time ….

Woodford made his name at Invesco by selecting blue-chip companies that produced steady dividends such as pharmaceuticals and tobacco companies. Woodford was attracted to businesses which he felt were undervalued but yet resilient to withstand an economic downturn. 

But he became bored with the safe and steady, he wanted to back winners, small science-based companies that could produce outstanding growth if he picked well. While at Invesco he wanted to launch a fund focusing on small, listed companies, similar to the Patient Capital investment trust – there is nothing wrong with this – but it is risky.

As every professional investment manager knows and is told by the Financial Conduct Authority – they must ‘know their client’ – does the client have the appetite for losses – while looking for winners – which is one of the benefits of engaging a professional investment manager. 

At Woodford Investment Management Woodford set up a fund called Equity Income which was set up to mimic his most successful funds at Invesco – but as the money poured in during the first few years – he needed to find companies in which to invest and began writing big checks to poorly researched private companies.

Again, there is nothing particularly shocking in making poorly researched investments – this is another benefit of engaging a professional manager – their job is to weed out the funds whose investments are poorly managed. 

However, in recent years investors are looking to save costs and invest themselves using self-managed investment platforms.  95% of the investors in Woodford’s funds were not professionally advised, they were self-advised investors using investment platforms.

Of the 95% of investors who were self-advised – 75% were using the UK’s most popular fund platform Hargreaves Lansdown which has over 1million users. 

A large part of the attraction of the Hargreaves self-managed platform is its ‘best-buy list’ – and this is where the story is shocking – the best-buy list is expressed to be – as the name may suggest – the best investments in which to buy – but for whom – the investor or Hargreaves Landown? Best buys are not classed as financial advice or guidance – and so are not monitored in the same way as other professional advisers’ recommendations to their clients.

 One of Woodford’s Funds was Equity Income. In 2018 it was down 17% and yet it remained on the list in 2019 despite the decision taken by Hargreaves to slim down its best buy list.   

According to Owen Walker who has written a book on the Woodford affair ‘Built on a lie, the rise and fall of Neil Woodford, and the Fate of Middle England’s Money’, as part of the negotiations to stay on the list Woodford Investment Management agreed to reduce its fee to 0.5% while other funds on other platforms were charging 0.75%.

 Owen goes on to say that several Hargreaves executives said they had reservations about Woodford’s investments as early as November 2017 but nevertheless the funds remained on its best buy list until the suspension of Equity Income 18 months later.

Charlotte Thorne founder and Director of CapGen and Podcast Professional Member of Caroline’s Club says  “the number one learning from the Woodford Affair is that there is no such thing as a free lunch. If you are offered preferential rates by your investment platform you need to ask what they gain from promoting this fund to you. Paying for impartial advice will always be cheaper in the long run.”

Noel Craven Director of Quartet Investment and Podcast Professional Member of Caroline’s Club says “it’s telling that 95% of the remaining Woodford investors were self-advised. As member of a fund selection committee I know the warning bells around Woodford were ringing for at least 2 years before the closure of the business. Woodford’s open ended funds were all removed from approved lists in 2017 and all discretionary clients divested. There is merit in knowing, understanding and monitoring, it’s not always exciting but it’s what we professionals are paid to do.”

If you would like to find out more simply register here

If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here where you can see what we are up to and if you would like to join simply upgrade your membership.