The article was originally published in Kapital, a leading business magazine in Norway. Have a look here (available in Norwegian only).
In the light of the global wealth structuring landscape changing and evolving rapidly, advisers must be able to keep pace to ensure their clients’ long term needs are met. When building a tailor-made strategy for a wealthy client, advisers might be confronted with some challenges with advising their clients the best way possible.
Lack of succession planning
Ensuring that wealth is properly managed after it is transferred to the next generation is often overlooked. 69% of family offices expect to undergo a generational transition within the next 15 years while only a third of those have established a written succession plan. While the person generating the wealth may be an excellent wealth manager, the heirs are often ill prepared and may not wish to take responsibility of their inheritance. Decision making between co-owners and siblings related to corporate structures, possibly in different jurisdictions, often turn out to be difficult.
In Norway, family governance services have become almost necessary in order to help second and third generations deal with the complicated management of family fortunes.
Lack of flexibility
As the world continues to experience rapid change, wealth management structures need to be able to keep up and accommodate the needs of both the initial investor and future generations in terms of changing investment options, succession planning, need for access to capital and cross border portability. Costs for altering or dismantling structures that no longer work from a succession planning or investment point of view can be considerable Family situations and compositions naturally change over time and second and third generation issues as explained above often decrease the flexibility of existing structures in several ways. “
Watch the costs closely – go for transparency
Estimating the true cost of wealth structuring is difficult as costs are found in multiple layers and potentially in unexpected places. The true costs including tax costs, transaction fees, costs for administration, book keeping and accounting may remain in the dark.
Wealthy individuals tend to have a variety of different structures, all with their own associated costs and purposes. Today, Norwegians can have a holding company, an Equity savings account, capital assurance, pension savings, and directly held investments accounts. Some structures may no longer even make sense, because the investment profile of the owner changed over time.
Each year more than half a million families are involved in transferring wealth across borders. When moving overseas or spending a significant amount of time in a second home abroad, the effect on existing wealth planning needs to be addressed and there may be adverse tax consequences or unexploited opportunities in the new country of residence.
Sweden would consider a Norwegian investment company held by an individual to be a closely held company and tax any dividend income with a tax rate of up to 60% whereas, , withdrawals from a capital assurance could be made tax free. Even with the adoption of the EU Succession regulation (650/2012) in force as of 17 August 2015, it is still necessary to actively plan the succession in order to manage carefully tax compliance and risks.
Diversification of assets
To effectively hedge against the vagaries of financial markets, advisers agree it is necessary to diversify ones investments between asset classes, industries, currencies and countries. However, different taxation of different assets is an obstacle to obtaining a well-diversified portfolio.
Taxation can be one of the biggest costs affecting the yields of an investment portfolio. If some investments can be made in a close to tax free environment while other assets trigger taxation where 1/5 of the profits are lost, it is clear that this will affect the return of an investment portfolio and also investment allocation. Investing in DNO shares can be done almost tax free under a holding company whereas gains from Apple shares or income from government bonds would be subject to taxation at company level and then further taxed at investor level when the proceeds are withdrawn. After taxes and fees there may not be a lot left for investors investing “by the book”.
Consolidating investments in a single vehicle where the portfolio can be managed without adverse tax consequences is ideal for optimal asset allocation. Today clients need to rely at least to some extent on the investment adviser to consider taxation when making investment decisions.
Written by Marjanne Olesen, Country Manager Norway