In the universe of HNWIs, it is not unusual to observe how clients’ wealth may not be tied up to a single financial institution or to only traditional assets. Indeed, we perceive how private clients are increasingly willing to invest in more complex assets in order to exceed the average market yield linked to traditional financial assets such as shares or bonds. Amongst others, real estate, private equity or hedge funds are interesting options for this type of investors, however, their administration and management is complex and requires deep technical expertise and knowledge.
Since the 90s, the time when the unit-linked cross-border business related to HNWIs started to develop rapidly in Luxembourg, the Grand Duchy has always distinguished itself by the enactment of a flexible yet tailored set of rules adapted to the needs of HNWIs willing to structure their wealth through unit-linked life assurance. A good example of this is the latest Commissariat aux Assurances (CAA) circular letter on investment rules (Circular Letter 15/3 in force since 1 May 2015) for life assurance products linked to investment funds where, for instance, in “type C” policies (i.e. min. investment of the policyholder in all life insurance contracts amounts to 250,000 € and min. policyholder’s wealth invested in transferable securities exceed 1,250,000 €), the premium can be invested with no limitations in complex assets such as alternative funds (notably, hedge funds), real estate funds or shares of non-trades companies. This is indeed a distinctive feature of the Luxembourg unit-linked life insurance products where traditionally the premium is invested in “plain-vanilla” financial assets such as regulated investment funds, typically, UCITS.
As a result of this enhanced flexibility, Spanish or Portuguese resident HNWIs can extend their range of investment alternatives beyond the traditional choices in order to obtain an expected higher return while keeping a diversified portfolio between low, medium and high risk investments. At Lombard International Assurance, we have developed an in-depth expertise on how to on-board, administer, value and monitor non-traditional assets in order to integrate them into a holistic wealth and succession planning solution. In concrete terms, in Lombard International Assurance S.A. we dedicate specific resources, notably a fully dedicated team of experts with different backgrounds to assess carefully each type of asset from a legal, regulatory, risk and tax perspective not only at the on-boarding phase but throughout the whole life of the policy.
Case Study
In the present example, we describe the situation of an entrepreneurial family that set up and ran a successful furniture manufacturing business for many years on the Iberian Peninsula, which they sold a few years ago. A vast majority of the wealth arising from this sale has been ring-fenced for wealth generation and preservation. Much of this has now been centralised with a Family Office with the objective of growing it and planning its transfer for future generations. However, some of it will be used for business opportunities reflecting the on-going risk appetite of the family.
The clients plan to retire shortly in their home country and rely more on the Family Office to manage their assets. They have three children – two sons living in their country’s capital and a daughter living in Sweden.
The clients have clearly manifested their willingness to provide financially for their children under a tax efficient scheme, sustaining the family wealth over generations. As entrepreneurs, they are keen to maintain a medium to high risk strategy with the ability to move beyond the standard assets that have previously been available to them to more sophisticated ones such as direct investments in private equity opportunities in the European market and in Real Estate Funds allowing investments in real economy as well as hedge funds or structured products. In this sense they have maintained contact with the banks that advised them on the sale of their business and wish them to stay as preferred financial advisors going forward.
Further to several conversations between the Family Office, the lawyers of the client, the financial advisors and Lombard International Assurance, the clients realized that the subscription to a Lombard International Assurance contract allowed them to access a broad and wide range of complex assets which went beyond traditional investment strategies offered by domestic banking institutions. In this sense, the Family Office in agreement with the clients decided to follow an investment strategy that would enable them to achieve specific investment objectives by broadening and diversifying their portfolio and accessing a wider offering of financial assets issued by financial institutions located in Europe and the United States. In order to meet the Spanish tax requirements applicable to this type of insurance products, the management of the financial assets needs to be fully delegated to the financial advisor by the insurance company.
As per the succession planning, beneficiary clauses reflect the clients’ wishes, appointing the children as beneficiaries and allowing the family wealth to be transferred across generations in a flexible and pre-established manner whilst maintaining the trusted banking relationships through generations. For instance, the clients were able to establish in the policy eventual restrictions related to the age of the beneficiaries when accessing the proceeds or limits as to the amounts to be distributed on a yearly basis.
By Pablo Peciña and Gonzalo García Pérez
This article was published on FundsPeople in Spanish and in Portuguese.
* The above fictional case study is a hypothetical example, which may bear little or no relation to clients’ particular circumstances. It is drafted with the intention to reflect reasonably analogous customer and market scenarios and is intended for informational purposes only instead of customer advice. Lombard International Assurance S.A. is not responsible for the accuracy, completeness, reliability or usefulness of any content or opinions reflected therein and makes no warranty that such information will assure a successful outcome.