After a torrid few years beset by geopolitically-driven market volatility, high net worth investors, (and their asset managers) have ridden a recovery wave. Indices in the US and UK, for example, have hit new highs and many market professionals are beginning to devise ‘top of the market’ strategies as spare economic capacity is employed and world markets face life without the largesse of central bank stimulus packages.
Like it or not, volatility is set to return and February’s spike in US and European volatility indices put investors on notice to prepare for a long period of yo-yoing or plateauing asset prices. Whilst not recessionary, wealthy investors need to decide whether they think global economic growth can continue for the next year or two. Catching that falling knife will mean preserving the gains they have made.
“Across Europe, governments have pension promises to meet, infrastructure to invest in and public services to sustain,” says Lombard International Assurance Director, Amaury de Potter. “Just as the environment for continued high investment returns looks uncertain, tax authorities are stepping-up their efforts to target the wealthy with aggressive revenue-raising initiatives.” Belgium, once famous for its generous tax breaks, has undergone the “tax shift” policy rolled-out by the government of Charles Michel to support citizens on low and medium incomes by increasing taxes on capital.
Tax on dividend and interest income has doubled over the last five years to a rate of 30% whilst rates on securities transactions, ranging from 0.12% up to 1.32%, have risen several times and expanded to securities accounts held by Belgians abroad. In addition, this year has seen the introduction of a new measure which creams 0.15% off the value of investments held in securities accounts north of €500,000 every year.
The consequence of Belgium’s increasingly more aggressive tax treatment of private wealth is that some clients ask their wealth managers to manage their tax exposure by focusing on capital gains over income and limiting turnover in their securities accounts. This constrained approach often creates sub-optimal portfolio management and, therefore, performance.
The direction of travel is clear and political parties need only look across the border with France for new policy ideas, meaning asset managers need to devise clever solutions to defend their clients’ wealth.
One answer to the problems created by aggressive tax reforms can be found in the life assurance market. These products benefit from a far lighter tax regime because policy-makers around the world support them as a mechanism to encourage long term saving for the masses. Holding investment portfolios within these structures enables investors to retain control of their portfolios, keep a greater share of any gains and shelter assets for their heirs.
Life assurance policies normally run for an undetermined period of time and innovations in the sector have included enabling individuals to place a variety of traditional and non-traditional assets within them. Lombard International Assurance, works with its clients and their advisers to build structures capable of handling a variety of outcomes. In anticipation of more volatile market conditions its specialists have created a new option, called Wealth Preservation Life Cover, which can guarantee that the minimum value of a life assurance policy when the last life assured dies will be what they put into the structure at inception.
In simple terms, imagine a wealthy individual in her mid-50s puts a portfolio of equities worth €5 million into a life assurance policy, earmarking a portion of her wealth for her children. Two years later, bearish markets have reduced the portfolio’s value and, at the same time, the policyholder (who is also the only life assured of the policy) unexpectedly dies, triggering the dissolution of the policy and payment to beneficiaries just as her asset manager grapples to recover the losses. But instead of the €5 million inheritance originally put into the policy, only €3.5 million is left. Opting for the life cover ensures that the policy pays the full €5 million to the client’s beneficiaries.
“The especially innovative aspect of this value preservation strategy,” says Nicolas Demarest, Lombard International Assurance’s branch manager in Belgium, “is that the life cover element only activates – and therefore accrues costs – when the portfolio falls below its initial value. At all other times it’s dormant and cost-free, enabling clients to derive fuller benefit from positive investment performance.”
In the case of the portfolio above, mauled by bearish markets, when active, the cost of the life cover is actuarily priced on a quarterly basis. For our mid-50s client with no serious health issues before her untimely death, the cost of cover for her €1.5 million loss would have amounted to just €2,873 per quarter.
It’s also easy to set-up since the majority of applicants will either automatically qualify or have to fill in a short questionnaire. Older clients, or those with a history of ill health, may need a medical examination to assuage the insurer – it is, after all, life cover – but it’s a one-time-only part of the cover’s creation. Whilst not unlimited in its scope to protect portfolios against losses, it does cover up to €20 million, creating a substantial cushion for clients.
“Since introducing the life cover option,” says Mr. de Potter, “it is interesting to see how clients in different countries have responded. Beyond encouraging take-up of the cover generally, certain markets – such as Italy – have been more enthusiastic, pointing, perhaps, to subdued sentiment and optimism amongst wealthy individuals in those countries.”
Wealth Preservation Life Cover helps to secure legacies in a simple and cost-effective manner for investors seeking to preserve capital and mitigate the risks in good economic times and bad. “As always,” says Mr. Demarest, “our job is to create the structures for wealth that serve our clients’ current and future needs. If we can offer them straightforward solutions that preserve and grow wealth, giving them peace of mind, then we’re happy.”
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Head of Belgian branch
Lombard International Assurance
Amaury de Potter
Director Sales - Belgium & Luxembourg,
Lombard International Assurance