Family Wealth Report caught up with Andy Hart, managing partner at Delegate Advisors, about how, despite potential tax increases and general financial uncertainty in the US, UHNW global families are increasingly looking to the country as a safe haven for their wealth.

Family Wealth Report doesn’t necessarily share the insights below but is grateful to be able to publish them and welcomes reader feedback.

Please outline the case from your point of view as it relates to the role of the US as a financial “safe haven” for global families, and what factors challenge this concept. 

The US is a financial safe haven for many global families because of our stable government and deep respect for the principles behind our rule of law, which include a strong foundation for protection of individual and property rights, the latter providing asset protection. The biggest factor challenging the US is that we have a relatively high tax rate compared to other countries, and we tax citizens on their global income, not just income derived from within the US. Hence, there is a significant cost for global families to access the US that must be considered and planned for before they become liable for US taxes.

That said, certain wealthy families (especially from Latin America) are beginning to look to the US as the Standard for Automatic Exchange of Financial Account Information (commonly referred to as the Common Reporting Standard or CRS) is implemented (or will be implemented) by more than 100 countries, the US not being one of them.

What would you say are the main cultural differences that wealth advisors need to be aware of or consider when providing wealth management services to global individuals and families?

Each country and each family is different, but we have found the biggest cultural differences to be communication style, preference for name brands and a lack of awareness for best practices regarding the investment process in the US. Families from other countries often communicate in a very formal manner and require face-to-face meetings with the key people from the family and the advisory firm.

Furthermore, they often avoid giving a direct “no” to advisors, which can be confusing for advisors who are used to more direct feedback about the potential of forming new relationships.  Many cultures have great respect for large firms that have been successful in building a global brand with a solid reputation. For advisors in smaller firms, it is important to present the experience of the key professionals within the firm and to leverage the strength of partnerships with other firms that have a global brand.

Finally, the investment opportunities available to global families often have very different risk and return profiles from what one finds in the US. For example, many venture opportunities in China have strong political backing that from the outset mitigates downside risk and materially enhances the prospects of a company. We have been told by families who have experienced great success in venture investing in China that they consider venture capital to be a lower risk investment strategy.

Advisors need to understand that their global families come to them with an understanding for how investments work in their home countries and that their views may by wholly inapplicable in the US. Advisors should take time to evaluate how their global families view investing in their home country to ensure that their understanding of investing in the US is accurate.

To what extent has the economic slowdown in certain countries such as China been a catalyst for the immigration of wealthy families to the US and elsewhere?

Our observation is that the economic slowdown in China has not been a catalyst for emigration, either to the US or elsewhere; rather, it is our observation that the catalyst for considering emigration arises more from the political instability resulting from the Chinese government’s attempts to clamp down on anyone deemed to oppose the ruling party. The stability of the US as a safe haven is more appealing to global families than the growth potential of the US economy. In addition, wealthy Chinese families realize that our educational system and relatively free-market economy afford their children greater opportunities than are available in China.

What have been the most significant industry regulatory or other legal changes that have affected the way you serve HNWIs?

The short answer is that there have not been any. That said, there has been a great deal of press about the Department of Labor's new rule requiring that financial advisors act as fiduciaries when providing advice to owners of retirement accounts such as IRAs and 401(k)s. None of these industry regulations have really changed the way we serve HNWIs, as we have always served as a fiduciary for our clients. We are not surprised that broker-dealers opposed this change so vehemently.

They have functioned for years based on a lower standard (“suitability”),  a standard that allows advisors to sell their clients products or solutions that are in the advisor’s best interest (financially) – so long as the products or solutions are suitable (a word for which there is no clear definition in this context) for their clients. It is important to note that SEC is considering requiring such a standard for all advisors (including those working for broker dealers). The opposition to such a change is very strong.

What are the main challenges you have encountered when serving wealthy families in the US from abroad? What would you say are among the biggest risks facing truly global families of wealth today?

In response to the first question, we currently do not serve any non-US families from abroad. In response to the second question, we observe that wealthy families frequently exhibit proximity bias, though increasingly wealthy clients make use of technology to conduct their global affairs, a phenomenon that tends to reduce proximity bias.

Nevertheless, our experience tells us that, wherever a client may reside, time spent with the client, particularly in the beginning of the relationship, is invaluable in getting to know the family well. We think the biggest risks facing global families are global tax planning issues (see our response to the first question) and local investment issues.

We believe that families with a global footprint need to have very strong legal and tax counsel who understand the laws and regulations of each jurisdiction to make sure that the family does not run afoul of those laws and regulations. Furthermore, we believe it is best for families to also engage a local firm in any country where they invest to make sure they get local knowledge and access to the best information possible. Based on our admittedly limited observations, it seems to us that many if not most of the investments that are aggressively marketed to foreign families would not pass muster with us. 

How is the current political landscape in the US affecting how wealthy individuals are planning for their futures, and how can advisors ensure they are best prepared for any eventual outcome?

Many of our families are trying to complete wealth transfer projects in 2016. We anticipate tightening of rules around the amount of transfers allowed and how the valuation of family controlled businesses are valued for transfer purposes. Many clients are wary that the lifetime gift tax exemption (currently $5.45 million) may revert to the previous level ($1 million) and are therefore completing additional gifts to children to maximize their lifetime giving before year-end 2016.