As wealth management markets go, the name of Israel may not grab as much attention as those of other economies, but a number of banks are ramping up their businesses in the country. This publication recently talked to Merrill Lynch.

As wealth management markets go, the name of Israel may not grab as much attention as those of other economies, but a number of banks are ramping up their businesses in the country.

The economic background, while not as favourable as in some of the hottest markets, has its reassuring points. After a brief recession in 2008-09, the country has managed to restore some growth; its strong IT sector and entrepreneurial economy are creating a sizeable number of millionaires and mass-affluent investors for a modestly populated country. In 2007, for instance, the number of people with $1.0 million or more of investable wealth rose by 13.6 per cent – about 1,000 individuals – to a total of 8,200, according to the Merrill Lynch Cap Gemini World Wealth Report 2008. Between 2008 and 2009, meanwhile, that figure to 8,500. Drivers of wealth included a 40 per cent increase in market capitalisation, for example, as well as a recovery in property prices.

It is probable that the HNW population growth rate stagnated in 2008 but the country’s recovery last year and during 2010 should keep the numbers on an upward path.

Certain banks are noticing the trend. One firm with a history of more than 20 years in the country, and of doing wealth management there since 2000, is Merrill Lynch. It recently appointed Yanir Brenner and Dan Ram as financial advisors to focus on both high and ultra high net worth clients. Brenner joined from HSBC Private Bank and Ram was latterly a financial advisor with UBS Wealth Management. Meanwhile, Citi and Credit Suisse, for example, have made hires in the country. In June, Pictet entered the Israeli funds market.

So what are the attractions of doing business in Israel?

The country benefits from clear laws, relatively straightforward tax rates – and a large and entrepreneurial economy generating considerable amounts of wealth, Sigal Shapira, head of Merrill Lynch’s wealth management business in Israel, told this publication.

“Global firms are doing business here; some are changing the way they do business and others are setting up here,” she said.

“The fact remains that those who are most able to offer clients access to the broadest range of wealth management capabilities, paired with the ability to provide both strong local experience and cross-border teaming, in the way that we do, will have the edge,” Shapira said.

A word she repeatedly used to describe high net worth individuals in Israel was “sophisticated”. Such clients have high expectations of the quality, variety and range of services in wealth management, she said.

Although Shapira could not offer exact percentages, she said a high percentage of clients in the country are entrepreneurs and self-made wealthy people. Many of them have backgrounds in the country’s vibrant IT sector, for example.

“The clientele is pretty savvy and knowledgeable about the level of service they seek,” she said.

Clients seek a range of services starting from investment management, asset allocation advice and portfolio construction, all the way across to structuring, tax and estate planning, and succession planning, she continued.

Structuring

Wealth structuring makes sense as Israel is certainly not an ultra-low tax nation; it would be unlikely, given the high spending on areas such as defence in a country frequently at odds with other Middle Eastern nations. Israelis are taxed on a personal, not territorial basis. Individual income tax rates range from 10 per cent to 45 per cent, and there is a withholding tax on interest and dividends at rates of up to 25 per cent. But even though taxes are not especially light, changes made by lawmakers to trusts and sweeping tax cuts have given a substantial boost to the country’s wealth planning industry, putting it in the frame to challenge other international financial centres.

Over a year ago, changes to trust law enacted in the mid-noughties came fully into force. (Trusts have been recognised under Israeli law since the 1920s.) The Israeli government has announced tax breaks designed to encourage immigration to the 60-year-old state, which has a current population of about 7 million. For 10 years, an immigrant or returning expatriate will pay no tax on overseas assets and no reporting of these assets is required.

One key change is that if a trust is set up by a foreign settlor living abroad, the trust is exempt from tax and treated as an overseas-domiciled trust. This applies even if some of the trustees live in Israel.

The changes to the tax treatment of trusts came about in 2003 when the-then Israeli government decided to move the country from territorial to global taxation. Foreign residents can set up a trust in any foreign jurisdiction, such as England or Gibraltar. The changes have drawn praise from the Society of Trust and Exchange Practitioners. Elsewhere, foreign residents in Israel enjoy a number of benefits to encourage inward investment, although foreigners are subject to capital gains taxes on gains derived from assets in the country, apart from gains in stock market equities and sale of shares in private Israeli firms.

Israel's inheritance law - which dates from the mid-1960s, does not limit how much that people can bequeath to family members, but there is a requirement to protect surviving spouses.

Straightforward

Merrill Lynch’s Shapira believes that the tax, regulatory and legal structure in Israel creates a healthy, straightforward environment for high net worth individuals.

Government incentives also encouraged affluent and wealthy immigrants to Israel, which was an obvious benefit to the industry, she said.

Most of the distribution of the wealth management service comes through word-of-mouth recommendation, said Shapira. “It is a small country that loves the media. Relationships, personal connections, public information and word of mouth are probably the main components [in spreading the message about Merrill Lynch].”

As a country, Israel would seem to offer opportunities. It would be wrong to ignore the obvious geo-political problems that Israel faces – too often, it seems, the country is in the headlines for reasons linked to conflicts over territory, clashes with groups such as Hamas, and attacks against its very existence as a Jewish state by the current leadership of Iran. But there is more to Israel than meets the eye. Its economy and financial successes merit attention from wealth managers.