The problem with wealth management, according to Robert Paul, London & Capital’s youngest ever partner, is that it is very antiquated.
Paul, who is an executive director in the wealth firm’s US family office, says in a world that is generally becoming more transparent, wealth management remains stuck in the past.
‘With legislative changes, with AIFMD, Fatca, CRS, Paradise Papers, Panama Papers; the world is opening its books, telling everyone else where the money is. But in this world [of wealth management] transparency is more provincial.’
He adds: ‘In a more transparent and upwardly mobile world of wealthy people, everyone purports to manage international money, but they don’t actually mean that. What they mean is they will manage their jurisdiction’s share of an international client. That’s a very strange way of approaching it.’
That is why Paul was drawn to London & Capital when he made the switch into investment management. He started his financial career in 2008 as an adviser, but with the launch of the retail distribution review in 2013 moved into investment management. He says it was because he was not happy with the direction advice businesses were going in.
‘Essentially, my opinion was that IFAs will struggle to deal with the more sophisticated larger clients. Because the route they were going down was charging an annual management charge on the assets under management, in addition to the investment manager then charging their percentage.
‘I found it harder to justify in my own mind. So I thought I want to deal with more complicated clients and can’t justify how I’m doing it at the moment. So I decided to join the investment management business. If you can’t beat them, join them.’
He says that he had always been told not to deal with American clients because of the layers of complexity around tax and earnings. ‘So when someone said they have a team dedicated to it, that was interesting.’
He joined London & Capital in 2013, when the US arm had just six people and $300 million (£235 million) in assets under management. It now employs 28 people and has over $1.5 billion in assets. The whole London & Capital business has around $4 billion AUM.
At the time the Foreign Account Tax Compliance act (Fatca), forcing overseas financial institutions to share US citizens' income data with Washington beancounters, was just dawning as a reality for north American clients and their financial advisers, stimulating a small industry of cross-border planners.
Since he made the decision to work at London & Capital, Paul believes the IFA world has become more sophisticated.
‘The fee-based IFAs are really good, but I can’t see how much longevity there is for those that drive their business on charging on AUA. I don’t see that model working. The fee-based financial planning, cash flow modelling has really come on. And advisers are having to add more value for what they’re doing, which is good.’
However, he sees wealth management becoming even more parochial, with businesses in the UK kicking out their American clients, and wealth firms in the US doing the same for European clients.
‘This is a trend I’ve seen in the last four years. People are exiting clients who don’t fit in their bucket. When a client walks in the door to talk to me about their strategy, they have £10 million across three jurisdictions but they don’t know their total return.
‘That’s like having three wills and not knowing how it joins up. If you think about it it’s a ridiculous situation.’
This is because the family will have a different manager for every jurisdiction they have assets in, which can quickly lead to incoherence across a portfolio run by a series of isolated managers who may, for instance, be actively betting against another’s core holding.
‘Another issue is, this time of year in the US, they go through offsetting losses and gains to get a net neutral position for US tax. But the dollar has strengthened significantly against the pound over the last three or four years. What’s happening is, they’re crystallising huge sterling gains and the client is not winning out of that. They are paying a UK tax bill for nothing, because the US business only cares about the US bank.
‘I see so much of that going on and that’s a development, that’s the wealth management business, which I find very bizarre.’
He adds: ‘There have been US-focused firms that were set up. It’s a niche market, but it’s a pretty big niche market. People like the idea of it. So they come into it but it’s at 50% [of a client’s affairs]. Because they say we can manage the UK pots of an American.
'I just don’t understand how a family would want that, they end up being the person running the money.’
Seeing the whole picture
When Paul joined London & Capital he had to leave behind his clients as they were not relevant anymore.
In his first six months in the business he received a crash course in how to manage money for American clients living in the UK, learning everything from regulation to international wealth planning. From being an associate director, he moved up to co-head the firm’s US family office alongside managing director and co-founder Daniel Freedman, and this October became a partner in the business. There are now seven shareholders in the company, including Paul.
He says the most important thing about managing money for both US citizens who live somewhere else and for foreign nationals who live in the US is avoiding the pitfalls.
‘That’s a big part of what we do, making sure it is all joined up. You need to be efficient and smart on how you invest the money. You have to run this dual thought process.’
He says this is especially true when thinking about taxes. Although the team does not give tax advice, reporting is a big part of managing international money, Paul points out.
The US tax year and the UK’s does not match up, which is where the team at London & Capital can help.
‘The US tax year is calendar year and in dollars. So you give them a UK tax report in sterling and it’s from the fifth of April, the accountant needs to go through the report and every trade and do all the conversions.
‘They will charge a lot of money for that. We have this accountant to provide reporting information. Wherever the money is that we manage, we will provide full US reporting information for their filing. We will also do all the sterling information for the UK tax year.’
Paul looks after around 85 families and describes a typical client as ‘genuinely international Americans’. They are families who have assets spread in the US, offshore and in the UK, with anywhere between £1 million and £50 million.
For his clients, Paul says the biggest challenge in the last few years has been constant regulatory change.
‘There is enough change in the UK in terms of legislation and rules, you overlay that with the US as well, that’s two jurisdictions changing legislation. Working out how to plan themselves within those is difficult. It’s why people like us exist.’
Robert Paul says the most basic pitfall to avoid when looking after American clients in the UK is buying non-US funds.
‘The biggest investment vehicle in the UK is funds. From a US perspective it is very tax punitive. The fund goes up and you’re still holding it, in dollars, you pay US income tax on that gain every year. And you can’t offset the loss.’
To offset the tax bill, the fund has to outperform significantly, Paul says. Americans also cannot invest in offshore bonds or investment trusts.
‘On the flip side, if you invest in a non-EU fund not on the UK reporting fund list, like a US mutual fund, these are taxed in the UK on the realisation of the gain. You’re paying half the gain in a fund in income tax.
‘I always say it’s perfectly feasible to manage yourself as a US and UK person, you just have to understand what you’re doing and realise that some things are off limits. And you always have to file more than one tax return.’
Therefore, instead of investing in funds, the team at London & Capital pick stocks.
Paul explains: ‘Our clients have money and want to maintain that wealth. We are focused on genuine capital preservation before it became very trendy to say it.
‘We run an institutional type set up. We have an investment team and the CIO, with about 25-30 people on the investment side. That is a centralised proposition. Their job is to set London & Capital’s view on the world.
‘From there they will put together an asset allocation and it is driven by parameters of risk.
‘The fixed income team, the equities team etc, pick the individual securities. You then have each team with a different specialism. Portfolio managers are all CFA qualified. Their job is to populate the portfolios with the individual securities that come out of the asset allocation team, but with the knowledge of the specialism of that desk. We have six portfolio managers in the US business.
‘That allows us to have one train of thought as a business rather than lots of people making their own decisions and have tighter controls which is needed for our capital preservation approach.’