High Net Worth – Advice you can bank on

When rock star Sting went to court in 1995 to explain how he had ‘not noticed at first’ that his accountant Keith Moore had stolen #6m from him, it simply underlined just how much money the very rich have, and how complex their financial affairs are.

Not all ‘high net worth individuals’ are celebrities: many are simply people who have inherited their wealth from relatives, successful entrepreneurs, or the small but growing group of elite managers in commerce and industry.

Traditionally, different types of financial adviser – bankers, fund managers and accountants – have each served this market in their own way, complementing rather than competing with each other. But the ground rules are changing.

Martin McLellan used to be a tax partner with Coopers & Lybrand. Now he is head of financial services at Coutts Bank, the private banking arm of NatWest. As an indispensable accessory for the well heeled, the Coutts cheque book is already well established. Now, says, McLellan, the time has come to provide more than a ‘red-carpet banking service’.

Coutts is aggressively recruiting tax experts from both the legal and accounting professions, and its aim is to provide a ‘total wealth management’ service which embraces tax advice, estate planning and investment and fund management.

McLellan says: ‘I am staggered the banks never did this in the first place.

We discovered that very significant numbers of our clients were not advised at all, or were badly advised, on tax matters. It was a real eye-opener.’

McLellan’s aim is to build a ‘very substantial private client practice’, using the advisory skills of experienced accountants and lawyers, and building on Coutts’ brand name, not to mention a wealthy customer base of around 45,000.

He believes the big accountancy firms have taken their eye off the ball as far as private clients are concerned, preferring to concentrate on the corporate sector.

Accountants beware

But Coutts is not the only threat to accountants’ hold on this market.

Chiltern Group, a financial services consultancy created through a management buyout from Union Bank of Switzerland, is actively recruiting tax advisers, and has already poached a significant number from Moores Rowland, including the firm’s entire tax investigations team.

Meanwhile there is strong speculation that American Express could extend its acquisition spree in the US accountancy sector to the UK. Amex is already the ninth largest accountancy group in the US.

Other financial institutions, such as Merrill Lynch, Norwich Union and Royal SunAlliance are reported to be considering a similar move. Clive Parritt, national managing partner at Baker Tilly, believes his own firm will hold its own, but would not be surprised to see competitors as potential acquisition targets.

That is not Coutts’ strategy, though, according to McLellan. ‘If you take on a whole accountancy practice, you are also buying the parts you do not need, and you are acquiring a culture which is not necessarily the bank’s culture,’ he says.

All-round growth

If competition is growing, the good news is that the market is too. One indication is the health of the private banking sector. The 1996/1997 European private banking survey, carried out by Price Waterhouse (now PricewaterhouseCoopers), found the majority of banks were predicting annual growth of 11% or more for the next decade. The size of the industry was estimated at between $4,000bn and $6,000bn (approximately #2,500bn and #3,700bn).

Ian Woodhouse, who heads PwC’s European banking consultancy practice, explains that a number of factors are coming together to create rapid growth in the number of individuals with substantial assets to invest. One of the most important involves both economics and demographics.

The post-war generation of entrepreneurs who built up many businesses were conservative in their habits and invested either in their own businesses, or in property. Woodhouse explains: ‘Now they are leaving their assets to their families and the estates are being dispersed among three or four people.’

Countries like Germany, where many enterprises are still in private hands, are seeing an increase in the number of companies floated on the Stock Exchange, as the next generation cannot or will not take over the management of the business.

Europe is also beginning to follow the UK and the US in creating a top tier of wealthy executives, with significant share and option holdings.

The net result is a transfer of the original assets into the hands of larger businesses or institutions, while individuals have more assets available for investment.

Peter Bolland is a manager with Bank von Ernst, a private bank owned by Bayerische Vereinsbank, in London. He says: ‘There are two important sources of clients: inherited wealth and owner-managers. Highly paid managers form a third group, but they take longer to build those kind of assets. The exception is expatriates, who can build up assets quickly.’

As far as most of the private banks are concerned, a ‘high net worth individual’ is one with funds of at least #250,000, excluding those tied up in their own business or property. The threshold is there because the banks’ fund management package is not economic for assets much below that, although Bank von Ernst, for example, offers a discretionary investment service to attract the wealthy clients of the future.

For accountancy firms and for Coutts, there is no hard and fast threshold, because their service is based on fee-earning advice, not fund management.

Coutts’ McLellan says: ‘We are more interested in the potential fees a client can generate, whether from managing investments, financial advice or arranging loans.’

For both the accountants and the banks, however, success in this market depends on providing a high level of service. For Bank von Ernst, for example, this could include booking a hotel for a visit to London, securing tickets for a West End musical, or even ordering a pair of boots from Jermyn Street. The dilemma is that, while profitability demands that banks consolidate and merge to gain economies of scale, and invest in information technology to make their back-office operations more efficient, clients will still demand a one-on-one service.

As Bolland puts it: ‘Technology has made retail banking profitable, but you cannot conduct a private banking relationship by e-mail. They want to see the whites of your eyes, because trust underpins the whole relationship.’

The lesson for accountants in all this is that there is room for the Big Five, the middle-tier firms and niche operators.

A crucial question is the source of new business, especially since private clients tend to remain loyal to one adviser. Hence, the Big Five have an in-built advantage when it comes to advising the senior management of their audit clients, or highly paid expatriate employees.

Similarly, the middle-tier firms have a client base of owner-managed businesses which dovetails neatly into offering a personal tax and financial advice service.

Clive Parritt says: ‘Thirty or forty years ago all clients would have received a general financial advice service from their local bank manager.

Accountants may not package it as “services to high net worth clients”, but it is nothing new. People want independence and objectivity as well as someone they can relate to.’

Baker Tilly’s financial services arm is registered as an independent financial adviser, so its staff can give investment advice on specific financial products. But the firm also works with other IFAs where appropriate. Parritt argues: ‘A good accountant, like a good solicitor, will be the co-ordinator, but will not necessarily deliver all the products.’ Although the firm is known for its base of celebrity clients from the worlds of sport and entertainment, Baker Tilly’s core market is owner-managed business, and this is a main source of private client work.

In contrast, Saffery Champness has concentrated entirely on private clients.

Clive Nicholson, the firm’s senior partner, says: ‘Our client base is composed of wealthy individuals and what they own, especially landed estates. In the widest sense we face a lot of competition, but I do not believe most people focus on what this market wants: a focus on the relationship between adviser and client. Clients want a financial friend.’

Saffery Champness is a successful niche operator with no desire to be a one-stop shop. In the 1980s it started a portfolio management arm but, says Nicholson: ‘It was not the right product.’ Saffery prefers to work with private banks to help provide an all-round service, and used to market jointly with Coutts until the bank started edging into the accountants’ own sphere.

The overlap between their client bases must mean that Saffery will be feeling the new competition more than most.

Nowhere to hide …

If increasing competition represents one threat in the high net worth market, the growing desire of governments to part such individuals from more of their wealth represents another. In the UK, the ability of individuals to shelter income and capital gains through offshore tax schemes has been eroded throughout the 1990s.

Now there are moves afoot internationally to clamp down on what the Organisation for Economic Cooperation and Development calls ‘harmful tax competition’, and proposals in Europe for a general withholding tax. The latter could be bad news for the UK – which is, in effect, a tax haven for those who are not domiciled here – as well as countries like Luxembourg, and good news for offshore centres such as Jersey or Guernsey, which are not within the European Union.

For UK nationals who live in this country, offshore options and ingenious schemes are now limited, even for the very rich, but, says Peter Bolland this may be no bad thing.

‘Historically people were so obsessed with tax they ignored the investment potential. Now performance is beginning to attract the attention it merits.’

According to senior tax partner at Grant Thornton Mike Warburton, the ‘taper’ rules for capital gains tax introduced in this year’s Budget could spark a move for the very wealthy into a new form of tax-saving vehicle: the personal unit trust. This operates much like a regular unit trust except that there is only one investor.

The advantage is that assets within the trust can be bought and sold without triggering a CGT liability. So if the trust itself is held for ten years, it is possible to take advantage of the maximum ‘taper’ relief available, without having to hold on to specific assets for that period.

There is one disadvantage, as Warburton explains: ‘You really need assets of #5m or more. With less than that at present, the costs tend to outweigh the benefits. The more people that start doing it, however, the lower costs will be.’

Continuing change in the tax and financial services regimes looks set to create a healthy demand for advice. Accountants will have plenty of opportunities to serve their wealthy clients, but they will also have to come to terms with the fact that others will, increasingly, be competing in the same marketplace.

[QQRobert Outram is a freelance journalist.

Related reading