“Brave New World” – Interview (übersetzt ins Englische) mit Philip Marcovici in SPEAR’s Russia
SPEAR’s Russia #4 (13), 2011:
There are two reasons why people most frequently turn to Philip Marcovici, member of the board of Kaiser Partner. Either they need to discuss the tax situation in various parts of the world or they need an expert assessment of various changes taking place in the world. In an interview with SPEAR’S Russia, the prominent expert combines these two subjects and explains the logic of responsible investment.
The world in the aftermath of the crisis in the early 2000s. What shifts were there in financial and tax aspects which HNWIs need to known about?
There are several very important aspects. The first is banking secrecy. Attitudes towards banking secrecy and the role of financial centers such as Switzerland, Liechtenstein and so on have changed fundamentally. There have been a particularly large number of changes over the past two years, although in fact they have been in the offing for the past decade. As a result, transparency has increased, particularly with regard to tax. These are the fundamental issues which wealthy people should bear in mind, because at the end of the day, it is in their own interests to realize that they have to play by the rules of the country they live in, and so if they don’t like them, they should move somewhere else. They must be aware that there is no third way. You can’t be wealthy and break the law by trying to avoid taxation by hiding your cash and assets offshore. For that reason it’s even more important for HNWIs who may live in a developing country with an unstable economic and political system, and who are concerned about the confidentiality of information about their property and assets to be aware of the various ways in which their capital can be structured to provide them with the necessary level of privacy. Traditional private banking, which in the past often sent out the message that its well-off clients need not worry about tax laws in their country because “here (in Switzerland or Liechtenstein) we have a system of banking secrecy and we can hide your money” no longer conforms to the reality. That world has gone.
How do private banking customers respond to this?
It’s very good that all are changing in this way, because it is simpler for wealthy people to understand that in reality their choice is limited to two possible variants: either pay tax according to your own country’s rules, or find a way to change your place of residence. This applies particularly to Europe, say, where wealthy families can move and remain domiciled in different countries, thus giving them the confidentiality they need while optimizing their tax affairs. Another important issue in my view is that increasing numbers of wealthy families come at a time when their capital and assets are to be passed on as inheritance to the younger generation. This stage of inheritance planning is extremely important for any wealthy family. And planning like this is becoming increasingly complex because practically all of these families are becoming multinational. For example, a wealthy Russian will have some family members living in Russia while others live abroad somewhere. Some of his investments will be in Russia and others abroad. And so forth. So how he plans his inheritance is very important.
But what’s even more important than getting the most tax-efficient structure in place when transferring assets to the next generation is to try and ensure that the process doesn’t break the family up. Because, unfortunately, this often happens in extremely wealthy families, depending on how the money is passed on, and what each one of the heirs has done to build up the wealth. All these questions can have a real impact on whether the family will remain together. And if you have a family business, how it is passed from one generation to the next is also very important.
In Russia many people are currently anxiously anticipating the coming parliamentary and presidential elections. How do you think that local HNWIs should behave for the sake of their businesses and their assets?
In my view, political risks and uncertainty are nothing new or unique. In other words, they’ve always come up throughout history in various regions of the world. To safeguard against such risks, wealthy people have used a wide range of instruments. As a rule they use offshore firms, setting up trusts, insurance strategies and corporate structures. But often there’s not much point in setting up mechanisms of this kind because you are simply swapping your “home” risk for a comparable “foreign” risk.
Let’s say you have a large diversified company in Russia with lots of subsidiaries active in various sectors. To minimize the political risk, you need to make sure that some of these assets and some of the ownership structure over those assets is actually located outside the country.
If you look at what some major companies did before Hong Kong was returned to Chinese jurisdiction in 1997, you will find that some of them, such as the Hong Kong and Shanghai Banking Corporation (HSBC), changed their ownership structure. They did this to insure themselves against heightened political risks. But in the end these new structures were pointless, as the political risks they feared and which they were hedging against did not come about. Nevertheless, history has many examples of good asset structuring against political risks which the owners of large fortunes in Russia would do well to study and use for their own situation.
In recent months there have been debates in Russia about the future of private banking. On the one hand there are those who regard this as an excessively costly, conservative and inflexible option. They say that the majority of private banking clients would do equally well to deposit money or take out credit with retail banks. And for good investment results HNWIs could go to some boutique company or to a multi-family office. Their opponents say that wealth boutiques don’t have banking licenses, which makes them less reliable. What is your view?
It seems to me that this doesn’t really state the issue correctly. It would be more appropriate to ask whether a client needs a private bank. The answer depends on what type of private bank and what that person wants from it. The reality is this: many banks don’t actually give their customers what they need. Also, many wealthy families themselves don’t know what they need. For example, if you deal with a rich Russian businessman, he may have an excellent understanding of his own business and be perfectly versed in Russian business affairs. But even then he may not know what questions he should ask (of his private bank), and what services he actually needs, how he should protect his assets against political risks, against economic changes, or what to do if he wants to invest for the long term. Or, if he has a business in Russia which is bringing in a healthy profit, what he should do so that he can pass these assets on to his heirs when he dies. What to do, for example, if one family member holds Russian citizenship and another American citizenship. And so on.
In addition, many Russian private banks frequently don’t bother to find out what their customer really needs. So if you ask whether any particular wealthy customer needs the services of a bank, the answer will be, yes, he does. But what it boils down to is, should he just go to the bank and say, “Here I am, what can you do for me?”. In many cases the bank itself is in no position to tell a customer in plain terms what it can do for him. It’s very important that users of private banking services actually understand the whole process. And to do this, you need to search the market for the institution that is more capable than the others of satisfying these requirements.
And these institutions can include private banks, as well as multi-family offices, and other companies of that kind.
However, the most important thing is for a wealthy customer to keep everything under his control and to be an educated user of these services.
But in the end is it worth going to a private bank for complex investment solutions?
In some cases private banks can do this, but very often they can’t, especially when a client needs quite complex solutions. Some private banks are part of a diversified financial group which has an investment division. Sometimes they are small independent companies. Some have a network of partners. It all depends what you need. Let’s say your wealthy customer is preparing to expand his business and he needs to draw credit, then an investment bank would probably suit his purposes better than a private bank. But even a private bank could act as an intermediary and help its client to find the expertise he requires and open certain doors to him, both within its structure and among its partners on the market.
Before taking the decision to invest money in any particular company ultra HNWIs generally study its track record, business plans, carry out a financial audit and have the assets valued. Would this be enough in itself? Or is there more an investor should look at?
It’s very important to bear in mind what factors could affect the financial results of your investment. Let’s say you want to value the return on your investment, you would have to see what the results would be after taxation, and not look just at the pre-tax profits.
For example, an investor attracted by the low prices of commercial real estate in the USA decides to invest in it. Actually buying real estate is fairly simple, but the return on your investment will depend largely on how you manage it. Because if the ownership structure has not been properly set up, there is the possibility that if the investor dies, those inheriting the estate may have to pay tax equal to 35% of its value. And apart from that, there is capital gains tax, which could also be 35% instead of the 15%, for example, which would be payable if the property were optimally structured. And what the ultimate return on the investment is will depend on this and any similar factors. So what is needed is a careful analysis of how any current tax system may affect the return. Let’s say I invest outside the USA, for example, in Russia: I have to analyze not only how American tax law will affect the end result, but also what tax I would have to pay in Russia.
In addition to questions of taxation, it is also very important to understand the tasks related to asset security, to their ownership structure. Too often, wealthy people use the services of advisers who set up a company in Cyprus, or a trust or a fund, but often the customer doesn’t realize what is actually happening and why it is all necessary. And this is also holds many risks. Many of these risks only make themselves felt after the death of the owner of the fortune. In other words, the closer somebody looks into these issues, and balances them all up, the better.
There is one more aspect which you personally will probably bring to our attention. That is how the company complies with the principle of “responsible investment”. Overall, how to “incorporate” such values into the investment decision-making process is quite clear. But can you get a steady level of good returns by investing only in the “right” companies?
In my office it’s not only possible, but also a very logical decision. If you look at long-term investments, taking this approach means investing in companies that will be on the market for a long time, without any risk of losing these assets, companies which will have no repercussions from any errors made earlier.
And the more you concentrate on “ethical” or “responsible” investments, the more you will be focusing on companies which have a long-term vision and which run their business in accordance with that long-term vision. In turn, the return on investments in these companies will also be higher.
And if you try and assess the sustainability of investments in companies which don’t just concentrate on making profits, but which also try and bring benefits to society, you will be see that this again is a factor which contributes towards the security and integrity of your investments in the long term. Because the more important the goods and services of the company you invest in are to consumers, the better its business will develop. And conversely, the more sustainable its business, the more important the goods and services it produces. So I sincerely believe that “responsible” investment is a win-win situation in all respects.
But if you look at the results of funds specializing in “responsible” investments, it is easy to see that they are not outperforming the market.
That doesn’t come as any surprise to me. I believe that it can be largely explained by the fact that the majority of companies dealing with “sustainable “investments appeared and started to trade quite recently. You shouldn’t judge their results against the same time horizon as speculators and short-term investors. Of course, when you invest on the basis of those principles, you shouldn’t expect the same returns within such a short timeframe. But over the long term, I believe the returns, and above all the security of these investments will be much greater.
The next question will be about Japan, which has recently been the subject of a series of bad news stories. Which of the events in that country will affect the world economy? And specifically, the wealth management industry?
To be honest, that’s not really my field, but I’ll try and say a few words about it, as I worked in Asia for some time. Ultimately, Japan is expecting a kind of investment boom. This will be mainly in the construction industry, as the country has suffered a lot and needs to be rebuilt. Of course, these events have also strongly affected the Japanese Yen. What’s very interesting for me is to see what’s happening from the perspective of wealth structuring and estate planning issues. It’s interesting that often the best time for such planning is a time when asset values are at their lowest. Japan is a country with a very high level of inheritance tax. That’s why if a father wants to pass his assets on to his children, this is probably the best time to do so, when assets are at their lowest, because then the tax payable will be much less. And this is a very good example, because sad though it is to watch events in that country, many of the companies there have a much lower price-tag than ever before.
As far as Russia is concerned, times of crisis and a complex market situation are often the best times to think of restructuring a business, not just for inheritance purposes, but to protect those assets.
Is it possible to make long-term forecasts today about the tax regime worldwide? What changes will there be in the next 10-15 years?
From my point of view, in particular the current trend of increasing fiscal transparency will be sustained in the future. The reality is that thanks to technological developments, tax transparency in each individual country of the world, not just the USA and Europe, but also Russia and other countries, will increase, as governments will be able to exchange such information much more easily. This trend will undoubtedly continue in the next 10-15 years. For wealthy people this means that they will have to play by the rules of their countries, or look at options for moving. But in general, fiscal transparency will grow. Which doesn’t mean, in my opinion, that we should expect a single tax system worldwide in the next decade. More likely there will be a variety of individual systems, so in all probability countries will continue to compete with each other for investors and investments. For the owners of large fortunes, this gives an opportunity to diversify their investments over many countries, to structure their wealth geographically and even to choose a country to live in. All these opportunities will still be there. As you know, today many rich Russians are living in the UK or other countries. Why do they do so? Because if you live in Britain, you get non dom status (the place of permanent residence for individuals or registration of companies under the laws of some countries – editor), you don’t have to declare income or pay tax on assets outside Britain. In this way, a wealthy person can implement his right to secrecy in tax and other matters. This situation will, in my view, remain unchanged.
But what will happen to countries like Switzerland and Liechtenstein in this new world?
They’ll have to adapt to the new conditions. To be frank, in the past countries like Switzerland and Liechtenstein relied to a very great extent on the system of bank secrecy which they “sold” to their customers, rather than any particular knowledge or expertise. The survivors in this industry will be those who understand that this is a knowledge-based business.
As the world becomes increasingly transparent with regard to divulging tax information, so the need to ensure confidentiality will effectively grow, and therefore the importance of laws protecting bank secrecy in Switzerland and Liechtenstein will be greater than ever before.
It seems to me that a “transparent” world and banking secrecy don’t go together very well. Do you agree?
The point is that banking secrecy is not just protecting customers from tax inspectors. It also protects the personal information of the family from getting into undesirable hands. The need to comply with tax transparency does not mean that banking secrecy has lost its importance. It’s true that Switzerland, Liechtenstein and some other countries recently gambled on using banking secrecy for purposes other than concealing tax information. And the reality of the world today is such that this protection is becoming increasingly important. Let’s take a wealthy Russian living in London. From the tax point of view, he’s absolutely transparent and complies with all the requirements on declaring the required information. At the same time, a person like this doesn’t want some third party to get information about what assets he holds. That’s why the option of using the services of financial institutions in countries where there is a regime of banking secrecy in force will become more rather than less attractive to wealthy people in the future. And the more complex the world we live in becomes – divorces, legal wrangles, disagreements and conflicts between partners, and so forth, the possibility of legally using banking secrecy will become an increasingly important element in financial and tax planning.
And the final question. How do you manage your own investment portfolio? Are you an investor who likes taking risks?
No, I’m not a risk-taker. I prefer a longer-term approach to investment and don’t invest my money in high-risk strategies. And the question of choosing instruments for investments boils down to understanding that at the end of the day, a key factor for success is diversification. It may sound very simple, but that really is the key. And it’s very important to diversify your investments not just by classes of assets, but also by currencies and geographically. A high correlation among various classes is no big problem for me if you take into account that I don’t invest independently, but use the services and expertise of professionals. I generally invest my personal money in longer-term instruments and strategies. Here I focus my efforts on ensuring the preservation of my cash and assets, and setting up optimum structures for passing them on to my children. But if we talk of my principles in simple terms, without going into details, I believe that diversification and understanding the process are key elements.