Editor’s Letter

Attending an international wealth management conference reminded me of one of the unresolved and crucial issues facing our industry: the needs of global families.

It is not hard to draw up an impressive list of the many advances that our industry has brought to wealthy families over the past 10 to 15 years. We now recognize that individuals have more than one goal and one risk profile; there is virtually universal agreement that strategic asset allocation must recognize this fact, and the new process has been dubbed “goals-based asset allocation.” I tend to prefer the term “goals-based wealth management,” as there is much more to wealth management and meeting individual goals than just the management of financial assets! We also now have clear processes to deal with tax issues in the day-to-day management of portfolios, although, in fairness, we must admit that tax awareness has not been uniformly accepted around the world. The main challenge with respect to tax awareness remains the fact that solutions or processes cannot be universal; they are crucially dependent on tax rules in each country. The focus on tax awareness has also led to material advances in the importance of asset location, a process through which we try to optimize which pocket of a family’s wealth should own which assets. We finally have recognized the importance of soft issues, whether they are related to the multiple dimensions of what Lisa Gray calls a family’s “authentic capital,” the education of future generations, the management of risk, or the governance that families should put in place. Many other advances could be cited here, but the point has hopefully been made that much progress has occurred.

Yet, as initially pointed out in The Journal of Wealth Management by Charles Lowenhaupt, one dimension has yet to draw sufficient focus: the needs of global families. What is a global family? Simply put, it is a family whose members may not share the same culture or religion and may be legal residents of multiple different countries. The main challenge is that these families are often caught in the crosshairs of conflicting regulatory and tax frameworks. Even when they are moved by the admirable goal of complying with all applicable rules and regulations, they can find themselves in a proverbial catch-22 situation when one country mandates one approach and another does not even recognize it. The problem, however, is not limited to tax or regulatory issues but extends considerably beyond, because it also involves many of the soft issues we are learning to consider.

A year ago, I moderated a panel that covered this topic, partly in regard to Singapore. To my surprise and disappointment, practitioners had really not dug much further than global custody issues or a global asset management platform. Although these dimensions are important, it really does not do justice to our clients to limit ourselves so.

Consider the case of a hypothetical family that decided to create a structure that would provide for ownership of a family compound in France that would be shared across two generations. The gift from the first generation to each member of the second generation was originally made in cash, so that the purchase of the land and the expenses associated with the building process were paid in the required proportion by each member of the family, irrespective of whether he or she was first or second generation. All members of the family are U.S. citizens, although a few also hold a French passport.

The initial gifting is not all that complex, as French laws do not view gifts that are made outside of France as taxable, unless they involve property. But here is the first interesting twist: Had the first generation waited for the compound to be built to give a share of it to the second generation, the transaction would have been taxable in France as well as the U.S., whereas a cash gift is taxable only in the U.S. One could assume that solid legal advice would have been available to allow the family to navigate this challenge.

The second issue, which is considerably more interesting and important, is whether the gift is completed for both gifting and estate tax purposes. French law does not draw a significant difference here, and French authorities therefore accept the premise that the ownership is equally shared across all members of the family, for all intents and purposes. Such is not the case in the U.S., however! Under French law, the test of the ownership being truly shared across the two generations involves simply the ability for any and all members of the family to enjoy a property for the purpose it should normally serve. For real estate property, a set of keys and formal permission to use it at will is really all it takes. U.S. authorities, however, are not so easily satisfied. They want to make sure that everyone has some measure of “equal” enjoyment of the property. Thus, if the members of the second generation do not use the property as much as their parents, there may be a question about it. Should usage involve paying some rent by the user to the family entity? How should such payments be treated for income-tax purposes in both jurisdictions? One solution, suggested by U.S. lawyers, would be for the family to draw up a contract that itemizes the provisions for equal access and enjoyment and pro rata rules for participation in the maintenance budget, possibly based on the number of nights spent by each member. French lawyers, in contrast, advise families that such contracts should not be written and that a common checking account will suffice.

Hopefully, this simple example illustrates how well-meaning regulations in two reasonable countries can sometimes place a family that wants to do what is right in a difficult position.

Unfortunately, the problems do not always stop there. Imagine that the family has set out an endowment portfolio, funded for the second generation by a similar cash gift or through some other wealth-transfer approach. Who really owns the assets? Depending on the wealth-transfer approach selected, the gift may be valid or invalid in one or the other location! How is this portfolio treated in an estate situation? What if the desire to avoid excessive complexity has led the family to commingle some financial assets among more than one project? How does this interfere with broader asset location issues? The list begins to grow when all dimensions are taken into consideration. What if some of the assets, which may or may not be held in common, came through estate events, for instance, from a grandparent who was a citizen of only one country?

Although such issues may have been relatively rare half a century ago, cross-cultural and multinational marriages are increasingly frequent. Wealth is being transferred and created in multiple locales and jurisdictions. Thus, liquidity events can occur in multiple jurisdictions as well. Consider the hypothetical case of a binational family that creates a business in a third country, and after the business becomes successful, the family decides to sell it. In short, families can find themselves confronted with such challenges in a multiplicity of ways. As an industry, we know how to advise a family in a single jurisdiction if we think wealth management issues might arise in the future. Whether by setting up family partnerships or wealth-transfer structures with or without appropriate discounts, most wealth advisors in most countries know exactly what to do.

What advice should be given to a multinational family? How should the family begin to address these issues? At the very least, is there a simple catalog of issues for which solutions are generally available and for those for which significant uncertainty exists?

Take this to the final step. How should a family process the so-called soft issues amid so many multiple dimensions? Multicultural families need our help with these complex issues. For example, most devout individuals tended to marry within their own religion in the past, but this no longer holds true. How religion intersects with family wealth management challenges is only one soft issue that immediately comes to mind.

I would thus like to close this letter with an invitation to our readers to contribute papers on this topic. It may be too much to hope that solutions are already out there, but it would be helpful if someone could even pinpoint models, processes, or analytical approaches that could start the ball rolling.

This issue of The Journal of Wealth Management begins with an article by Lisa Gray that covers family education and governance across the world and provides an overview of multicultural and generational backdrops. She illuminates the need for more-customized education about governance and a more-tailored governance creation process that fits the different needs of families based on their geographical and cultural heritage. The second article, by Sanjiv Das, Harry Markowitz, Jonathan Scheid, and Meir Statman, is an abbreviated version of their seminal piece “Portfolio Optimization with Mental Accounts.”¹ It shows that advisors can help clients construct multiple subportfolios that take clients to their multiple different goals while also leaving them on the mean–variance efficient frontier. The third article, by Cory Dowell and Gregory Singer, uses this goals-based asset allocation approach to solve the specific case of an athlete and illustrates the importance of goal prioritization and the potential deferral of the achievement of certain goals.

The next two articles address the world of hedge funds. The first, by Greg Gregoriou and François Lhabitant, investigates whether hedge fund investors and managers have learned anything from the 2008 crisis. They conclude that many of the classical warning signs seem to be back again in the world of hedge funds. The second, by Gaurav Anand, Thomas Maier, Iliya Kutsarov, and Marcus Storr, examines the issue of tactical allocation in hedge funds, particularly for funds of hedge funds, and suggests that there is significance in tactical strategic allocation.

The other four articles do not necessarily fall under the same topic, although they each contribute significant insights. The first, by James Chong, Monica Hussein, and Michael Phillips, focuses on the factors differentiating index-tracking ETFs and index funds; they conclude that fees should not be the key element and provide an in-depth analysis into other factors that may be pertinent to one’s decision in choosing between the two. The second, by Qianqiu Liu, Rosita Chang, Jack De Jong, Jr., and John Robinson, evaluates recent research critical of “lifecycle” funds and concludes that such research may be too narrowly focused. The penultimate paper, by Alex Wang, examines the effects of gender, ethnicity, and work experience on college students’ credit card debt.He concludes that it is important for wealth advisors and financial educators to ensure that effective education programs on using credit cards are available to college students so that these programs can enhance their financial learning and experience of using credit cards. Last, but not least, is an article by Willi Semmler and Chih-Ying Hsiao that is probably somewhat more quantitatively oriented than is typical of The Journal of Wealth Management, but it covers an important and interesting topic. It evaluates dynamic consumption and asset allocation decisions and spells out rough practical guidelines for financial investments for the case of time-varying asset returns.

TOPICS: Wealth management, global, legal/regulatory/public policy

Jean L.P. Brunel

Editor

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