HNW exodus places cross-border financial advice in high demand
If High Net Worth (HNW) clients were a fast-moving consumer good, they would literally be flying off the supermarket shelves. And while Home Affairs, National Treasury and the South African Revenue Services (SARS) are keeping ‘mum’ about how many South African citizens actually leave our shores each year, financial advice practices cannot keep up with the demand for financial and risk advice for clients who are emigrating, thinking about emigrating, or straddling two or more countries.
Cross-border advice in high demand
The demand for cross-border financial advice is so high, that Momentum Investments recently held a Global Citizen masterclass event to school the country’s independent financial advisers (IFAs) and financial planners on the opportunities and pitfalls they face when navigating HNW clients through multiple jurisdictions. “The world is changing, expanding and far more integrated [than before]; millions of people are moving abroad and crossing national borders,” said Jeanette Marais, Deputy CEO at Momentum Metropolitan Holdings, as she opened the event. She referred to the International Organisation for Migration’s 2022 World Migration Report which revealed that some 281 million people were considered to be ‘international migrants’ in 2020.
“We live in a world where our clients’ assets are in multiple jurisdictions, forcing you as advisers to think about different countries, laws, rules and tax systems while maintaining world-class financial advice,” Marais said. As such, South Africa domiciled financial advisers and advice practices must explore options that will make their product and service offerings more globally attractive. “These trends open up an entirely new playing field; but we need to understand the intricacies of building a global financial plan,” she said. To stand out from the crowd, financial advice professionals must be able to navigate the complexities that arise from investing clients’ funds offshore, and know how to structure financial plans to suit each client uniquely and objectively, across borders.
Expanding your product and service horizons
Marais took six minutes to introduce the Global Citizens even. She noted that the jam-packed programme sought to identify and unpack the red flags to cross-border advice, global estate planning and cross-border financial planning. PS, to be clear, the webinar was little more than an introductory teaser to advice disciplines that take years to master. Its value was in introducing the supporting framework that financial advisers would have to have before even contemplating entering the realm of multi-jurisdictional advice. “As financial advisers, you can now structure global financial plans for your clients while sticking to the fundamentals of advice … what a great opportunity for you to specialise and to differentiate your offering,” Marais concluded. Her parting shot: it is time for advice professionals to broaden their product and service horizons!
Eugene Taljaard, CFA, CFP® and Regional Manager at Momentum Wealth International was second to take to the virtual podium, to speak about the red flags that financial advisers must be aware of when entering the international planning discipline. “A growing number of South Africans are considering emigrating or investing abroad,” he said, citing United Nations’ statistics that around 1.9 million South Africans were living or working abroad in 2020, mostly in Australia, the United Kingdom and the United States. Financial advisers, who already help clients plan for a number of life changing events must now also plan for the eventuality of having to advise clients who are emigrating or residing abroad and / or who have family members who are emigrating or residing abroad.
The ‘residency rules and tax jurisdictions’ headache
“It is an imperative to ensure that your clients are well-informed and aware of the risks involved with cross-border financial plans and what they can look out for to avoid sub-optimal outcomes,” Taljaard said. He singled out navigating residency rules and tax dispensations for different countries as one of the biggest challenges advisers face when it comes to cross-border financial planning. For example, if a client moves from South Africa to the United Kingdom, they will be subject to different tax rates, allowances and exemptions, and may even need to file taxes in both countries. Determining your client’s tax residency is non-negotiable because it impacts on estate duties; income tax and situs tax, to name a few. Situs tax is ‘the taxation of assets based on their location or situs’, as defined by Moneyweb.co.za.
“Situs tax can put enormous pressure on the liquidity of an estate if not planned for properly,” explained Taljaard, before sharing the following ‘chilling’ reality. “Structures like nominee companies do not provide protection against situs taxes, with many foreign jurisdictions looking through the nominee to the actual beneficial owner of the investment”. Armed with the necessary information on jurisdiction, financial planners can take steps to reduce their clients’ tax liabilities by, for example, setting up international endowment policies. “Where this is not planned for, your clients could face a scenario where they have to pay inheritance taxes on the specific assets in the situs jurisdiction as well as estate duty in South Africa,” he said.
Save through life, pay away at death?
This writer was in awe of the minefield that lies in wait for cross-border advisers and their clients. For example, financial planners may be called upon to navigate a potential three-way intersection of estate duty agreements between the client’s jurisdiction; country where the client is considered tax resident; and jurisdiction where the assets are actually domiciled. “Picking the right jurisdiction for international structures and investments is crucial as it can have significant implications on the legal, regulatory and tax treatment of the assets held in those structures,” Taljaard explained. ‘It does not help your clients’ interests if they achieve a 40% return over an investment holding period and then pay all that away in taxes at death”.
The questions that advisers need to consider before moving clients’ assets offshore rattled like bullets from a gatling gun. Is an offshore company or trust best? Is the transaction to build offshore wealth or support future emigration? What do we know about the chosen jurisdiction’s exchange control, government, legal, regulatory and tax systems? Etc. “These are just a few of the things that play a part in determining the appropriate jurisdiction for your client,” said Taljaard, before adding ‘black-listed jurisdictions’, ‘donations tax’; ‘tax avoidance’ and ‘trust jurisdictions’ to the growing list of considerations. Thankfully, he closed by bringing the discussion back to the more familiar element of how clients’ asset allocation and investment strategies must adapt to accommodate clients’ changing needs. There are countless financial planning considerations when clients move aboard.
A skilled, multi-jurisdictional financial planner is invaluable
For example, they will have to adjust their investment portfolios to reflect currency risk, country specific risk and geographical risk; to accommodate the liquidity and volatility of investments in offshore markets; and to accommodate legal or regulatory restrictions in those markets. Taljaard offered one example to conclude his presentation: “Once a client has emigrated, chances are that a large part of their assets may still sit in SA retirement funds [which] may lead to a case where the assets are not sufficiently diversified globally; they need to weigh up the benefits and the drawbacks of withdrawing from the retirement fund, if possible, and reinvesting in hard currency versus keeping it in South Africa with a higher South African allocation”.
And that, dear reader, is why the services of a skilled muti-jurisdiction financial planning practice / professional is invaluable.
Writer’s thoughts:
I have read dozens of articles covering the ‘ins and outs’ of multi-jurisdiction taxation and so-called South African tax emigration, yet remain as unclear on these topics as ever. And that suggests that getting financial advice on cross-border financial planning is non-negotiable. Are you able to assist clients in multiple jurisdictions, or do you outsource cross-border financial planning activities to offshore partners? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
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