Matthew Feargrieve talks about Investment Fund Solutions for Private Clients: the sweet spot between private banking and asset management
In 2019, Switzerland’s asset management industry boasted an AUM of CHF2,161 billion, according to the IFZ/AMP Asset Management Study, a joint report by the Institute of Financial Services Zug IFZ and the Asset Management Platform Switzerland:
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The Institute of Financial Services Zug IFZ, part of Lucerne University of Applied Sciences and Arts, and the Asset…
There is a growing overlap between the traditionally separate spheres of Swiss “private banking” and institutional fund management. This blog examines the growing development of private label funds (private-label-fonds) by banks and family offices in Switzerland as alternative tools of wealth management that are beginning to replace traditional Trusts.
Trusts are established tools of wealth planning. The legal concept of the Trust provides clients with a way of retaining control over their assets, whilst ensuring confidentiality of ownership. It also permits trusted advisers with a degree of oversight and the ability to handle the day-to-day management of the client’s assets.
There is a downside, however. The Trust is effectively an Anglo-Saxon product, not widely or truly understood in European jurisdictions. A Trust can be a highly complex creature that is only understood by foreign lawyers, not by the client or its professional advisers. The suggestion of surrendering control of assets to third party (the Trustee) is not acceptable to some clients, particularly Russians. A Trust requires Trustees, who need to be paid a salary, and many of of them lack the ability to carry out or supervise the management of the Trust’s assets. And a Trust is a very private structure, not attractive for outside funding or investment.
Private Investment Fund Solutions
Enter the private label fund. Banks, family offices and professional managers in Switzerland are increasingly aware that the benefits of a Trust can be replicated, often at lower cost and without compromising autonomy, confidentiality or tax integrity, by using a vanilla investment fund.
The fund will be structured as a SICAV or FCP in Luxembourg or Switzerland (sometimes the Cayman Islands), limited by redeemable, participating shares that will be held by the client, or nominated family members. A special purpose management company, owned by the family office and staffed with trusted advisers, will frequently retain corporate control of the fund through a holding of voting, non-participating shares. The client’s assets are housed in the fund, thereby becoming “portfolio assets” which are then actively managed. As the value of the portfolio assets fluctuates, so does the value of the participating shares, which therefore have a net asset value. The management company, whether run by the family’s advisers or independent managers, may be paid a fee based on asset values and/or increments thereof. To an outsider, the product is indistinguishable from a professionally investment fund.
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The use by private clients of a private label fund solution is influenced by the following drivers:
- Gives the client control of investment strategy
- Gives the client ability to remove and replace a non-performing investment managers and control their fees
- Avoids liquidity management and insolvency risks associated with arm’s length investment products
- Enables pooling of separate classes of family assets, and their division amongst family members
- Provides the means of opening the fund to outside investment, in order to grow assets and charge third party investors commercial fees.
Banks in Switzerland are increasingly offering private label fund solutions to their UHNW clients: GAM, Swisscanto, LGT, Vontobel and Pictet to name a few, in addition to dedicated arms of Credit Suisse and UBS. From the bank’s perspective, the structure is effectively a white labeled product, being effectively owned and controlled by the family investors, bearing a name of their choice and serviced on an arm’s length basis by the bank custody and administration units. The “private label fund” thereby opens up for banks revenue streams that are not available to Trust structures.
Investment funds of this type are established predominantly in Luxembourg as SICAVs, as well as Lux and Swiss FCPs (fonds commun de placement), with some in the Cayman Islands.
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EU domiciles such as Luxembourg are popular with European clients, but are generally less flexible and more costly than the traditional “offshore” jurisdictions. All mainstream investment strategies are available in such vehicles, as are the usual structural mechanisms pertaining to share classes, fees, liquidity (redemptions), management/advisory fees and tax planning.
Subscribe or follow this blog for more coming up: Private Label Funds in Switzerland: Structuring and Tax Implementation.
Matthew Feargrieve is an investment funds consultant. You can read more of his blogs here: https://matthewfeargrieve.wordpress.com/blog-feed/