A new cut

Private wealth has changed. No longer the sole reserve of the moneyed upper classes, LB finds firms cashing in on a new breed of international entrepreneur

Picture the scene. Tarquin Huntersley-Cooper, an ageing member of the landed gentry, needs some trust planning to secure the future of his dilapidated 70-acre country estate. Dressed from head to toe in Prince of Wales tweed, he pays a visit to his lawyers, Reginald Hurley & Sons, a two-partner provincial firm that has acted for his family for generations. Settling down on an antique leather Chesterfield in the dusty study, they quickly knock out a draft before retiring to a wood-panelled smoking room for a snifter of fine cognac and some Cuban cigars.

A work of fiction, of course, but for many City partners this outdated view of private client work remains. The reality couldn’t be more different.

At the market’s leading practices, old money has given way to new. First generation wealth is now the order of the day, and when it comes to these international entrepreneurs, the line between personal and business affairs is often blurred. For the firm that can offer these demanding, dynamic clients comprehensive advice on both sides of the coin, the opportunities are considerable.

Suits you

If ever there was an example of a firm taking full advantage of this new generation of super-rich, Macfarlanes is surely it. As one of the few remaining City firms to offer private client services, it is something of an oddity. But having reassessed its own position when the majority of the UK’s other major commercial players started dropping their practices in the late Eighties and early Nineties (although individuals remain at some, such as Herbert Smith and Linklaters), the firm is confident it has made the right decision.

‘We took a long, hard look at private client at the beginning of the Nineties and committed ourselves to ensuring that it remained a vibrant and fully contributing piece of the practice,’ senior partner Charles Martin says. ‘That’s been the case ever since. There isn’t really any magic to it – we just make sure private client is operated in the same way as the rest of our practice areas. It’s not seen as a backwater at our firm and is certainly not a cushy option in terms of the commitment or intellectual capacity it requires. We’re also very discriminating in the sort of work we do and the sort of clients we act for – we don’t do knockabout private client work.’

With a client base that includes billionaire tycoon Sir Richard Branson, he’s not kidding. Partner Jonathan Conder leads a team that has acted for Branson in a personal capacity for over 15 years, with the firm starting to receive corporate instructions from the Virgin Group shortly afterwards. It has been a lucrative relationship. In 2007, Macfarlanes advised the shareholders of the Virgin Group on the tax aspects of the $400m IPO of Virgin Mobile USA, and secured Virgin the first ever ‘media public interest intervention notice’ from the Secretary of State in opposition to BSkyB’s acquisition of an 18% stake in ITV. The firm retains a place on Virgin’s eight-member UK legal panel.

‘Private client is operated in the same way as the rest of our practice areas – it’s not seen as a backwater.’
Charles Martin, Macfarlanes

The private client team also acts for New Look founder Tom Singh and his family, which recently led to a corporate instruction in relation to their shareholding in the clothes retailer. Its client base also includes US investor Simon Glick, who teamed up with Morgan Stanley’s real estate arm to buy Canary Wharf Group for £1.7bn in 2004. The consortium, Songbird, now controls 7.9 million sq ft of Docklands office space as a result of the deal, in which Macfarlanes acted on the other side for Canary Wharf founder and chair Paul Reichmann.

Despite this, Martin insists that the firm could do more to exploit the narrowing divide between private client and commercial work.

‘In all honesty, I’d only give us six out of ten for unlocking the potential of cross-selling – it’s massive,’ he says. ‘Personal assets and corporate wealth are often inextricably linked, so to be able to handle both aspects is an increasingly powerful message to clients.’

It’s a message that isn’t entirely falling on deaf ears. While most City firms have turned their backs on private client work, others are bucking the trend.

Berwin Leighton Paisner bolstered its practice last September with the hire of Murray North from Clifford Chance, where he was a partner specialising in personal and trust taxation, trusts and estates, and inheritance tax for private clients and high-net-worth individuals. He joined Jonathan Kropman’s trusts and personal tax team, which regularly refers work equivalent to one-third of the group’s income to other parts of the firm. The wider tax department accounts for almost 15% of the firm’s total revenue, according to BLP.

In the same month as Murray’s move, senior private client partner Martyn Gowar left Penningtons to establish a London practice at US outfit McDermott Will & Emery. Before joining Penningtons as a consultant in April 2008, Gowar had spent over 40 years at LG, including a stint as senior partner between 1997 and 2002.

‘When McDermott was set up in Chicago, it was originally built around dealing with tax and private businesses,’ Gowar says. ‘The big London firms gave up their private client work over the last 20 years, but I don’t think they’ve done themselves any favours. Non-private client lawyers still think that it’s all about doing little old ladies’ wills, but these families are often of a size that would buy up many corporate clients of which the firm would claim great pride in acting for. Having said that, it’s a good thing they did, as it focused the attention onto a different range of firms and allowed those that major in the sector the opportunity to build up the required critical mass.’

McDermott has set a bold target of being the same size and quality as the other leading private client practices in London within the next ten years. That means competing head-on with the likes of Farrer & Co, Withers, Charles Russell, Speechly Bircham and LG. It will be no mean feat, but these specialist firms also need to adapt their practices to meet the broadening requirements of their increasingly entrepreneurial clients.

Smart choices

Perhaps best known as lawyers to the Queen, Farrer & Co recently launched an international private wealth group to advise high-net-worth families under private client tax head Russell Cohen. The team recently advised the executors of an estate in the Far East that included a shareholding in a UK-listed company worth more than £1bn. It will work alongside the firm’s existing entrepreneurs and families in business group, which was established in 2006, and, to further underline the growing interplay between the two practices, is now run by a corporate lawyer, Richard Lane.

‘We’ve been very successful in crossing that bridge between private client and corporate,’ says Lane, who started his new role last May. ‘New money clients are much more corporate in how they hold their investments. They don’t just think about property or institutional investments, but pursue much more exotic options through private corporate structures. Even the landed classes are becoming more entrepreneurial – it’s a permanent change.’

Like Macfarlanes, Farrer has benefited from the crossover between private client and corporate. Airmiles and Nectar card founder Sir Keith Mills has long been a private client of the firm, and when the English entrepreneur came to sell Nectar to Canadian company Aeroplan in 2007, Farrer got the lead corporate instruction on the £350m deal. In 2009, the corporate team advised international dim sum restaurant chain Ping Pong on its establishment of joint ventures in Dubai and Brazil; East Hill Management Company on its disposal of Prolysis to Biota Holdings; and the management team of Wildnet Group on its management buyout – all of which originated as a result of existing private client relationships.

Withers is another example. When Diana Parker’s tenure as chair came to an end in 2007, the firm elected a corporate lawyer to the role for the first time. In a statement to announce the appointment of Anthony Indaimo, an Australian who previously headed the commercial practice from its Milan office, the firm said it was a reflection of the ‘international nature and the commercialisation of the private client sector’. Withers’ client base includes around 25% of The Sunday Times Rich List, 15% of the Forbes 400 list of the wealthiest Americans, and a growing percentage of China’s Hurun Wealth Report list. Almost half of the firm’s £93.3m revenue comes from wealth planning.

‘We’re seeing it more and more,’ Indaimo says. ‘If you went back just 20 years, the vast majority of wealth was inherited among the passively wealthy. Now, the majority of our clients are entrepreneurs, innovators or active wealth generators. The crossover between private client and commercial is more blurred today than it’s ever been. You have to start at the top and build a relationship through looking after your clients’ personal interests until you’re their trusted adviser. When you get to that stage, you can start looking after their commercial interests – it’s a virtuous cycle.’

The firm advised London-listed gold mining company KazakhGold on its $270m sale of a majority stake to Polyus Gold last August, an instruction that came from its private client relationship with the Assaubayev family, which controlled around 42% of the company.

‘It’s a real sign of the times,’ one former Withers partner says. ‘The firm used to be full of Old Etonians and Oxbridge graduates, and now they have an Australian as chairman. It shows how different the market and the clients have become. Some of the other firms need to wake up to that fact.’

The right size

Market changes have resulted in the formation of a number of boutique firms. In February 2009, Allen & Overy demerged its private client group as part of its £44m cost-cutting global strategic review. The six-partner team now operates as Maurice Turnor Gardner. Almost exactly a year later, four partners from LG’s wealth planning team left to establish West End private client boutique Berkeley Law, which formally opened for business on 1 May.

‘We’d been looking to move for some time, but wanted to do it on our terms as we think what we can do here is much more flexible and attractive to our clients,’ says Nick Rucker, one of Berkeley’s founding members. ‘All of us believe that the future for advising ultra-high-net-worth individuals is more than just legal. We’ve set ourselves up in a way that will allow us to move towards other areas, such as wealth advisory.’

As such, the partners – who also include Alexandra Ruffel, Glenn Hurstfield and Tim Thornton-Jones – took the unusual step of establishing Berkeley as a limited company rather than an LLP.

‘None of us really believe in the partnership model,’ says Rucker, who was director of UBS’s investment banking division between 2001 and 2005. ‘To do your time at the coalface and hopefully get to partnership – it’s ridiculous. Law firms have become more and more like banks, with people jumping to wherever they see the next payout. That’s not what we want – we want people to stay here and look after our clients for a long time. That’s what private client is all about.’

‘I started to realise that I could do so much more for my clients if I wasn’t acting just as a lawyer.’
Andrew Young, Opus Fiduciary Services

Although the partners intend for Berkeley to remain a boutique to avoid the ‘politics and unnecessary cost’ of larger outfits, Rucker says that it will grow ‘reasonably quickly’ to build a critical mass. The practice has already made its first lateral, hiring senior associate Julie Howard from Withers to head its tax practice last month.

The departures of the Berkeley four followed that of LG’s international private capital head Andrew Young, who left to join Guernsey firm Opus Fiduciary Services as executive director last August.

‘I started to realise that I could do so much more for my clients if I wasn’t acting just as a lawyer,’ Young says. ‘It was like having a succession of Miss Worlds walk past and all you can do is wave to them. Lawyers are scared of stepping out of their comfort zone – some of my colleagues were horrified when I said I was leaving the cosy comfort of the law, but that horror turned to envy when they saw what we could do. We’re making hay while the sun shines, where the sun shines.’

Young says the majority of Opus Fiduciary Services’ private client work now goes to Berkeley, rather than LG, which now has just four partners in its tax and private capital group. However, LG managing partner Hugh Maule says it remains a core practice. In the last financial year, three of the firm’s top 20 clients were originated by the private client team. Another four were growth clients driven by high-net-worth entrepreneurs. The team’s gross fee income hit £9m in 2009, and it generated a further £4m in referrals for other departments, winning Private Client Team of the Year at the 2010 Legal Business Awards.

‘Our private capital and corporate teams are fundamentally connected due to the entrepreneurial nature of the respective client bases,’ Maule says. ‘Outside the UK and the US, the majority of significant wealth is held in individual hands. Many of these families have net wealth substantially in excess of FTSE 250 companies – it’s pretty significant. The ability to service the broader requirements of private client, not just in the UK but internationally, is crucial.’

Over 75% of the practice’s client base is international, and the targeting of high-net-worth individuals was one of the main drivers behind the firm opening a Dubai office in November 2007. The move has already paid dividends, with a recent instruction to advise the Saad Group on a multibillion-dollar debt restructuring arising as a result of a private client relationship.

The great reveal

It is not just law firms that are heading towards the boutique model as a means of servicing increasingly discerning high-net-worth individuals. The move mirrors a similar trend among private banks.

‘Before the crisis, the private banking model was becoming commoditised,’ explains Rupert Bentley, head of asset management at Butterfield Private Bank. ‘Rather than trying to match products to the needs of their customers, private banks were trying to sell products that had been provided by investment banks or fund management businesses. It was like sales, only with smarter suits. That may work further down the affluence scale, but for true high-net-worth individuals you need a truly personal service where they know you’re not just trying to flog them something. That’s not scalable – if the relationship officers are doing a good job and have an in-depth knowledge of their clients then they simply cannot act for hundreds of them.’

One institution hoping to disprove this theory is Barclays, which is investing heavily in wealth management. The UK bank has ring-fenced £350m for investment in Barclays Wealth, which in 2007 hired former Baker & McKenzie partner Jonathan Burt as senior wealth adviser and recently appointed him managing director. It intends to double the number of bankers serving high-net-worth clients (which it defines as those with at least £5m in investable assets), and establish a ‘global wealth platform’. It recently set up a wealth management joint venture with Sumitomo Mitsui Banking Corporation in Japan.

‘You need to know exactly what’s happening in the economies you operate in – the shift in wealth, regulatory changes and any taxation issues.’
Iain Johns, Equity Trust

While Barclays invests, UBS Wealth Management, one of the leading bulge bracket advisers, remains in the spotlight for all the wrong reasons. The Swiss giant recently reached a settlement with the US authorities that saw it agree to hand over the account information of customers identified by the US Internal Revenue Service (IRS) as using the holdings to avoid paying taxes. The reputational damage has been severe. Its US customers withdrew $11.6bn of assets in the last quarter of 2009 alone, while the bank is now set to close its US offshore wealth management business.

UBS is not the only financial institution affected by Western governments’ attempts to clamp down on bank secrecy. The entire Swiss banking system now finds itself under close scrutiny.

‘Everything has changed so fast,’ says Isabelle Poncet, a partner at Geneva private client law firm Poncet Turrettini Amaudruz Neyroud & Partners. ‘Lots of people have come here to hide money, which was perhaps not the best thing to do, but it’s how it’s always been. It’s now a real problem, but it’s given us a lot of business. Geneva was very badly hit by the Madoff problem, so it’s like we’re all waiting for the next catastrophe. On the one side it’s challenging, on the other it’s kind of scary.’

According to Edmond Tavernier, name partner of Swiss law firm Tavernier Tschanz, clients and their advisers need to find acceptable alternatives.

‘[The attack on bank secrecy] is changing the market – people need to adjust,’ he says. ‘Having undeclared money in Switzerland used to be the solution, but now clients will have to use other instruments like the trust, which is a black hole that the international system seems to accept.’

Dress to impress

Bank secrecy throws another factor into the mix for those high-net-worth individuals currently considering domiciling in Switzerland to escape the UK’s increasingly severe tax environment.

In October 2007, the British government announced in its pre-budget report plans for a controversial ‘resident non-dom’ (RND) tax. It was designed to target those individuals living in the UK as ‘long-term residents’, meaning that they don’t pay UK income or capital gains tax on their international earnings, and are therefore only accountable to the tax regime in which they are domiciled. For the vast majority of RNDs, that means a favourable, low or zero tax jurisdiction. However, when the change came into effect in April 2008, those individuals found themselves subject to potential HM Revenue & Customs (HMRC) taxation on offshore trusts and companies, and, for those that had lived in the UK for seven of the previous ten years and wished to continue claiming non-dom status, a £30,000 annual fee.

Many felt that it would damage the competitiveness of the City. Global Elite firm Skadden, Arps, Slate, Meagher & Flom lobbied the British government in an attempt to delay the imposition of the tax. Ironically, the UK Treasury approached Skadden for advice on the US tax implications for US citizens resident in the UK.

‘It is likely that there will be some people who want to go back to their home country sooner than they otherwise would have,’ Skadden’s European managing partner Bruce Buck commented at the time. ‘It’s bad for the City of London and it’s bad for the UK. But, most importantly for us, it depends on what our US banking clients do about it.’

A recent report by London wealth management company Stonehage claims that RNDs spend more than £19bn in the UK each year, contribute £8.3bn in income tax, stamp duty and VAT, and that even a 1% reduction in the growth of the UK’s RND population would make the tax changes loss-making within five years. It has already had a significant impact on compliance costs. One accountant told LB that his average bill for RND clients has doubled in the past year.

Despite this, while there has been lots of talk and a fair degree of planning, the expected mass exodus has been little more than a trickle. However, with high earners now subject to the new 50% tax rate, that could be set to change.

‘We are very grateful to Mr Darling,’ Tavernier adds. ‘His [budget] speech gave people more reasons to worry if they stay in London, so we must thank him. There’s no secret that the government has no answer [to the economy] but to take the money from people that have it. Those that have something to protect will think seriously about coming to places like Switzerland. We are at war, you and I. It’s a very civilised war, but it’s still a war. London will never die, but your politicians have put so much pressure [on the market] that it has suffered. The trust people had in the place has gone for some time.’

The same is also true in the US, where partners speak of clients taking the radical step of renouncing their citizenship to avoid paying taxes to Uncle Sam on worldwide income.

However, those hoping to live the life of a so-called ‘Monaco millionaire’ – basing themselves in low-tax jurisdictions and flying in to the UK a few times a week for work – have been dealt a major blow by recent HMRC guidance that said it would place a greater emphasis on what it describes as the ‘pattern of lifestyle’ in determining UK residency. A precedent has already been set, with HMRC winning its high-profile High Court battle against Robert Gaines-Cooper, a UK businessman domiciled in the Seychelles. Having seen his appeal turned down in February, Gaines-Cooper now faces an estimated £30m tax bill.

HMRC had already run two tax amnesties targeting offshore account holders. The first Offshore Tax Disclosure, in 2007, raised £400m, while the most recent, which closed earlier this year, is expected to encompass up to 100,000 individuals.

The government has also entered into Tax Information Exchange Agreements (TIEAs) with a number of countries in an attempt to root out those who are avoiding paying taxes. Darling’s recent budget speech stated that Britain is to sign further TIEAs with Dominica, Grenada and Belize.

‘Most of our clients are entrepreneurs. The crossover between private client and commercial is more blurred today than it’s ever been.’
Anthony Indaimo, Withers

Even ignoring these changes, there are some more fundamental logistical issues that may prevent large-scale relocations to Switzerland. Namely, a lack of housing and suitable Grade A office space.

‘It depends on the type of immigration,’ says Bernard Vischer, who heads Swiss firm Schellenberg Wittmer’s private client practice and was managing partner until 2007. ‘If you’re talking about individuals, this is not really an issue – it just puts pressure on the price of real estate. If you’re talking about relocating businesses, the clear lack of depth and availability in the market could be an issue. We have the developers who could [build infrastructure to meet demand], but the downside to the stability we have in Switzerland is that the legal framework for real estate projects is rather heavy and slow. The people interested in coming are not that patient to wait years for space.’

Some institutional moves have already occurred, however. Qatar National Bank established a presence in Geneva – QNB Banque Privée – last November, while the National Bank of Abu Dhabi followed suit by launching a private bank this January. Walter Boss, a founding partner of Zurich firm Poledna Boss Kurer, which acted for a number of UBS’s US customers in appeal against its IRS settlement, is currently advising a ‘large financial institution’ on moving ‘around 35’ senior staff members to the city. A number of Chinese banks have also established bases in Switzerland.

Global style

The traditional offshore jurisdictions remain under fire. At a meeting of G20 nations in London in April last year, the leaders set out an agreement to crack down on offshore tax havens. Some offshore centres have been cleaning up their image: having just signed its twelfth TIEA, with New Zealand, the Cayman Islands, for instance, was added to the Organisation for Economic Co-operation and Development’s ‘white list’ last August as recognition of its improving accordance with international tax standards.

‘Cayman is not seen in any way as one of the tax haven jurisdictions anymore,’ says Carlos de Serpa Pimentel, who heads offshore firm Appleby’s private client and trusts practice. ‘It’s actually been ahead of the curve in developing cutting-edge legislation early. It introduced reserved powers and star trust legislation in the 1990s, and is looking to introduce foundations legislation soon. It should help attract business from civil law jurisdictions like Panama.’

Having opened a Guernsey office in April, Appleby now has trusts experts in seven different offshore jurisdictions.

Rival offshore firm Ogier appears similarly unconcerned. In October 2008, it launched a private wealth business that comprises more than 20 lawyers and 50 professionals throughout its nine offices. The firm also recently hired BVI-based Harney Westwood & Riegels’ trusts head Zac Lucas to further bolster its offering for high-net-worth clients.

David Rosier, chairman of Thurleigh Investment Managers, feels that such an international outlook is key. ‘We’ve seen a dramatic recovery in the UK market, but we don’t see the same increase in the stock market,’ he says. ‘It’s important to be globally focused – we think the UK is going to be a pretty austere place for the next few years, so if you’re running an international portfolio then you have the opportunity to look elsewhere for returns.’

A number of new jurisdictions are coming to the fore. Singapore has enjoyed a great deal of success in positioning itself as a hub for Asian wealth and is, according to one City private client partner, ‘actively setting its sights on being the new London’. Other emerging markets, such as China and Russia, are expected to generate a significant and growing proportion of global wealth over the next five years, while countries such as Ireland and New Zealand are looking to promote themselves as alternative fund administration centres.

Stephen Abletshauser, founder of offshore trust company Palladium Trust Services, feels that Brazil is just one of a number of emerging markets that are being overlooked by the larger firms.

‘There’s a huge amount of untapped potential here,’ he says while on a business development trip to São Paulo. ‘There are only two [wealth management] companies of any repute with bases out here, and even those are pretty shabby compared to their London offices. There is a real trend towards the globalisation of private client work and Brazil has one of the highest overall tax bases in the world, but people are being slow to react.’

Abletshauser trained at Weil, Gotshal & Manges before joining Withers, where his experience of external trust providers led him to change his career and set up Palladium in 2008.

‘When I was at Withers we’d use offshore providers that were charging exorbitant amounts for a relatively basic service,’ he says. ‘The large trust companies operated an uncompetitive racket of poor standards, but as lawyers we also feel that we can provide a better service. We’re a trust company, but with an added string to our bow.’

Much of the wealth in these emerging jurisdictions is still in its first generation. As such, the next decade should generate considerable work for advisers on succession planning. In most countries, this is a relatively straightforward process, but the situation in the Middle East is complicated by Sharia law.

‘In the Middle East, a huge proportion of the wealth is owned by individuals – much more so than in the UK,’ says Charles Russell partner Robert Blower, who specialises in Sharia-compliant trust structuring. ‘Sharia has set rules on how you are supposed to leave your wealth. A son gets twice as much as a daughter, but everyone is supposed to get something. The concept of a trust doesn’t really fit in that environment, and that can create real headaches when it comes to corporate assets.’

A second fitting

It’s easy to be dismissive of private client work. To the modern City firm, the low-margin world of trusts and probate with its asset-rich but cash-poor clients is anathema. But this old wealth is dying out. What was traditionally a slow-moving, generational practice has been shaken up and the old clients replaced by a newer, more corporate individual. We’re not simply talking about country estates anymore – many of these clients have levels of wealth approaching that of major publicly listed companies.

‘There’s been a bit of a revolution in what wealth management actually means,’ says Ashley Crossley, chair of the Europe and Middle East wealth management practice at Baker & McKenzie, one of the few transatlantic firms that handles private client work in London. ‘A lot of the big City firms have lagged behind a bit in understanding that it’s not just a UK-centric practice anymore. The banks are chasing these individuals like mad, so it’s strange that some law firms don’t see the same potential.’

There are signs that interest is being piqued, however. Herbert Smith, which alongside Linklaters is arguably the last of the Magic Circle to have any private client capacity, recently launched a practice in Hong Kong under London-based private wealth and charities head Rupert Ticehurst. UK firm Addleshaw Goddard also announced plans last year to set up a London practice targeting the growing family office market.

‘UK politicians have put so much pressure on the market that it has suffered. The trust people had in London has gone.’
Edmond Tavernier, Tavernier Tschanz

The traditional private client firms also need to adapt. The market is no longer the staid, old boy’s network – these new entrepreneurial clients require a more robust, business-savvy lawyer. Specialist City firms must internationalise beyond the traditional offshore jurisdictions, and ensure that they have the strength in areas like corporate and funds to match their private client offerings.

‘You need to be more astute and alert than ever,’ says Iain Johns, head of the Equity Trust’s 300-strong private client division and managing director of its Jersey office. ‘You can’t predict the market, but you need to know exactly what’s happening in the economies you operate in – the shift in wealth, regulatory changes and any taxation issues. Everything is revolving around tax at the moment.’

With the total global wealth of high-net-worth individuals predicted to increase almost 50% to just under $50 trillion by 2013 (see box, ‘Feeling the pinch’), it’s time for a rethink. Private clients offer cross-selling opportunities like never before. Law firms ignore them at their peril. LB