Outlook for the Financial Service Industry

Status and Trends

Dec.1.06 by Denis Kleinfeld

INTRODUCTION

Globalization brings everything closer to home. Opportunities to expand the financial service market, as well as geopolitical instabilities, and the risks they create for economies and markets.

The world is full of expanding opportunities and some dangers. The successful will seek out their opportunities and the wise will avoid the dangers. To discuss how individuals and companies use international financial centers is for the broad of topic what is relevant to our mutual interaction here is, briefly, how U.S. persons and others – say from the fareast – may utilize St. Vincent.{{more}}

IDEAS FOR ST. VINCENT

On the U.S. side, there may be a desire for corporations, LLC’s and other limited liability entities and trusts. I need not dwell on the draconian anti-abuse tax rules imposed by the U.S. to restrict or eliminate the deferral of tax.

Nonetheless, corporations/IBC’s are still used by U.S. persons to gain a measure of wealth protection and as part of a multi-national structure. I would thin their desirability could be enhanced by providing that the shares of the corporation were – in some legally/statutory shape or form – protected from creditors. After all – isn’t this the full meaning of a company limited by shares?

Photo Right: Left to Right- Prime Minister Dr. Ralph Gonsalves with Dennis Kleinfeld.

At the ITPA conference in Barbados, a speaker from the BVI gave an excellent presentation of the BVI amended corporate law which includes additional forms of corporate entities. They review their law in detail and they do so regularly.

It certainly would be interesting from a U.S. perspective to have a company limited by guarantee and limited by shares whereby the statute clearly provides that the guarantee interest is a contract interest or relationship and specifically not to be deemed or construed at law or equity to be an equity interest or debt. (Essentially it is an investment financial product)

Effectively it would be possible to have a hybrid vehicle that could act as a substitute for a trust or insurance policy. It would be better if the contract interest was not subject to levy by creditors of a contract holder. Perhaps creditor protect series of protected contract cells or should I say protected protected contract cells.

Trusts for asset protection are part of mainstream planning. Personally I like the Belize concept which eliminated the Statute of Elizabeth and thereby does not recognize fraudulent conveyance law. It would be better if a regime similar to Florida Statues 222 (which exempt certain categories of assets) was utilized on the beneficial interests were exempt from creditors. Why not? Florida and other states do it.

For U.S. persons there is little that can be legitimately done to achieve tax deferral. However, with that said, insurance is still – that is, since 1913 – the well recognized and accepted financial product that can provide deferral of tax.

Insurance is a mainstay for estate, disability and retirement planning. What’s more, while “drop-off” trusts cannot be used for non-U.S. persons moving to the U.S., a variable insurance policy can act easily as a viable and effective substitute. Similarly to my view of corporations, LLC’s and trusts, insurance and the proceeds can also be declared by statute to be protected from creditors. Florida is a well known example of this – as in Texas.

Photo Right: Left to right – Marcus Ballantyne, Registered Agent, Dr. Linton Lewis and Stephen Koystal, Chairman Loyal Bank.

Tying a protected trust with a protected insurance policy is a very attractive package for U.S. persons to engage in international wealth management. And certainly will give a significant degree of legitimate privacy and confidentiality.

Undoubtedly, these could be promoted by professional money managers, brokers, banks and unit trust groups. All of whom are in need of a means to allow high net worth individuals and companies to effectively use their services and products.

These types of vehicles would enable them to maximize or extend the range of financial services and products to their customers to make best use possible of their existing expertise, and importantly their existing network of sales outlets or contracts – and enhance the goodwill attached to their names. The benefits of a jurisdiction are many fold. This creates employment and business expansion opportunities, and capital inflows. Corporate and trust registration fees, stamp duties – there is a strong multiple effect that runs through these commercial and professional services which impacts positively all sectors of a small island economy even right through agriculture and fishing.

BANKING

Banking is always important to an OFC. It is always a question of which comes first, the successful bank or the financial service providers who generate clients. Each in fact is interdependent as each other as if in some intricate dance routine. Each enables the other to grow. Can a small remote location establish a successful international banking operation? You can look at St. Lucia and Nevis for examples. My only advice to those in the banking business is to learn from those financial institutions what they are doing right, those that support fully and market the financial service providers and do that.

CAPTIVE INSURANCE

Captive Insurance operations have been around a long time and have been a useful way of exploiting the advantages that had existed in some offshore jurisdictions. Captives offshore are often used as vehicles through which onshore principle risk are re-insured. There is however significant difficulties for a new player in this sector. First, the dominant jurisdictions i.e. Bermuda, Cayman Islands, Guernsey – have a market lead and, importantly, the sophisticated infrastructure to take on more business. Second, onshore jurisdictions – South Carolina are getting into the game.

SHIPPING

Flags of convenience for shipping companies can be a nice segment of the financial services sector. St. Vincent is among some good competition in introducing tax measures to make ship registration here more attractive.

Shipping companies and yacht owners recognize that a flag of convenience includes keeping the ship well out of the tax net of high tax countries. As noted in a report by the Economist, there are geopolitical reasons as well. Nearly all Israeli, Iranian, Iraqis and South African ships have avoided boycott regulations – with full knowledge of the countries imposing the boycott! Need I mention that convenience flags enable owners to use convenience crews. (Avoiding the anti-competitive crew costs and manning scales required of union controlled high tax countries.

Photo Left: Kay Bacchus-Browne (left) and Joel Pitt, Registered Agents.

In fact, cost minimization can start the moment a decision is taken to buy or build a ship. Thereby this should give you a strong clue as to one of your target markets. (Existing yacht owners, brokers, ship financial sources, the internet is quite useable for this purpose).

RESIDENCY AND CITIZENSHIP

In additional to these financial services and products, we know that not only is capital mobile but people are mobile as well. There is a great deal of uncertainty and unease in the world. Until the West ultimately defeats those who don’t want happiness in this life but do want to die in a glorious jihad, the Caribbean can become the bastion for economic safety and personal security.

Any number of the high net worth people from troubled lands will be seeking residency and citizenship in jurisdictions that are not as exposed to the declining economies, political and social strife, internal turmoil or a fundamentalist suicide strategy. Attracting high net worth individual to make internal investments and expenditures is one very good way of getting external foreign direct investment without putting the government in debt or selling out the country’s natural resources.

For a small Caribbean community encouraging an influx of wealthy persons, the entrepreneurs of the world, can add dramatically to an island’s economy; and importantly successful prosperous people bring with them an ability to employ and train local in the habits of success. Creating local opportunity will go long way to stopping the brain drain whereby some of the best and brightest immigrate to places of greater opportunity.

It seems to me that an aggressive program to encourage residency and, in time, citizenship is something which need to be properly pursued. I can only remind those in the public and private sector that this business does not fall into your lap.

COMPETITION FACTS

As was repeated in Business Week Magazine, radical change in the structure of the world economy is rare but it’s starting to happen – change of one kind or another is always an ongoing process. The emergence of world class companies from developing nations is a shift that portends a new global game.

Rather than competition among three or four countries that have dominated global commerce, we have entered an evolving game of multiple geographies. Lots of places never before a player are entering the game – Dubai – challenge it poses cannot be overstated.

Photo Left: Tom Phillips, Registered Agent and NCB employee Ms. Dublin.

This seismic shift from dominant jurisdictions to small jurisdictions entering a specific niche began roughly 10 years ago, brought about by four forces:

1. mobility of talent;

2. mobility of capability and capital

3. mobility of knowledge (thanks largely to the internet);

4. enhanced regulatory environment.

As a result, anyone from anywhere, with determination, can join a global industry. The new participants see niches in the global economy which enable them to tap world intellectual capital and financial markets. Without question, opportunity market niches in the world is about to get a lot smaller.

Dr. A.G. Romero outlined in a presentation given in Curacao in August 2006, stated the prerequisites for success of an international financial center to attract quality business and maintain its reputation of pursuing high standards and integrity.

1. Economic and political stability.

2. Favorable fiscal and legal infrastructure. The financial industry continuously reforms itself to adapt to the constantly changing environment of the international business community. Relevant legislation should be introduced and adapted in a timely manner as needed.

3. An efficient and experienced client oriented financial community. (Public or private industry) The success of an IFC is to a great extent dependent on the competence of its financial service professionals that includes government and public support.

4. Good affordable communication and support services.

5. A sound regulatory framework. The regulatory framework should support economic development and growth, financial stability and protect investors, depositors, customers and clients. Must be responsive to the changing financial environment and the remarkable advances in financial engineering and innovation which has dramatically altered the way in which financial services operate. Clearly, the pace of innovation will increase further as financial markets increasingly integrate the use of new technologies into the global economy.

6. Physical infrastructures.

A major change is the continued blurring of lines between financial products and financial industries. It will intensify as more financial products and services combine to fit the financial needs of the consumers now known as wealth management.

WHAT IS WEALTH MANAGEMENT?

Wealth management is the professional multi-disciplinary exercise that assists clients in the accumulation, protection and transfer of wealth throughout the life cycle. Wealth management covers an ever widening array of services and products offering encompassing the entire financial services industry. Wealth management is gathering significantly increased focus because of the growth in personal wealth and changes in consumer attitudes which have fueled demand for a wide array of financial services.

THE WORLD WEALTH REPORT 2006 – 10TH ANNIVERSARY

– It Has Been a Decade of Change and Growth

This year’s Capgemini Report – the 10th – focused on growth through globalization and wealth transfer. According to their primary and secondary research, more than two-thirds of relationship managers identified “information available to clients” as one of the most influential trends in wealth management.

Photo Right: Prime Minister Dr. Ralph Gonsalves and representatives of Trend Bank.

This trend is closely lined with improved technology which has greatly increased the quantity, speed and quality with which information is delivered. The clients, customers, consumers and investors have become more sophisticated, demand more products, expect better performance and have a greater global perspective.

At the same time the wealth management industry has grown far more competitive. In fact, the three most powerful market forces shaping the industry are technology, proliferation of global information and competition.

WHAT DOES THIS MEAN TO US?

It means that we in the global wealth management and financial services industries can look forward to a bright future for those who can capture the potential client that the economic forecasts predict.

To win the hearts and minds of your customers and clients, keep them loyal to you over the long haul: And to optimize your share of fees – you need the right strategies, tools, infrastructure and an ability to psychologically connect with your client. Trust is the number one factor in achieving any sustainable relationship.

KEY MARKETING QUESTIONS

Do you know?

– Which markets and customer/client segments hold the most potential and which are your best suited to serve?

– What is the best way to compete in these markets?

– What is your competitive value proposition?

– How will you engender and reward a culture of collaborative and effective team workers to best serve your clients?

– Do you know what are your goals and objectives (Baseline measurement)

TRENDS

There are trends which are driving the growing market of wealth management and financial services.

– Earned wealth is increasing faster than inherited wealth.

– New wealth takes a more active role in how their money is managed.

– The internet makes quality research more readily available.

– Increasing competition in wealth management is offering high net worth individuals more product and service choices.

– Customers are increasingly demanding access to information 24/7.

– Today’s high net worth individuals are increasingly performance conscious globally oriented and looking for integrated opportunities and solutions to their needs.

– Even local business is globalized.

Wealth management is the latest growing and most dynamic sector of the global financial services market place. As has been well noted, there is an enormous profit potential and market opportunity in the delivery of wealth management services to international business organizations and for high net worth individuals, there are formidable challenges. The vast array of services that are needed to meet the global challenges of structuring and planning, human resource and asset management, advising and consulting, risk and liability control, and the all-important compliance with a growing web of governmental reputation.

Photo Right: Left – right Marcus Ballantyne, Registered Agent, Governor General, Sir Frederick Ballantyne, Bryan Jeeves and his son Alex Jeeves, Registered Agent.

Wealth management integrates the provision of every form of financial services – banking, insurance, trusts, compliance, fund management – to just scratch the surface – who assist clients in the accumulation, preservation, and transfer of wealth throughout the life cycle. It is having a significant impact on the financial services industry because of the vast number of changes in services and products that are needed in the wealth management market place. These needs and the services and products they demand have created concomitant changes in the manner services and products are distributed, the intensity of client relationships and the rise of value added compensation models.

Numerous commentators have observed that financial service providers will need to alter their traditional “product-centric” approach to the new “client-centric” approach. The focus is on the client. The goal is to integrate the best of class products timely monitored with enhanced internet technology all wrapped in high levels of personalized service.

It has been recognized that though high net worth clients continue to be the top of the food chain, the wealth management and financial service industry has developed a vast array of product and service offerings to reach the broad middle markets as well as the very wealthy.

Wealth management services are being targeted towards the growing class of the new affluent as well as traditional old line inherited wealth. It is well realized that the baby boom generation has done well in accumulation wealth and can be expected to leave sizable estates. However, the pre-baby boom generation has not been merely waiting for an inheritance but has been extraordinarily energetic in becoming wealthy on their own.

A number of professional observers have reported on seeing increased levels of sophistication and empowerment among investors. It is widely reported that financial service consumers are fervent about wealth preservation, investment yield, and tax efficiency. They expect a choice of financial products and technology and integrated financial services such as comprehensible financial reports via the internet and all the other goodies such as credit/debit cards, and wrap accounts.

The new affluent – particularly the baby boomers for which retirement is tomorrow’s reality – realize that they must be self-reliant and not dependent on the government for healthcare and retirement needs. They understand the value of compounding interest on a tax advantaged basis. This portends the coming clash with government since Revenue finds their reason to exist is to deny people from achieving this state of tax-sheltered investment. Expect that tax compliance will be the most critical area of due diligence for financial service providers.

WHAT’S THE IMPORTANCE OF THIS ANALYSIS OF HIGH NET WORTH INDIVIDUALS TO THE CARIBBEAN?

It has been reported that high net worth individuals around the world have two things in common: (1) a deep concern about wealth preservation, and (2) an abiding desire to ensure wealth growth for the benefit of future generations and beneficiaries.

THE ELEPHANT IN THE LIVING ROOM

I believe I would be inexcusably remiss if I did not mention the “elephant in the living room”, so to speak.

The West’s conflict with Islam as noted by an article in the Intellectual Activist Magazine recently is more than a “clash of civilization”. It is, at root, a clash between two world views and two moral models. A clash much wider and more important than any political or military conflict.

The United States of America is a nation founded not on the ideal of suicidal self sacrifice but on the right to “the pursuit of happiness”. Essentially it is a doctrine of rational self-interest which is espoused by the poor as much as the rich.

As a result, the distinctive model for American culture is not the suicide bomber but the “self-made man” the entrepreneur, the investor, the person who achieves prosperity by hard work. Implicitly, Americans recognize that the proper business life is not suicidal sacrifice but achievement. This is not the philosophy of the anti-globalist, extremist environmentalists, and even those other types of fundamentalists who are afraid of change and their enablers.

What does this mean to us is the need to support policies to extend a free market capitalist system to every corner of the globe starting right here. We know that people living in prosperity or at least making progress toward prosperity will flourish as they join the global economy. Prosperous countries do not bomb each other.

ACHIEVING SUCCESS

There is no magic formula for achieving success in this era of globalization. Any number of conferences, symposiums and seminars I have attended have pointed out the “Ten Steps To Success”:

1. Develop a “value added strategy”. Let clients know that you care about their affairs for reasons that go beyond your fees and commissions. The most successful will be able to relate in a very personal way to their clients’ needs, desires and individual circumstances. Which will you be? “high-tech, high care” competence or the other end of the extreme of “hit and run high-tech boiler plate?

2. Increase your “product” range. Whether you realize it or not, you are selling a product and that includes selling a client on your competence and capability. Enhance and increase your ability to provide a broad spectrum of services, tools and techniques.

3. Increase your client contact. Quality must be leveraged by quantity. Interact with clients by phone, mail, e-mail or seminars. Find ways to keep in touch more often.

4. Provide continuity of service. Does the client know that they will always be able to reach you? Will someone be there to take the client’s call and respond? No one likes to get the run-around – and that applies even more so to government operations.

5. Enhance your consumer reputation. What can you do to add prestige to your name? Are you a member of the Offshore Institute, the Royal Society of Fellows, STEP, The International Tax Planning Association? Do you attend the Offshore Investment Program at Jesus College Oxford University? What are you planning to do to enhance the overall value judgment of your services by your client? How can you get them to really appreciate how good you are?

6. Make your reports user friendly. You must improve your ability to provide clients with reports or statements or whatever work product you produce on a regular basis in a form which is easily understood. It should be up-to-date, accurate and easy to comprehend.

7. Automate and develop your operation to the proper scale. This applies to government and private industry. Are you geared up to efficiently service your targeted market? Does the government facilitate work permits so that private industry can bring in all the competent staff they desire? Does government keep telephone rates low to facilitate business needs? Does your office – private or government – have consumer-oriented staff, trained to handle multi-faceted problems?

8. The bottom line is critical. What’s important financially is what is left after taxes, inflation, government fees and transfer costs. Improve the bottom line.

9. Plan for success. You don’t plan to fail; you fail because you don’t plan. Be able to articulate your goals and quantify them. Increase (net) income – the upside, reduce risk of exposure – the downside.

10. Education is the best investment. Make sure that you and your staff consistently increase the scope and depth of your technical knowledge. The more you and your staff know about a wide range of financial and wealth management subjects the better they can be at being “client-centric”. And with enhanced client contact, your clients must perceive that you have an ever increasing expertise.

To grow and prosper in the new relationship, economy wealth management professionals, private industry and government must deliver consistent quality, service-coordinated with other professional service providers across a broad spectrum of seamlessly integrated channel. Comprehensive, enterprising solutions to customer/client needs are essential. The challenges are great, but those wealth managers who can meet expectations and who provide satisfactory customer experiences will reap great rewards.

CONCLUSION

To conclude, I would like to observe that the international financial community is constantly evolving. Government and private industry each in their own way and in an intertwined matrix must constantly anticipate or later adapt to changes in the growing requirements of an increasingly sophisticated industry. Yes, it is true that external events are not in our control – but making strategic decisions to cope with these events are in our own hands. Clearly recognizing the realities of the financial service business making the right choices thoughtfully and objectively will go a long way to enable both the private sector and government to capitalize on the opportunities readily available and – importantly – overcome the difficulties and disadvantages that comes, naturally, from the size and resource constraints of a Caribbean island.

Competition is intense and will continue to be intense. To be competitive we must be able to identify changes as they are occurring and take effective tactical actions in a timely manner – let me stress timely. I am confident that discussions such as this, further or in depth conferences and seminars will help in enabling us to keep our focus on capitalizing on the new opportunities and constantly improve our competitive efforts. Sharing our thoughts, observations, concerns – enables us to learn from each other to benefit all.

It has always seemed to me that to be successful, you must do more than seeing the tree and or the forest. Success comes from seeing the pathway.

Thank you to Louise Mitchell for inviting me this evening, to the Honorable Prime Minister, Ralph Gonsalves for his support in this endeavor and all of you for your kind attention and participation.