March 29, 2023: When family offices cross borders, they encounter challenges … and opportunities
Family offices with members spread across the globe have to deal with a host of challenges — from taxes to cultural differences around money and investing — that can cause tension. It takes proper planning, communication and some healthy perspective to address these issues, Steven Weiss reports.
Also in this issue, we talked with Jochen Wermuth, one of the leading proponents of sustainable investing for family offices, who describes his own environmental awakening as a youth. He also talked about his investing strategy, how family offices can move to a more climate-conscious approach, and why he doesn’t want to be the only one making money on clean-tech investments.
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HANDPICKED: When family offices cross borders, they encounter challenges … and opportunities
By STEVEN I. WEISS
As family offices proliferate and family members move to different parts of the world, more wealthy families are crossing cultures — whether national, religious or ethnic — through marriage, relocation, adoption or the expansion of the family business into countries around the world. That growth can bring all kinds of unexpected challenges and complications, from tax and estate issues to new twists in finding common ground on approaches to investments and philanthropy.
When dealing with multiple jurisdictions with varied laws and traditions, there is no one way to handle these matters, family-office advisers say. But it’s key to have a team of professionals in place to review the options and for the family to establish a common ground when it comes to their shared needs and goals.
"Be aware of these complexities, and hire local talent to offer specialized advice," said Harsh Agarwal, a Dallas-based managing director at Bank of America Private Bank.
- When family members relocate across borders, it can present legal, regulatory and cultural challenges.
- Addressing those challenges comes down to planning and communication.
- It also helps to hire local talent who can offer specialized advice.
- Cross-cultural family offices can also take advantage of new investing opportunities.
Taxes: One of the thorniest issues is taxes, which can cause friction within different branches of a family. Susan Schoenfeld, a family office adviser, recalls working with one family where one of the primary members had moved to a jurisdiction where that person’s distributions would be subject to “an enormous amount of tax.” That family member “wasn’t taking any distributions and, as a result, was the poor relation,” which shifted the family dynamic. Proper planning can help avoid such complications.
Cultural differences: Cultural differences — especially around attitudes and values about money and business — can present challenges. In the case of one family Schoenfeld worked with, they “had emigrated from a Latin American country [and] the daughter married an Irish-Catholic guy” who’d grown up in the United States and didn’t come from the same level of wealth. “The son-in-law had encouraged the family to invest in his business,” she said, but their differing cultural attitudes on sharing details about how his business was performing created disharmony. The family expected him to take the lead on transparency, but the son-in-law interpreted their lack of questions as a lack of interest.
“He felt that he couldn’t talk to them about it, and they felt that he didn’t talk,” Schoenfeld said. Eventually, the family came together to communicate through those differences.
Philanthropy: Agarwal cited his own family’s cultural differences as an example of how to bridge divides on philanthropy. While his father grew wealthy as a corporate executive in India, Agarwal made his life in the U.S. and married a woman who grew up in America and was of Polish descent. While his family in India had focused their philanthropy on working to alleviate extreme poverty, “my wife, who’s employed here in the U.S. as a paralegal in the family-law space, wanted to empower other women to take on roles in law,” Agarwal recalled. When his family members heard about her plans during discussions at regular meetings, they thought it sounded “like an entitled goal.”
That division forced Agarwal to “play the broker in helping both sides see each other’s perspectives.”
The family began seeding his wife’s project with a small allocation, and she “ran with that baton and started offering KPIs and metrics.” Now, Agarwal said, “My mom is actively reaching out to her to see what else we can do.”
Family cohesion: Agarwal got the idea to focus heavily on family meetings as a way to bring together an international oil and gas family of a prominent client in Texas. By the third generation, many members had moved to Europe.
To keep their bonds strong and involvement in the family office consistent, a physical office was established in Europe, and family meetings now alternate between there and the U.S. every year. As an indicator and reminder of the entire family, a photo taken at every year’s annual meeting is blown up large and placed at the entrance of both the U.S. and European offices “so family members can walk in and recognize they are part of the larger family fabric,” Agarwal said.
Divorce and succession: The tensions that arise during divorces and around succession battles can be amplified when the drama crosses borders. In the U.S. specifically, families benefit from an estate-tax provision that grants spouses the right to inherit tax-free from a spouse who dies — but that’s only when the inheriting spouse is a U.S. citizen. International families need to prepare trusts and other mechanisms if they want to avoid that tax hit.
In the case of a divorce, Agarwal said, it’s not uncommon for a settlement to include requirements about how children are raised — including religious activities — in order to be eligible for distributions from the family. Again, it helps to be prepared.
New investing opportunities: Of course, the global expansion of family offices provides new opportunities along with these challenges. When it comes to investing, embracing multiple cultures can increase returns, said Francois Schramek, managing director of the Los Angeles-based wealth management firm Manhattan West. “Every investor has biases,” he said, and “the most basic bias that most people have is people tend to invest in their local country first.”
For families who want to diversify globally, having a presence in another country and a keen understanding of other cultures can be an advantage, said Schramek, adding that he himself is a product of a marriage between French and German families and has benefited as an international adviser from having a foot in both cultures.
“Probably half of my time is spent with people who have some kind of international presence,” Schramek said, whether “through marriage or a business entirely located in another country.” He emphasized that all countries are not the same when it comes to gaining access to investment opportunities and advice and that families should consider where they locate their hubs to best capitalize on their opportunities.
While many family offices remain fairly homogenous — Agarwal said that of the more than 60 strategists who are advisers to families within Bank of America, only a handful need to specialize in global families — the continued blending of cultures around the globe and increasing globalization of investment means that families need to take all manner of legal, regulatory and cultural differences into account as they expand.
PEER-TO-PEER INSIGHTS: Jochen Wermuth
Jochen Wermuth has emerged as one of the leading forces promoting sustainable investing for family offices through his firm, Wermuth Asset Management, a Germany-based family office and advisory firm dedicated to climate impact investing. In the early 1990s, Wermuth became an adviser to Boris Yeltsin as part of an effort to transition Russia from a planned economy to a market economy. After a stint at Deutsche Bank in 1997 and 1998, during which he and his team raised $8.8 billion in financing for Russia, Wermuth left amid a dispute over a multimillion-dollar bonus that was later amicably settled out of court. Since then, Wermuth has donated generously to the Green Party in Germany, co-founded the DivestInvest association and served on the steering committee of the 100% Impact family-office network.
How did you first get involved with environmentally conscious investing?
I was born in Boston, because my parents were Fulbright Scholars. But I grew up in Mainz, on the Rhine, the largest river in Germany. Officially, the Chernobyl [nuclear plant] cloud had stopped on one side of the river; supposedly it didn’t pass over the river, just like it stopped on the French border. That meant that people on the one side of the river were allowed to play in the grass and in the sandpits; and on the other side of the river, they weren’t — because of different government decisions. Then five of my mother’s best friends on the no-cloud side of the river developed cancer. One of those friends, who was dying of cancer and asking for euthanasia, is what got me interested in environmental issues at the time.
Demonstrations against nuclear power and nuclear weapons didn’t seem to change much, so I decided to study math, economics and finance, aim to become wealthy and to do good with it. I studied at Brown University, then went on to Oxford, where I met a woman who said, “Do you want to donate 1% of your income to Greenpeace, or 10 pounds a month?” Because I was chopping potatoes at food services, the cheaper option was 1% of my income. As a result, I became one of the biggest donors of Greenpeace because I stuck to that 1% of my income.
I became independently wealthy around 2000 and decided to invest in climate solutions. I quickly found out it’s very difficult to do that on one’s own. And so I raised a number of funds, raised a billion total in funds — mainly in Eastern Europe; long, short equities; and some small private equity in venture investments in clean tech.
Then I met Charly Kleissner, the founder of the Toniic impact-investing network. And Charly said, you’re one of the biggest donors to Greenpeace, but you invest in oil, gas and coal companies. Don’t you see that as an issue? So I started building a network called the global DivestInvest movement.
What is the investment approach of the DivestInvest movement?
We are a finance-first, return-first and then an impact fund. That means that we don’t do anything unless it has a net positive impact. But we believe we actually get higher returns.
We are now in a third industrial revolution where the fossil fuels are being replaced by wind, solar and geothermal and hydro. Again, 90% of the index is going to disappear, 90% of the jobs are going to disappear. It’s a hugely disruptive period. And the question is whether you want to be invested.
For an established family office that wants to make the shift to a more climate-conscious approach, what steps do you recommend?
The way that the DivestInvest movement pledge works is, you pledge that “within five years I will divest from all fossil fuels in my portfolio.” You look up the list that’s called Carbon Underground 200, which is provided by fossilfreefunds.org and identifies the top publicly traded coal and oil and gas reserve holders globally. As a risk manager, I would remove the Carbon Underground 200 from my portfolio. I would then go to my fund managers and ask them to do the same.
For family offices and other investors, what’s the tipping point for climate-conscious investing?
There’s this climate finance gap. We need something like $3 trillion more in capital to move quickly to a climate solution. That it doesn’t exist already means I could make a lot of money individually [through investments in clean tech and other solutions]. The more laggards there are, the more time I have to make money. But then I – along with the rest of us — won’t survive as a species. So I want to move as much capital as possible. To do that, we need to get to a situation where the emissions of CO2, currently valued at only €7 or €8 a ton, is finally priced properly and taxed. I think there's an opportunity in the U.S. Congress now that the Republicans are open to a carbon tax on dividends, subject to getting a wave of benefits for the fossil fuel companies.
Interview conducted by Alec Foege
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