Research Paper on Exploring Investment Options for HNW Clients: Strategies & Benefits

Introduction

This module seek to provide an overview of approaches to exploring investment options for high net worth clients and providing suitable advice to achieve their long-term objectives. This document will further discuss the different ways which may be considered in addition to outlining different types of savings and investment strategies, and the benefits as well as drawbacks of each strategy and how these would be suitable for different types of investor with different objectives. This will be by examining the investment vehicles which are available to those with higher income and existing assets to continue to invest in a tax efficient manner to realise their long-term objectives.

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Objectives

To establish the current financial position of the client, their future circumstances and their requirements for future investment income.

To describe the potential options available for each client.

To identify the risks and benefits available for each option.

Recommend a focused investment strategy for the clients' circumstances taking into account their levels of expectation and risk.

Assessing the Client's Needs

Although a client may approach you with a specific goal or objective in mind, there will usually be a additional information you need to obtain from them before providing a recommendation, especially with regards to school fees planning, due to the amount of variables to anticipate from what is usually a long-term objective, when questioning your client. Some key considerations would be details such as;

Savings

A standard consideration before assessing any time of investment strategy would be to ensure the customer has substantial savings to maintain their standard living following an unexpected life event. However as the investment strategies discussed will be with a focus on high net worth clients, there is an assumption there would already be adequate 'rainy day' provision so would not take as great priority when considering further investments. According to (......), investments would be useless if the client do not have enough savings that can assist the client cater for the day to day expenses or maintaining the standard of living for the family.

Cash

Cash is another thing to be considered and it is quite similar to savings However, some savings may be invested in assets where they are not easily accessed, it is important to ascertain how much accessible cash is available. This is important because different clients have different amount of cash and thus, their priority regarding the type of investment they would like to venture into differs significantly. It is also important to note that clients often need assurance that the cash they want to invest will enable them achieve their long term future goals like paying the school fees of their grandkids at college level .

Salary

Whist you may be approached by many clients which have sufficient income to cover the school fees, it is important to ensure that investing for their own personal objectives is not ignored. The customer needs to be enlighten that they can invest small amount from their salary on a regular basis which would greatly assist their grandchild when they are older. For instance, if a customer can manage to invest up to 50 pounds a month, they will be in a position to have about 15000 pounds by the time they are old (Tanskanen, 2017).

Further Considerations

Bare Trust

This is a legal structure that enables success of a legal and beneficial ownership. Based on bare trust, the assets are often held in the name of an indicated trustee for instance, the grandparent and designated to person benefiting (the grandchild). The beneficiary will be able to access the invested funds at the age of 18 years. This type of investment is crucial since they provide an avenue for the money to be passed on prior a child is old so that he or she accesses the money directly. According to Watt (2018), bare trusts provide a wide range of tax benefits. For example whilst the assets are held by the grandparent, the investments as well as cash are often taxed on the grandchild. The grandchild has similar allowance regarding the personal income (PS10,600 in the year 2015/16) as well as capital gain tax allowance (PS11,100 in the same year).

Discretionary Trust

This is a type of trust that has been initiated to benefit more than a single beneficially. However, the trustee is given all discretion on what and when money is channeled to the beneficiaries. The benefit of discretionary trust is that the amount of income can be accumulates throughout the life of the investor and the number of beneficiaries can be added with time. Another importance of this kind of trust is that it provides a flexible way in which assets; money and property can be channeled to the beneficiaries.

Role of the Grandparents

Grandparents play a key role in supporting the life of their grandchild for instance, during their college studies and even after completing the study. They tend to invest a significant amount of money in their grandchild's education. Besides, grandparents also have a role of providing financial education to their grandkids so that they become financially responsible (Pashos, Schwarz & Bjorklund, 2016).

Investment Options

There are a number of tax-free savings and investment wrappers that the client may wish to use depending on the objectives you have identified and with any savings or investments, the client should be advised initially to look at making use of their ISA allowances before investing further to benefit from the PS20,000.00 tax free ISA allowance permitted per annum.

Depending on the age of the children, a Junior ISA is also a product they may wish to look at when looking to mitigate their tax liability however, the funds would then belong to the beneficiary and would not be available until their 18th birthday meaning that it would then be difficult to designate the funds to a specific purpose and would be unavailable until the child reached further education.

It is feasible to place the funds into a discretionary trust however, this is more complicated and the cost to a solicitor to draw up a complex arrangement to ensure the funds are correctly assigned may outweigh any benefit, depending on the level of investment required by the client.

Bonds and Gilts

These are low-risk and low-return investments which provide capital security up to PS50k and guaranteed returns. Due to current interest rates, the returns available are currently offered between 0.5 and 2%, which is less than the rise in the rate of school fees, and inflation. It is always advisable to hold a certain amount of these investments in a portfolio due to the security of the investment, however unless these investments are ISA wrapped, any gains would still be subject to tax despite making a loss in real terms. Whilst rates may recover, the use of these should be minimized when the client has an investment objective of large-scale growth.

ISA - it is always advisable to make use of the PS20,000.00 annual tax fee ISA allowance prior to the investment.

Direct Equity Investments

When making long-term investments requiring a high-yield, the client will require exposure to shares and direct equities when the aim is to achieve higher than inflation growth. When investing, most clients will not have access to a trading platform; has have the specific knowledge or the capital for to carry the risk of exposure to a specific investment. With this in mind, there are vehicles for HIGH STREET investors to easily gain exposure to these markets.

OICS and Unit Trusts

These are useful investment strategies to provide the client with exposure to equities to promote higher-growth which matches their urge to risk.

Both Open-Ended Investments Companies (OEICs) and trusts are collective investments where the investor enjoys tax free growth whilst their money is invested in the fund. This is on the ground that the fund does not have a tax liability to capital gains and any associated liabilities in dealing with direct equity investment is deemed to have been paid by the fund before the return to the investor is calculated. Another tax advantage is that it is usually possible to invest in a unit trust using an ISA so the investment can grow tax-free.

Whilst there are tax advantages of investing in this kind of fund, unit trusts will typically have an upfront cost to invest, which will be deducted from your initial investment when the units are assigned. Furthermore, there are annual management charges, usually a percentage of the value of your shares, which will be applied in addition to potential exit charges if you wish to withdraw from the fund in a short timescale. This is a risk, especially to short-term investors as the fund will need to perform well enough to provide a return for the investor once these charges have been deducted as even a low, positive return, may provide the investor with a return lower than the original investment. Another benefit of these investments is that in case the funds of the investor are mismanaged, the firm is then entitled to compensate the investor based on the agreed value.

Much like investment into a REIT, any funds invested into a unit trust are at risk, as the investor does not own the underlying asset so the returns are based solely on the performance of the fund. Unlike REITs however, the units are not traded in real time meaning that the price an investor may receive for selling their units in a fund may be lower than when they provide an instruction to sell.

Offshore Funds

A highly tax efficient way to invest in collective funds similar to those outlined above, is to invest in an offshore investment bond. These funds are domiciled in jurisdictions which enjoy favorable tax regimes which gives greater flexibility to the investor over their tax liability, as they are able to control when the tax is paid, how much tax is paid and to who the tax bill will be paid.

Furthermore ,any gains, dividends or income from these funds are not subject to tax until disposal, which means returns can benefit from tax-free gains being added or 'rolled-up' into the investment as whilst within the fund, as gains are not subject to income tax or capital gains tax. The tax is then paid on withdrawal of the funds at the investor's income rate in their current jurisdiction as a chargeable event gain.

The investment however, allows a withdrawal which can be taken as tax-deferred income of up to 5% of each investment amount for a maximum of 20 years. This amount does not have to be taken annually and aggregate amounts can be taken as long as the 20 year limit is not exceeded, so these withdraws do not trigger a chargeable event for tax purposes.

One of the disadvantages of these funds is that there are sometimes hidden fees and charges as some funds have a complicated and opaque charging structure, and sometimes the fees may offset the additional gains enjoyed whilst the funds are in the offshore 'wrapper'.

Venture Capital Trusts

Venture capital trusts are another long-term investment with potential high-yields with favourable tax treatment. Based on this investment, income tax relief is available on newly-invested shares on up to PS200,000.00 per tax year at 30% this is provided as a tax credit to set against your total income tax liability and is unavailable to investors who buy existing venture capital trust shares. The tax relief is offset against your total tax liability which means it cannot exceed your personal tax amount for the tax year and this will also be claimed back from HMRC if shares are sold within the initial 5 years, although the tax will not...