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Analyst Interview: HNW Offshore Investment: Drivers and Motivations 2017

Senior Wealth Management Analyst Heike van den Hoevel has been working on our “HNW Offshore Investment: Drivers and Motivations 2017” report. Here, we ask her about the findings of her research and how she expects the offshore investment space to develop over the coming years.

What has been the most striking change since the last edition of the report?

Political instability as a driver for HNW offshore investments has always figured prominently in the developing world, where investors fear for the long-term future of their assets. But in Europe this driver was negligible in the past. However, this has changed dramatically in light of the current political climate, with politics becoming increasingly polarized in Europe: globalization versus isolation, free trade versus protectionism, Europe versus nationalism.

A good chunk of the French population voted against Europe in the first round of the presidential election at the end of April 2017. And the growth of extremist parties is not limited to France; anti-establishment parties resonate with many of those who believe they have been negatively affected by globalization, as can be seen by the growth of the far right AfD in Germany, where elections will be held in September. Many have lost faith in the EU and expect the worst after being surprised by Brexit. We believe this has the potential to lead to a rise in offshore investments across the continent.

What does this mean for wealth managers, and who will be the beneficiaries of this trend?

It is more important than ever that wealth managers understand the changing reasons why HNW investors want to channel assets offshore, and design their service proposition accordingly. Catering to European offshore client needs to be done with this risk mitigation factor prominent in a wealth manager’s international investment offering. In fact, risk is an important determinant in HNW investors’ service requirements. Those investing offshore because of political uncertainties are more likely to opt for safe havens, so the main beneficiaries of this trend will be stable economies with liquid financial markets and sound legal systems.

One example is Singapore. The city state offers legal certainty, a large, highly skilled workforce, and a competitive tax environment. Yet time zones and geographic proximity also constitute important factors when selecting a booking center, which means that European HNW individuals tend to invest close to home. Consequently, we expect Switzerland to attract the bulk of the inflows as Europeans look for a safe home for their investments.

What do you believe to be the main challenges for offshore banks over the coming years?

Definitely regulatory pressure, which already has permanently altered the nature of offshore investments. Ongoing and automatic exchange of information as part of the OECD’s Common Reporting Standard (CRS) means that client anonymity in order to hide illicit assets or for tax evasion has effectively been compromised. And increased regulatory pressure not only constitutes a cost burden, but it also has a significant effect on booking center preferences, benefitting markets with more to offer than low tax rates, such as Switzerland, Singapore, and the US.

Indeed, the CRS has created an uneven playing field, giving the US – which is already the largest booking center – an advantage. Claiming that it has already signed bilateral data-sharing agreements, the US refuses to participate in the CRS (despite burdening the rest of the global community with the Foreign Account Tax Compliance Act). This means the US is becoming an increasingly popular destination for HNW wealth for a number of reasons: the country is regarded as a safe haven, it is home to well-developed and liquid financial markets with a broad range of investment options, and states such as Delaware, Nevada, and South Dakota are attractive to those looking to minimize their tax liabilities – a feat other jurisdictions will find hard to replicate.

For more on this topic you can read our HNW Offshore Investment: Drivers and Motivations 2017 report, which is now available on the GlobalData Report Store.

By Heike van den Hoevel, Senior Wealth Management Analyst

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