It is common to associate wealth management with private banks, family offices, brokers, asset managers, and other financial intermediaries. But the structuring and transmission of wealth also touches upon many that are outside of the financial trade.
Interactions between essential sectors in an economy and smaller surrounding activities are normal. Some globally significant industries, such as the natural resources and mining industry, are known for involving significant ancillary industrial and service activities. Others, like tourism and hospitality, have deliberately nurtured the perception that they not only add directly to GDP, but also do so indirectly, and through vaguely “induced” contributions.
While outside of the real economy, the financial industry is interrelated with practically every sector of it. Thus, as some European asset managers argued publicly in the aftermath of the great recession, professional asset management is a “vital source” of economic growth, by linking investors in search of appropriate savings vehicles with the financing needs of the real economy.
“Total investment fund assets represented 66 percent of the European Union’s GDP at end-2010, whereas total assets professionally managed amount to more than 100 percent of EU GDP,” a 2011 paper in the OECD Journal pointed out as evidence for asset management’s “crucial contribution” to the European economy by enabling capital flows in service of productivity, providing liquidity needed for sound capital markets, and securing tools by which investors could achieve their objectives.
When it comes to wealth management — defined in broader terms than asset management — not all interrelations with the real economy and potentially positive interactions with other sectors may be as obvious, however, nor receive government support for enhancing the value they could bring to a nation’s economic output. If wealth management is regarded from a perspective of its direct and indirect contributions to GDP, the importance of indirect wealth management activities, such as legal services in the structuring of assets, tax and accounting services, and estate planning, jumps out.
For local law professionals, wealth management is a field of great importance, even if lawyers would not get directly involved in the management of wealth itself, explains Chadia el-Meouchi, managing partner of EBSM (Etude Badri et Salim El Meouchi) law firm in Beirut. “Wealth management is a banking and financial activity, so it’s not something that law firms will typically do. From a lawyer’s business perspective, you support either the investors, or the institutions that are taking those services, so that’s what we do [at EBSM]. We understand the wealth management business very well, and can provide all the legal services and support for that business. We give a lot of advice on wills and succession issues, as well as on the tax on structuring wealth management assets,” she tells Executive.
In this context, the circumstances for wealth management already seem to offer some potential for growth, as Meouchi points out several legal advantages that exist in Lebanon. One is the fiducie law, which is similar to a trust law. “Under this law, banks and financial institutions can act as a fiduciary, and you can place your assets with them — but not any kind of assets, there have to be conditions. The bank will then manage those assets, with specific instructions as to what happens in case of bankruptcy, or inheritance. Also, under the fiducie law, there is no disclosure on the ultimate beneficiary,” she says.
According to her, favorable circumstances for the management of wealth in Lebanon exist through measures, like the holding law and the offshore law. “We can do a lot of structuring of different assets [under these laws] to put them in the most tax-advantageous vehicles for the clients,” she says, before adding that another major advantage resides in the Lebanese banking secrecy law, even after it has been weakened to accommodate anti-money laundering and combating of terrorism finance. “We are still a country that benefits from banking secrecy, and this is usually quite attractive to clients,” she concludes.
The legal attractions of placing wealth under the Lebanese jurisdiction are very real, confirms Mohammed Alem, managing partner in law firm Alem Associates. “The system is designed to provide a very good environment for local wealth management. It’s not taxed to have money in Lebanon. You’re shielded from any review by the Ministry of Finance, and even your own laws forbid your tax authority from finding out what your real tax declaration is,” Alem tells Executive, furthermore pointing out that residents enjoy a large amount of freedom in aspects related to taxation or to personal transactions.
No fear of the latest taxes
Even with regard to the latest increases and new measures in taxation, private bankers and law experts seem to see little that could disturb the existing peace in this area. Charles Salem, head of private banking and wealth management at BLF says that the Lebanese measures are merely following an international trend to full tax transparency. He sees this as having positive ramifications for private banking and the wealth management industry, in moving from an off-shore to an on-shore model, and in adapting to a fully transparent and internationally accepted new environment.
“International recognition is very important for your business, especially in private banking today,” he says, reasoning that the transition to full transparency will not be difficult to achieve for private banks. In his view, clients of Lebanese private banks, many of whom are used to operating in transparent environments from other countries they have dealings in, will be more comfortable in a regulated world that resembles what they are used to.
Based on measuring impacts of recently implementing taxation for revenues from foreign investments by Lebanese residents, Toufic Awad of Audi Private Bank does not anticipate major repercussions for private banking, such as significant loss of clients, or withdrawal of assets under management because of new or higher taxation at the rates imposed in 2017. “I don’t think that any investor in today’s world should, or could, avoid taxation altogether,” he says, adding that one has to agree — overall taxation in Lebanon is still reasonable.
EBSM’s Meouchi also sees the Lebanese tax environment as favorable when compared to tax regimes in Europe and many other regions, even as she stresses the importance of having a reliable environment when it comes to imposition of tax duties. “If you keep changing tax regimes, there is uncertainty, and businesses start asking if there are going to be more taxes and additional increases. This creates a sort of instability and discomfort. But relative to other tax systems, our [taxes in Lebanon] are still relatively benign,” she says.
In her understanding, other issues than taxes act as detriments to growth of the wealth management industry in Lebanon. “When you think about the wealth management industry, the real problem is the market as a whole. You might have the best regulations, and the best tax system, whatever you want, however, there are other, very important factors, [namely] if your economy is so unstable, if there is so much corruption, and if there is instability in the judicial sector. These factors are what I regard as the real impediment and obstacle to a flourishing wealth management industry in Lebanon,” Meouchi elaborates.
[pullquote]“You’re shielded from any review by the Ministry of Finance, and even your own laws forbid your tax authority from finding out what your real tax declaration is”[/pullquote]
The challenge that remains
It is critical for wealth management, as for everything else in Lebanon, to set the spotlight onto the need for fundamental reforms, Alem also says. “There is, of course, a lot to be done to develop Lebanon into an international hub [in wealth management], but first we have to re-consolidate the trust in the Lebanese banking system and its financial position. The real threat to the Lebanese financial system is by infrastructure issues, by deep issue how the economy is structured, and how you can maintain a spending level [as we have] with a loss-making operation at all levels,” he confirms.
When approached from angles of the country’s social and economic structure, wealth management in Lebanon is entwined with the strong role of family businesses, says Hania Hammoud, who is a family business and wealth advisor as second generation member in the Hammoud Law Firm in Beirut. Lebanon as a country in the Arab world is influenced by cultural taboos against planning for future, and the Lebanese family is constructed in ways that are close to Arabic culture, she notes.
“This is why western wealth management methods and tools practiced by many large international consulting firms don’t totally respond to the family wealth needs and requirements,” Hammoud tells Executive, arguing that cultural and legal impediments both affect the implementation of the western family wealth management approach in Lebanon. “Therefore, it’s paramount to adapt tools and techniques in a way that fit the family and country’s needs and requirements,” she says.
In her view, this spells out as need for legal action. Family businesses and family wealth management require attention from the Lebanese government and Parliament, by way of changing or amending laws to better protect family wealth and to encourage family businesses to stay in the market, she says. “We urgently need a huge constructive reform of the applicable Lebanese laws, namely [the] personal [status] law, [and the] business and corporate law, which don’t respond to the current and future economic and social needs.”
Family business is the backbone of the Lebanese economy, and this must be taken into account through long-term thinking and incorporation of concepts, such as a family’s emotional commitment to their business, to the management of the family’s wealth, Hammoud emphasizes. “Wealth centricity, by itself, is not enough.”
In the right direction
There is wide agreement in the legal and business communities over the need to modernize and develop the laws that regulate matters stretching from creation of companies and bankruptcy rules to inheritances and equality in questions of citizens’ personal statuses. If legal initiatives reconcile between globally accepted principles and the specificities of the Lebanese terms of existence, measures could be a boost to the — just awakening — Lebanese wealth management industry as to other activities in the economy. And since the financial business of wealth management interacts with other businesses, development of this particular industry appears to have good potential for its own multiplier effect.
[pullquote]“Wealth management is definitely an activity that could grow in Lebanon, but you need an underlying fundamental infrastructure for that, and I would say regulations are very important in this regard”[/pullquote]
When compared with other potential and emerging wealth management locations in the Middle East, the cause of Lebanon seems neither lost, nor destined for automatic perfection. What encourages contemplation of the country’s specific potentials as a wealth management hub is the fact that steps in the right direction have already been taken. As FFA’s Riachi explains, “Wealth management includes many businesses. Usually these are entities that are licensed and have the right to do specific kind of businesses according to their license, such as advising, managing, providing custody, executing, etc. Individuals are not licensed [as wealth managers], but they have to pass certain exams. These are mandated by the Capital Markets Authority (CMA), and the central bank [Banque du Liban]. Today, you have very strict regulations. [As a corporate financial intermediary] you have to be licensed and regulated by the CMA, and you have to apply very straightforward rules and procedures.”
Lawyer Meouchi gives a similar assessment. “Wealth management is definitely an activity that could grow in Lebanon,” she says. “But you need an underlying fundamental infrastructure for that, and I would say regulations are very important in this regard. We’re lucky to have good regulations today, as the Capital Markets Authority is playing a positive and active role.
“From the perspective of a legal mind, the CMA shows flexibility toward foreign investors to the extent that we’ve seen them come up with ‘tolerated practices’ and other things that aren’t written in the law, if the laws do not enable foreign investors. Seen against all the other institutions that we face in Lebanon, both the central bank and the CMA are doing a great job on the level of developing things to encourage foreign investors. I think what we really need to work on is getting a more stable economy, less corruption, and making the country generally more attractive.”