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26Nov2014Nov26,2014

Sustained economic growth and unprecedented levels of foreign investment into Latin America have created vast fortunes for the families behind many of the region's leading companies. To manage their newly made wealth and navigate tough new rules on taxation and offshore banking, the region's rich are increasingly turning to outside counsel for help. Vincent Manancourt investigates

Latin America's economies may be facing a slowdown, but it seems its people are only getting wealthier. According to a report by Julius Bär, a private bank, the region has one of the highest expected growth rates of wealthy people in the world, with the number of individuals with investable assets of more than US$20 million – known as ultra-high net worth individuals (UHNWIs) – expected to grow by 42 per cent by 2023.

Lower down the rich list, Latin American high net worth individuals (HNWIs) have far deeper pockets on average than those in other regions – US$13.5 million compared with US$3.3 million for European HNWIs, for instance. Unsurprisingly, Brazil has the lion's share of the region's wealthy, with more than a third of HNWIs, while Mexico's Carlos Slim and family, with a net worth approaching US$80 billion, lead the pack. It's hardly slim pickings for the rest though. Thanks to mining, Chile's Fontbona family and Mexico's Larrea family, for example, have accumulated a combined net worth of more than US$30 billion – a touch higher than Paraguay's GDP.

If it was bricks and mortar that led the world into the 2008 financial crisis, it is the BRICs and MINTs that emerged from the ensuing chaos in the best shape. The rise and rise of the Latin American contingent of the Goldman Sachs-coined acronyms has been well documented – land sales, the commodity boom, private equity interest and a slew of IPOs have driven their growth, and that of the region as a whole. This has fattened Latin Americans' wallets – the number of HNWIs (those with at least US$1 million to invest) has increased by over 100,000 over the last five years, while the UHNW population has nearly doubled since 2003.

One reason Latin America is home to so many wealthy people is that the region's companies have stayed in the hands of individuals and families for far longer than in other parts of the world – meaning they have benefited directly from the region's economic growth. Pension funds, insurance companies and big corporate investors started to invest in the region's businesses later on, and now the families selling off stakes are pocketing millions, if not more. But Latin America's newly minted millionaires are often at a loss about how to manage their fortunes. As Carlos Fernando Siqueira Castro of Siqueira Castro Advogados puts it, "these people who received 100 million in shares overnight just didn't know what to do with it."

Juan Guillermo Ruiz, Marcelo Paolini and Colin Maltby
Juan Guillermo Ruiz, Marcelo Paolini and Colin Maltby












​Wealth of opportunity

As Latin America's companies continue to grow and draw the attention of foreign investors, their increasingly wealthy owners (by now often the third or fourth generation of the founding families) are increasingly turning to law firms to manage their wealth and family estates. A rising number of the region's leading corporate firms are devoting time and energy to developing teams to provide wealth and estate planning advice, drawing on lawyers from their tax, finance, corporate and real estate law departments. "At the moment it is not that common for law firms to have wealth management practice areas but more and more law firms are gathering partners and associates from different departments to have a special interest group dedicated to wealth management," says Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados partner Marcelo Trussardi Paolini. Some firms have taken a more aggressive approach to developing the area. Earlier this year, Brazil's Trench, Rossi e Watanabe Advogados hired tax associate Elisabeth Libertuci to develop its wealth management practice, while last July Veirano Advogados hired Christiane Sultani, a former head of legal at Itaú Unibanco, to add banking expertise to wealth management work the tax team had been doing. In Mexico, Sánchez Devanny also recently made several strategic hires in a bid to develop its wealth management practice.

In the past, this was more the domain of private banks and wealth managers. While in recent years law firms have been catching up fast, the two are not competitors, but instead complement each other through the different services they offer. "Traditional wealth managers are experts and very good advisers in terms of the financial products that they have, in terms of the investment alternatives that they offer to the clients or the jurisdictions they know are the best for structuring those financial products," says Juan Guillermo Ruiz of Colombia's Posse Herrera Ruiz, who advises HNWIs on tax issues. "Law firms advise individuals on how to construct these investments from the point of view of the specific tax rulings and regulations applicable to the residency of the investors or the real beneficiary of those investments." In other words, the advice of wealth planners is general and financial, whereas the advice offered by lawyers is specific and geared towards making the client and their family fully tax-compliant.

Up close and personal

Those firms diversifying into wealth management will soon find that its highly personalised nature means the relationship that develops between a lawyer and client can be vastly different to the dynamic a corporate lawyer might be used to. With effective wealth management dependent on clients opening both their business and personal accounts to scrutiny, Siqueira Castro explains that an intimate relationship between lawyer and client is both the outcome and a prerequisite of a good level of service. "The important thing is that you are dealing with something which is sacred and secret to the business person – he is opening all his intimacies and showing all the assets he has because in order to give sound legal advice you need the full scenario," he says. There are other differences to the lawyer–client relationship. "A lawyer that deals with HNWIs should be someone who likes to deal with people and individuals. If there is trust between an HNWI and his lawyer, they can forge a relationship which lasts generations," says Paolini.

Law firms contemplating expanding their service offering into wealth management services must ensure sufficient safeguards are in place to protect them from the legal and ethical challenges they may encounter. With the potential for client relationships to become deeply personalised and span many generations, one of the greatest challenges is ensuring lawyers maintain sufficient distance to avoid running into conflicts of interest or ethical issues.

To an extent, firms have seen the growth in their wealth management practice develop organically as a result of their corporate offerings. As Siquiera Castro explains, a wealth management practice can follow on naturally from advising high-level executives on their companies' corporate matters, as the professional trust placed by CEOs and CFOs in the firm will translate into personal trust. With many of Latin America's leading companies remaining under the strict control of the founder, or their relatives, issues of business management and a family's finance are often closely intertwined. In this context, the well-being of the business can often be highly dependent on the well-being of the family. Divorces, family breakdown and the death of the founding father can all have the potential to scupper a business if ownership and personal liability are not clearly agreed. (One lawyer who advises HNWIs in Latin America says this can even go as far as asking whether a new client has a mistress, due to the increased risk this implies of family breakdown or costly divorce proceedings.)

Given family-owned companies often lack clear rules on ownership, an owner's decision to sell up, or cash out, can cause disputes to bubble to the surface as family members compete for a stake in the proceeds. Two years ago Japanese beverage company Kirin experienced this first hand, when its attempt to acquire family-owned brewery, Schincariol, in Brazil sparked a protracted and bitter legal battle between relatives of the company's founder that threatened to derail the multibillion-dollar acquisition.

Indeed, one reason wealth management is taking off as a practice of law is that business owners are growing more mindful of the need to establish sound corporate governance structures and plan appropriately for succession. There are various areas in which lawyers must be well versed in order to anticipate what impact this will have on HNWIs and their family-owned enterprises, and "forced heirship" is one example of legislation that can prove problematic. Despite variations in the rules between jurisdictions in Latin America, it typically means that a certain percentage of an individual's assets must go to his or her heir when they die. This becomes complicated when the family estate includes business interests. Maples and Calder Cayman partner Simon Firth explains that if succession is not planned for and handled carefully, forced heirship legislation can have a "severely detrimental effect" on a family's company. "Ownership can become fragmented among family members who may have competing interests or different visions for the business," he says. "Similarly, children who inherit an interest in the family business may have no idea how to run it, while others may have no interest in participating in its running."

In the longer-term, the death of the family member in charge can also remove entrepreneurial and managerial skills that are essential for the running of the business. "The next generation don't necessarily have the same skills that their mother or father had in terms of making money," says Colin Maltby, director of Berkeley LatAm. Problems such as these can be avoided by implementing structures that limit heirs' interference in the running of the business, but give them access to the company's profits.

However, in some cases a change in leadership can inject entrepreneurial verve or make the family business more outward-looking, as the new owners introduce knowledge and skills gained studying or working abroad. Often, this makes them more likely to open their companies to outside advisers (including lawyers), as they seek to professionalise or expand the business. "The profile of many of our Latin American clients is someone who was raised up to a certain age in their own country, educated in the best universities in the world and trained in some of the best professional service firms. In many cases they have returned to their home countries with a whole new perspective and some will take the family business to another level. The relationship with outside counsel like us has become a bit different – these are very sophisticated consumers of legal services with very high expectations and standards of quality and service while the new ownership is thinking about and pursues possibilities outside of their home markets," says Enrique Martin, a partner at Jones Day.

Taxing work

In addition to local legislation, there are often multiple jurisdictions for lawyers to navigate their clients through. The assets of Latin America's wealthy families – like others across the world – are becoming increasingly globalised, which law firms must take into account when ensuring their clients' families are tax-compliant. "Law firms must do global analysis in order to make sure their clients are tax compliant not only in one jurisdiction but in a good number of jurisdictions as a result of how the family is integrated," says Ruiz.

Many HNWIs like to park their assets offshore and Latin America's are no different. In 2013, Mexican HNWIs held 22.2 per cent of their wealth outside their home country and the Boston Consulting Group expects that around half a trillion dollars of offshore wealth will come from Latin American investors over the next five years. Offshore centres in the Caribbean, such as the Cayman and British Virgin Islands, will benefit most from new offshore wealth created in Latin America.

Increased scrutiny of offshore assets is only driving up the demand for legal and compliance expertise. One driver is the OECD's plan to fight tax evasion, defined more accurately as base erosion and profit sharing (BEPS). With BEPS, the OECD is hoping to achieve global transparency in terms of defining clearly the real beneficiary of assets, which is seen as one of the biggest factors in the drive for compliance.

There is an important effect of that. "The first thing is that not only financial institutions but also clients or rich families in Latin America know now that it is not acceptable, nor convenient, to keep assets disconnected from the residency as they had before. It was common that families have certain assets – ­basically financial assets – disconnected with their residency," says Ruiz.

HNWIs are increasingly realising that properly structured wealth planning has never been more important. "A common form of wealth planning in some parts of the world has been not to take advice and keep a low profile in the hope that there won't be problems – that is now changing with tax authorities seeking to enforce taxes more stringently than they historically have due to mounting domestic spending and clients looking to protect themselves better with robust structures," says Maltby.

But perhaps contrary to expectations, the crackdown on tax evasion has not resulted in Latin Americans moving assets away from offshore locations. "There is a belief that a move towards greater transparency will in some way be to the disadvantage of international financial centres. This couldn't be further from the truth – the likes of the Cayman Islands, which, for example, has effectively been removed from Mexico's blacklist as a result of entering into a tax information exchange agreement, are becoming increasingly appealing to Latin American advisers seeking sophisticated international wealth structuring solutions," argues Andrew Miller, a partner in Walkers' Cayman Islands office.

Instead, Latin America's wealthy are now being forced to analyse how they currently hold their assets offshore and are looking to move away from certain offshore jurisdictions that are considered to be less reputable. "In essence, [the global focus on tax evasion] is causing legitimate business owners to attempt to distinguish themselves by restructuring to more regulated and more transparent internationally acceptable structures," says Firth.

As a consequence, tax advisers and wealth managers will have to become much more sophisticated in handling offshore assets. "Before it was very simple – now the challenge is to have the same advantages of having assets offshore, but that at the same time are considered fully compliant with the regulations of each jurisdiction," says Ruiz.

What is clear is that as the world becomes increasingly interconnected and the ranks of wealthy Latin Americans swell, the demand for law firms and lawyers will not let up any time soon – as Miguel Jáuregui Rojas, a partner at Mexico's Jáuregui y Del Valle, SC says: "In the last 10 years I would say that the legal profession has taken centre stage in the planning and maintenance of wealth. People realise the world is getting smaller and smaller and so their need for outside help is growing."

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