The operational aspects of managing wealth and individual investments are probably not the most exhilarating topics to write about. However, once you realise how much time, effort and money it takes to construct, and then manage executions, settlements, taxes, legalities, accounting, reporting and all other facets of administering an investment, you would be amazed how exciting even the dullest mechanics can become.
As always, what you see is what you get, and for every action there is a consequence. So, if you have very complex investment strategies, possibly involving direct or illiquid transactions, chances are the administrative tasks to value, report and monitor the investments will also be very complex. There is also the cost, time and money spent in initiating the investment in the first place. The classic example are tax deferment strategies. To set up trusts, wrappers, or other vehicles to shield an investment from immediate taxation, requires the assistance of lawyers, accountants and an administrator to manage the structure and reporting obligations. Of course, this has to be done every year over the life of the investment and structure, therefore, the fees will also compound.
Where operations get very complicated is when you invest in different regions or currencies and across different tax and reporting jurisdictions. The more you have, also the more of a burden there will be to retrieve all the information that is required to do the accounting, risk management and reporting. Collating this information to make sound investment decisions can also be cumbersome, particularly if you are dealing with illiquid investments or private (direct) transactions. I have seen grown men cry when the various tax reporting deadlines approach. The sheer volume and difficulty in bringing all the information together in time to provide reports and statements to the relevant authorities is overwhelming and costly.
Keeping it simple has never rung so true when it comes to dealing with all the tasks, risks and information flow that is required in today’s regulated world with shifting tax regimes. What may seem like a great investment, can actually turn out to be a horrendous burden and after accounting for all the time and fees, it could look much less attractive. There is also the risk of being too clever. Laws and treaties can be subject to change and thus also the danger of retrospective taxation, particularly in the current climate. Proper planning helps, having good service providers is essential, and knowing where to find what information, within the specific time frame of one’s obligations, is crucial. A system with clear processes are well advised here, not only to avoid last minute stress but also to avoid the danger of missing information. Most important of all, is that whatever one does to make the investment decisions, understanding the complexity of administering and managing said investment is highly advisable.