In a world that seems filled with more and more risk, it’s natural for wealth owners to ask how they can protect their investments. In their own country, and in ones they operate in.

But from that initial question spring forth a multitude of others. How should a wealth owner think about political, economic, and legal risks? How should they prepare for an unknown event, like the coronavirus pandemic?

To help navigate these questions and more, we spoke to Mahnaz Malik – a barrister and arbitrator who specialises in representing governments and corporations in commercial and investment arbitration.

Mahnaz publishes, teaches, and speaks extensively on a range of topics – including international investment law and commercial disputes.

 

1. How should wealth owners and their families think about risk?

All investments – even all businesses – carry risk. But, while you can’t eliminate it, you can certainly mitigate and manage it.

In my experience, wealth owners and investors are very good at understanding commercial risks, because that’s their bread and butter. As lawyers, we’re very good at dealing with legal risk, and can look at exposure under contracts and structures.

But sometimes there’s a missing piece: the political risk, or the unknown factor.

Take coronavirus, for example: not even the best clairvoyant could have predicted that. That was one of those low-probability, high-impact scenarios that transformed so many lives and enterprises.

With every investment and business, there’s always an element of not really knowing. For investors, it’s important to get comfortable with that. For advisors, it’s our duty to think about those risks more holistically – and to understand how the interplay of commercial, legal and political risks will impact a business and a family.

 

2. What are the common mistakes wealth owners make when navigating these risks?

Historically, I think people tended to not look far ahead enough. That’s a very natural, understandable tendency – but it’s definitely changing.

A few years ago, legacy planning was really for very few people, whereas now everyone seems to want to leave a legacy. Part of that shift is really looking long-term, and at what challenges and obstacles you may experience.

Another common mistake I see is a tendency to be overly optimistic, without considering all the things that could go wrong.

In my profession, I’ve seen time and again what can go wrong with businesses, investments, and partnerships. Of course, when an investor is at the start of something, they want to focus on the positive. They want to believe that a business partnership is unbreakable, or that a country will never experience turbulence.

It’s hard to really commit to an idea without that optimism. But it’s important for someone – usually a lawyer – to ask “what if?”.

And finally, I think it’s a mistake not to consider the entire lifecycle of an investment. In doing so, they can identify the tools and mechanisms they need to protect their investments in the future.

 

3. How can changes on a personal level affect how an investor (and their investments) are protected?

Think of navigating international law like piloting a ship.

The most important question is usually: what’s your flag, what’s your nationality? Nationality is an important concept. Where you were born, what citizenship you bear. Individuals – and companies – can give up existing nationalities, or acquire new ones.

These concepts are the heart of my work, as they determine what rights an individual or company might have under international law.

If an investor wishes to change their nationality, it’s very important that they use this time to seek advice.

It’s important to realise the consequences that any change in nationality can have on a range of different areas.

In my experience, investors don’t always realise how complex this can be. They will look at the immigration and tax perspective, but won’t always consider what it means for the protection of their investments and assets.

 

4. What are the practical tools that a wealth owner can use to protect their investments?

I think an investor should approach this in two phases: first, mapping the potential risks, and second, finding the tools to mitigate those risks. Ultimately, it’s important to take a long-term view – and to consider all of the risks that might come into play, across both the lifecycle of an investment, and the areas of political, economic, and legal risk.

In the mapping phase, I’d recommend that an investor steps back and thinks about the scope and scale of risks they might face. That goes back to the point I made about the interplay between commercial, legal, and political risks.

For example, they might consider:

• What are the key risks facing their investment?
• Could it be difficult to take money out of a particular country?
• Are there any concerns over tax, politics, business partners, or even physical security?

An investor will normally have a good instinct of what those risks might be.

After this mapping phase, a wealth owner (and their team) can identify ways to mitigate those risks or incorporate them into their business plan.

This “team” usually involves a range of different experts. There will most likely be local and international lawyers, sitting down with their client to identify those risks and the ways they can be managed.

As part of this, a wealth owner may discuss tools like the right:

• Contractual framework of their business structure
• Corporate structuring
• Provisions for agreements and contracts
• Dispute resolution clauses

Advisors play a critical role by serving as an additional layer of security, helping to ensure that an investment leverages the different tools and rights. Their expertise is crucial in aligning these tools with the original investment objectives.

 

5. How do you believe wealth owners will need to think about risk in the future?

We’re in a time of enormous transition – economic, environmental, political. Of course, none of us can predict the future, but I think it’s likely these transitions will continue for the foreseeable future.

At the same time, people – and businesses – are becoming more fluid. So, if I had to describe what the next five years might look like, I think we’re going to have a lot more disruption – and a lot more fluidity. How wealth owners – and ourselves as advisors – deal with this is going to be fascinating.

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