The diversification paradox: hidden risks of spreading wealth across borders

This article was originally published via Professional Wealth Management.

Geopolitical tensions are prompting wealthy families around the world to review their private wealth management strategies and diversify across jurisdictions and asset classes.

These families are typically fluent in diversification because they have done it for their whole investing lives. But this fluency can also be the source of new problems when it comes to spreading wealth across international borders beyond the relatively straightforward governance structure of just one or two jurisdictions.

Diversification across assets and jurisdictions is seen as a strategic choice about where to invest, where to hold and where to establish a presence. Aligning the operating model — including how the family office will function across a growing number of locations, who decides what, and how reporting consistently meets the family’s needs — tends to be seen as an implementation detail.

Adding a jurisdiction is not like adding a new position, which is fairly straightforward to exit.

Entering a new jurisdiction creates permanent operating obligations involving ongoing financial and tax reporting, governance, data management and legal obligations.

If handled incorrectly, diversification does not reduce risk so much as convert it, from concentration risk to operational risk. This new risk is often harder to see because family offices are unlikely to be looking for it.

Wheels in motion

Where issues often arise is with pre-planning and preparation. Families may decide to move, put the wheels in motion, land in a new jurisdiction and then call an adviser to get their affairs in order.

By this point they may have created a footprint, and perhaps a place of business, which limits their opportunities to implement the most appropriate structure. The task is then one of remediation rather than strategic planning.

Increasingly, a mismatch in legal systems creates additional complexity. Structures which span common, civil and sharia law jurisdictions can function perfectly well until there is a dispute, at which point unpicking them becomes materially more complicated than may have been expected.

If possible, it pays to accommodate the different legal systems, or design an overarching structure able to bridge them, when the new structure or entity is formed.

Another common stumbling block is data management. Families rightly want a consolidated global view of their assets, but they also need to consider the implications of where that data will be held, how it will flow between entities, and which data protection and privacy regime governs it.

Some jurisdictions may have stringent EU-style rules, while others will have much lighter-touch requirements, protections and regulations. Expanding without dealing with this issue can create wider exposure in a location the family considers barely operational.

Market proximity

The most important reasons for families to choose a new jurisdiction are proximity to the markets they are investing in (31 per cent), political stability (23 per cent) and economic stability (23 per cent), according to recent research published by TMF Group.

Proximity is a revealing answer, because it works in both directions. Some families want assets managed close to home, in a compatible timezone and language, not necessarily at home. Others deliberately value stability, with access to the right expertise or asset protection, higher than proximity.

The motivations for moving to a new jurisdiction need to be examined well in advance. Each decision involves a set of trade-offs, and the families who struggle are often those who optimised for one factor and realised the importance of the others afterwards.

For example, they might opt for a structurally excellent jurisdiction but arrive to find an environment that does not meet their lifestyle expectations and unwind the arrangement.

A complex jurisdiction can frequently be the right investment destination for reasons unrelated to ease of administration. For example, the annual Global Business Complexity Index (GBCI) shows that the UAE moved up 21 places to 18th in this year’s rankings because of higher complexity in corporate tax, tighter anti-money laundering rules and tougher transparency rules, but has remained an attractive destination for private wealth, given that these changes have enhanced the jurisdiction’s reputation.

However, the fast-changing geopolitical situation across the Middle East means families need to remain flexible and stay alert to the risks.

There are similar wealth planning complexities at play in Latin America, where political change is influencing decisions.

Brazil has reintroduced a dividend withholding tax (its first since 1996), with an election in October likely to prompt families to review their existing structures further. Likewise, Colombia has seen capital outflows amid political shifts and anticipated tax reforms from the new government.

By contrast, Uruguay is attracting families seeking a stable intraregional structuring jurisdiction, despite the fact that it has increased in complexity according to the 2026 GBCI.

The flight to stability does not necessarily buy families out of complexity; it just relocates it.

Inflexible models

One of the paradoxes of cross-border wealth diversification is that adding new jurisdictions to family office structures is often harder to do than setting up new multi-jurisdictional structures from scratch.

Governance models designed when a family was in one or two jurisdictions tend to be more inflexible and are likely to need a root-and-branch review rather than extension.

Although not always practical, the ideal is to start afresh, which gives families the flexibility to take a step back and build a workable structure from day one. Operating practices around governance, decision rights, reporting and regulator obligations can all be put in place at inception.

The reality is there is no perfect jurisdiction. The challenge for family offices is deciding which risks they are willing to hold rather than striving to remove them all.

By identifying and weighing the risks of diversification in advance, family offices will have a much higher chance of avoiding inadvertently creating a greater problem than the one they are aiming to fix.