Private Client Adviser Knowledge Base
Issue IV
Financial Education – Who’s responsible? - By Ronan Kearney - Managing Director and founder, Allium Capital Ltd
Taking the Twitter path to client-centricity - By Graham Harvey, Director – Scorpio Partnership
Fees: The Merits of a Systematic Process - By Roderic Rennison - Director, The Ideas Lab
Professional Executors and why you need to use one - By William Feeney, Director, Kings Court Trust Corporation
Financial Education – Who’s responsible?
Ronan Kearney - Managing Director and founder, Allium Capital Ltd
History is a great teacher of many things. For example don’t burn your ships when arriving in a foreign land, don’t invade Russia in the winter and of course avoid Greeks bearing gifts.
As a nation we are careful not to cross on the stairs, whilst others advise you to avoid breaking mirrors and to throw salt over your left shoulder. Sound advice indeed and it might be all very well, but imagine if you weren’t in possession of ready information to base a decision on. Imagine if you had no prior knowledge on the best course of action or even where and how to start to formulate a plan? How do you know where to put your hard earned savings or inheritance from Great Aunt Maureen? In the bank, under the mattress or take advice from the financial adviser sitting opposite who may be talking a different language?
Every year this is exactly the position millions of people in the UK find themselves in when considering their financial matters. There are just too many variables when it comes to investments, savings and financial affairs. Most people find that they haven’t been brought up to understand the basics of financial wealth management and many even feel queasy at the thought of having to listen to such advice.
But just who is responsible for teaching the man in the street the very basics of financial education? Here lies one of the biggest debates of the year. A debate that might have never started had it not been for the implosion of financial markets and the ensuing credit crunch.
There are many schools of thought on where this lack of understanding comes from and who should fill the vacuum on lack of education. This is the legacy of a generation that thought it was ‘vulgar’ to openly discuss money, and the subject still hasn’t been incorporated widely into the school curriculum. Over the years there has been a cloak and general fog surrounding how the financial services industry operates. Indeed, many consumers have never had the desire to ‘lift the lid’ and delve deeper into the advice they have been given. Consumers actively delve into the minutiae surrounding the purchase of a washing machine, TV or car; whilst at the same time will happily place fifty thousand pounds into a financial product they don’t fully understand.
At schools we are hopefully taught to read, write, add up and subtract. We are taught right from wrong and learn all manners of things. It seems strange then that not once are we taught the rudiments of saving or why a pension might be a good idea. Until such time that the basics of financial capability are brought to the wider education syllabus in the UK by the state, the job of educating the public rests on the shoulders of the financial services world. The UK has a solid financial services industry with many well educated and knowledgeable advisers available to give excellent advice. However with knowledge comes power and responsibility. It seems only fair that it should be very clear to our customers what it is they are buying and we should not as an Indus try be able to hide behind fancy terms or clauses that are easy to say but have little meaning for the recipient. Personally I know my children would be fascinated to be taught about how money is put to work and would readily understand the value of this education.
One thing I think we could all agree on is that educating society to help understand basic financial concepts will only increase in importance as time moves on. We can almost thank the implosion of the banking system in late 2008/09 for that. As for the many millions that have missed out on any financial grounding, as an industry we have a duty of care to ensure that this ignorance ceases to form part of most people’s lives and de-mystify our industry for the good of all. To advisers across the UK I wish you a fantastic start to 2010 – long may your good advice continue to be heard.
Ronan Kearney is Managing Director and founder of Allium Capital Ltd and recently was instrumental in the launch of Sequel Investments, a joint venture with Foster Denovo
Taking the Twitter path to client-centricity
Graham Harvey, Director – Scorpio Partnership
Twitter, for those of you that do not yet know, is a free social networking and micro-blogging service that enables its users to send and read messages known as tweets. And for those of you that have not yet realised, it has the potential to emerge as an entirely new communication and marketing channel for the wealth management community.
Until now many have dismissed Twitter and other social networking tools as “for the kids”. This misconception ignores key realities of their use. Indeed, findings by Forrester Research show that the use of social networks by people aged 35 to 54 grew 60% in the last year. In addition, Nielsen believes that adults aged 35-49 have the largest representation on Twitter and comprise 42% of the entire audience, or 3 million individuals.
The demographics alone are compelling enough to force a strategic engagement with Twitter (and/or other social networking platforms) onto the 2010 agenda for private banks. However, we suspect many in the industry believe Twitter and the like to be too “retail” for the wealth space. Here we turn (as usual) to parallel industries to identify the game-changers.
Indeed, Twitter has already found a role in the rarefied world of haute horlogerie. Perrelet, one of Switzerland’s oldest brands (and inventors of automatic movement in 1777), uses Twitter to augment its marketing and product development – particularly the 2009 Turbine. The brand, backed by a collection of luxury luminaries, under H5 Groupe, has engaged consumers on the experience of ownership to gain market penetration (at almost zero cost) in an ultra-competitive and fragmented brand market.
So, looking to the horizon, the use of Twitter as a corporate tool will become even more commonplace. Twitter itself recognises this and will soon offer business accounts to corporate clients. This will enable client teams to analyse trends in consumer interaction. Critically it will provide businesses with demographic information and deeper insight into the client psyche. The use of web analytics, Twitter surveys, will allow for data on individuals following the company’s account to emerge. To overlay these tools to measure online reputation, impact and influence of individual tweets will also become commonplace.
In this context, it is not too far-fetched to see private bankers, between client-visits, Tweeting the successes and issues that arise, on a no-names basis. If their fingers can handle the small buttons on their Blackberries, of course, as Obama complained. Going further, this could be linked into marketing and communications for individual client segments and propositions.
Of course, this still falls short of the Holy Grail – end-client product development and viral marketing. These two elements will be the keys to proving the client-centric business model in a tangible way to existing and potential consumers. Indeed, Perrelet is a case study of retail communication tools being applied to the luxury market to this end. The examples will grow.
However, as with all communication programmes, it will be imperative that institutional leaders obtain company-wide buy-in, set clear objectives and metrics, ensure consistency to protect corporate reputation, and plan the delivery of varied and exciting content to engage the end client, as well as staff. Delivery across all these criteria, not partial delivery, will deliver results.
These are all areas that Scorpio Partnership has actively been researching as part of its wider strategy to identify the future benefit of Web 2.0 tools to the wealth management community. Go Twitter.
Scorpio Partnership is the leading insight and business strategy consultancy dedicated to global wealth management. We assist firms and leadership teams discover new markets, understand the competitive environment, create corporate plans and strategically execute to maximize their business impact.
Fees: The Merits of a Systematic Process
Roderic Rennison - Director, The Ideas Lab
The RDR has already generated an enormous number of words about fees, initially Customer Agreed Remuneration (CAR), and now Adviser Remuneration (AR). The fundamental change that the RDR is seeking to achieve is that fees are agreed between the adviser and the client, and are not set by providers or fund managers.
The advent of the Menu resulted in the badge of independence being contingent on the IFA firm offering a fees option. However, our experience is that it is only offered by the majority of advisers when there are no commissions in prospect. Where there are commissions available, the fee estimate all too often has an uncanny correlation to the level of commission foregone.
Currently, only a small minority of advisers currently work wholly or predominantly on a fee basis. An even smaller minority base their time on their actual costs; indeed most advisers charge at the level they think the client will pay, instead of what it costs to provide the service.
This, aside from having TCF implications, often actually results in the adviser charging less than the cost of delivering the advice and mitigates against having mutually beneficial long term client relationships built on need and trust.
The Five Cs of Fees
Advisers should focus on the following five aspects:
Calculation
Advisers should start by working out what it costs to deliver their services. This should involve a through analysis of the adviser’s own costs, office overheads and the costs of support staff such as paraplanners and administrators – who may be charged for separately.
These charges then need to be set out clearly and compellingly in dealings with prospective clients – and also existing clients when converting from a commissions to a fees basis.
Content
The advice process should be unbundled so that the client is given a cost for research and preparing a report, implementing the recommending, managing/overseeing the investments, and review as well as one off assignments.
Context
It is also important to continually consider the advice process from the client’s perspective and on occasions, it will be appropriate to relate the fees to the tax saved.
Collection
It is fundamentally important for advisers to always remember that fees are not automatically payable unlike commissions, so not only must invoicing be timely and based on what has been agreed, but there must be mechanisms in place to collect the fees. This task should not be delegated as it is the adviser who knows the value of what has been delivered.
It is also appropriate to consider seeking deposits for work to be undertaken so that clients are aware that there is a cost and process in place for providing advice.
Continuity
The cost of providing ongoing advice and reviews needs to be an integral part of the process and retainers may be appropriate if the fees from funds under management are not sufficient.
In summary there is no substitute for having a thought through process and we will be exploring these and other practice management issues at the Dealers’ Group Practice Development workshops on 2nd February 2010 in London and on 4th February 2010 in Manchester.
Professional Executors and why you need to use one
William Feeney, Director, Kings Court Trust Corporation
The veteran financial advisers in this country will have experienced many tax changes and innovations over the years. At each event they wearily sit down to understand and interpret the frequent announcements coming from the Inland Revenue offices and to see what impact it will have on their clients.
In conversations with many of you, the announcement of the introduction of the IHT205 in August 2004 still takes the biscuit. You will recall that under the guise of “amendment and improvement” and “simplification and removing anxiety” the rules were changed to provide that every estate requiring a grant had to complete a tax return.
The words of the Inland Revenue in their August 2004 newsletter are still engraved on my memory – “We understand that providing this information on a revenue form where one is not currently needed may be seen as a retrograde step.” This was followed by the justifications which included the statement that it “ensures that personal representatives are aware – through signing a document containing the appropriate warnings – that they may be liable to penalties if they are negligent in applying for a grant….”
This change and numerous subsequent requirements including the introduction earlier this year of the much longer form called an Inheritance Tax Return 400 (IHT 400) really hammers home how complex the administration of an estate has become, driven by the needs of the tax man rather than the legal system and protection of the beneficiaries and the wishes of the testator.
Understanding this background, it is easy to see why the role of an executor is often misunderstood and can be intimidating for your clients. Working with a professional Executor, can be turned to your advantage enabling you to give support to your clients while protecting and creating future business opportunities for yourself.
The role of a professional executor has traditionally been performed by a solicitor, however, the advent of probate specialists offers you the opportunity to work with professionals who adopt a far more flexible and commercial approach.
An executor is responsible for applying for the grant of probate, administering the estate and distributing the assets in accordance with the instructions in the will. There is no limit to the number of executors that can be appointed, although no more than 4 can apply for the grant. It is normal practice to appoint a professional alongside a couple of family members, although, as we will see later, care is required on who to select.
Probate can be delivered by someone not named in the will if the other executors agree at the time of death. In order to charge a client for the time and effort involved in applying for the grant you need to be a solicitor, barrister, notary or… a trust corporation.
The role of an executor, especially for a first timer, can be difficult, onerous and time consuming. There are complex legal, financial and tax consequences together with liability for all the deceased’s obligations, all at a time when family members have plenty of other things on their mind.
The duties of an executor start with the requirement to carry out the wishes of the deceased as expressed in the will. All the assets and liabilities, or claims against the estate, need to be identified and then date of death valuations obtained.
As stated above, the most daunting aspect of probate is dealing with tax authorities. The new Inheritance Tax form (IHT 400) has mushroomed to a minimum of 60 pages (depending on the type of assets), with another 80 pages in the guidance notes and even where no IHT is due, executors are responsible for proving no tax is payable. The quick start guide is not very helpful and while the overall look and feel is similar to the Self Assessment Tax return, all the same complexities and complications remain.
In addition to IHT there are Income Tax returns, with the prior periods to the date of death being required, and Capital Gains Tax returns. HMRC are becoming noticeably more aggressive in their attitude to late payment and the new penalty regime gives new interpretations to what is an innocent mistake and what is a lack of reasonable care.
The responsibility for completing the tax returns correctly and on time sits fair and square on the shoulders of executors, with the consequence that they are personally responsible for any penalties or shortfalls that come to light after the assets have been distributed.
Executors are responsible for more activities than simply completing tax returns. A little known fact is that the executor’s responsibilities last for 6 years after the date of death. For example, if a distant family member turns up in 5 years following the distribution of assets, unless a provision has been made, the responsibility for paying a share resides with the executors.
Likewise, if the executor distributes all of the assets too quickly, (possibly under pressure from the family), and then further liabilities emerge, those liabilities also become the responsibility of the executor. The executors have a responsibility to identify everyone to whom money is owed - and not all of those may be on record. If overlooked or unknown creditors emerge at a later date and make a claim against the estate, the executors will be personally liable; but they can protect themselves by taking out a Section 27 notice. This is a notice placed in various papers to advertise the death, inviting creditors and unknown beneficiaries (for example, illegitimate children) to come forward. Claimants have two months in which to make themselves known.
Once the executors receive a tax receipt from HMRC, they are finally in a position to apply for the grant of probate. The executors swear an oath in the presence of a solicitor that this is the true will; they can then submit their application to the probate court. This will include the original will and any later amendments, plus the oath and the IHT receipt. The grant should be sent within two or three weeks and it's worth asking for several official copies to send to all the financial institutions. Finally, the executor needs to prepare estate accounts although it is much better practice to have these available at any time during the administration. Where there are many beneficiaries or large families sharing in an estate, the accounts are even more important and regular, and accurate accounts can avoid many problems later on in the administration. If an estate has charities who are beneficiaries they will also be closely scrutinised to ensure they have received everything they are entitled to.
The instinctive reaction of many clients is to appoint family members or friends as their only executors. While this offers a clear advantage (someone who knows the client being involved in all the key decisions), appointing family and friends can create potential problems.
Friends can often be a similar age and as we all grow old, there are obvious consequences! Family appointments have the potential to inflame already simmering family issues, and most importantly, those grieving for a loved one may not want the burden of probate.
This long list of responsibilities makes probate for the uninitiated an onerous and stressful exercise. By using an executor, they simplify the process and act as a gatekeeper for financial advisers – helping to access a generation of future clients. At Kings Court, we value our relationships with financial advisers, and as an example, we have developed INSIGHT - an online tool to give advisers real time access to case records. This means it is easy to see when, for example, assets are about to be distributed.
We suggest appointing an executor alongside family and friends. This ensures the family are fully involved in the decision and can rely on professional support.
While the tax man seems unlikely to let go of any flow of financial information (either during the life of a tax payer or at death) and with the revenue spotlight shining at the tax gap we can expect the rules to remain tight. Using a professional executor can help and protect your clients, and enables you as a financial adviser to be involved in important decisions of the assets of the estate and in the pole position to assist the next generation – your new clients.
William Feeny is a Chartered Accountant with thirty years' financial experience, both in the UK and overseas. Prior to establishing Kings Court Trust Corporation he was Senior Vice President of a major international corporation based in South East Asia. For the last eight years, William has been a Director of Kings Court Trust Corporation plc, a market leader in the supply of Probate and Estate Administration services to Intermediaries and Financial Advisers.
Further information: http://www.trustcorporation.com/