Estate Planning: a client-led context for financial advice

From

In Chapter Seven of its final report, the Ripoll Committee has called for the creation of a professional standards board for financial advisers.

Irrespective of the fate of this recommendation, elements of the financial planning profession are taking steps to ensure that their standards are sustained at the highest level of professionalism (1).

Professionalism is clearly now the community and regulatory expectation for the operation of financial planners (2).  Establishing the meaning of that term (both for the Australian community and for financial advisers) still remains a task largely, for the moment at least, for the financial services industry itself.

Not all those currently operating under an Australian Financial Services Licence (AFSL) may consider the existence of a financial planning ‘profession’ appropriate, necessary or something in which they want to participate. On that dividing line, the future occupational characterisation for those involved in consumer access to financial products and services is being formed.

George Beaton summarised the concept of professionalism as that which:

‘… includes skills, knowledge and expertise, but also the virtues of trustworthiness and altruism. Josef Mengele of Auschwitz, with his infamous human experiments, was a learned doctor and scientist – but no one would call him a professional. Professionalism as set forth in the early Dialogues of Plato holds that the true professional not only possesses the practical skills and knowledge of his or her trade (tekhne in Greek) but is also disciplined in moral excellence (arête) (Reid, 1998)’ (3).

Estate Planning – explaining the context of the client

Estate Planning is professional occupation within the fields of Private Wealth Management and Trusts and Estates practice (4).

The Financial Planning Association (FPA) has recently signalled the rising importance of Estate Planning as an occupational focus for professional financial advisers (financial planners) with the launch of its Accredited Estate Planning Strategist (AEPS) program.

Estate planning is not, however, an occupation that financial planners can pursue in isolation from other professionals. It is essentially a multi-disciplinary service, led by the adviser closest to the client to which a number of other professionals may contribute, depending on the scope of the engagement. This lead adviser is engaged by the client to facilitate the operation of the management of her affairs. The role of the lead adviser is to be the advocate of and representative of the interests of the client and to apply that knowledge to the engagement of relevant professionals to assist in the client’s estate administration.

Assisting their clients to explain their objectives so these objectives can be met by professionals engaged to assist in the task becomes the key to the lead adviser’s value to their client. This role will normally be focussed on one or more of these estate administration themes:

  1. Affairs management
  2. Wealth preservation
  3. Wealth transfer
  4. Family continuity
  5. Legacy within Society, Community and Family
  6. Financial security and compliance
  7. Business ownership, control and transfer

For example, in relation to a client’s will making, it is the role of the lead adviser to investigate and understand the current state of a client’s affairs, objectives and estate risk tolerances and to help  all relevant  professionals to use that information to facilitate achieving the client’s objectives. It is not for the lead adviser to provide concluded advice about the operation of the client’s will. It is expected that the lead adviser will help  the client to explain  the job she  intends the will to perform in her  affairs. It is for the lawyer to determine the most appropriate method for this to occur having regard to the client’s situation.

The client’s estate is in this context taken to mean all property owned by or controlled on behalf of the client or her interests. The term wealth is itself given an extended meaning in estate planning that includes the following forms of capital (5):

  • Financial
  • Family
  • Human
  • Structural
  • Societal
  • Spiritual

Estate planning requires that an adviser achieve an understanding of these matters when reviewing a client’s situation unless the client specifically excludes such an understanding from the review.

Estate planning as a discipline is therefore itself is best summarised as:

‘The strategies, processes and actions to preserve your capital and values for yourself, your family and successors (6).’

Professions operating within the Private Wealth Management field include:

  • Law
  • Financial Planning
  • Accounting
  • Tax
  • Other professions from the management science and social sciences.

Setting robust definitions of the professional and operational boundaries for these contributing professionals remains a work in progress. Current discussions focus on a need to:

  1. Identify the activities that comprise the actions that flow from the unique body of knowledge that defines each profession.
  2. Describe the activities of a professional, of assistance to clients that are common to the professions.
  3. Discern and demonstrate the difference between the ethics of care practised by relational focused professionals and the transactional output of technical professionals e.g. wills for lawyers, accounts for accountants, tax advice for tax advisers, investment strategies and financial plans for financial planners.

This paper explores the impact of Estate Planning as a business model for financial planners. For simplicity, the term ‘financial adviser’ can be distinguished from the term ‘financial planner’ (7).  The term ‘financial planner’ is used in this paper to describe a professional member of the financial advisory industry, whilst the term ‘financial adviser’ is considered to mean, in contrast, a regulated member of that industry with no defining professional characteristics.

Estate Planning – Contribution to Corporations Act Compliance

It is in providing a robust method for understanding the situation, objectives and engagement limitations of the client that Estate Planning makes a key contribution to determining the appropriateness of advice to a client. Appropriateness can be understood only by examining the nature of change produced by the advice given and determining whether the effect produced was within the objectives first agreed with the client.

Advice in turn has to be understood as the process by which a professional, after due investigation and consideration, presents options for evaluation and decision by a client.

The presentation simply of a “packaged” service result to a client is more akin to a product sale than advice.

Similarly, the selection by a client of a standard model of service is more akin to a product sale than advice.

Clarifying a client’s explanation of herself and her affairs to better facilitate the delivery of a range of professional services to the client that will assist her in meeting  her estate administration and succession goals is certainly within the field of Private Wealth Management focused professional advice. This role is normally carried out by the lead adviser to the client.

The Service Supply Chain for Estate Planning Advice

Financial advisers are part of a services supply-chain to one or more members of the public (consumers). They can therefore operate primarily in one of two ways, either:

  1. As a gateway to financial products and services for the client; or
  2. As an advocate, representative of, and gateway to the client.

Being a Gateway to Financial Services and Products

In this context, the financial adviser is a technical expert in a range of products and services and his role is to draw in an understanding of the client and then provide advice about the most appropriate range of financial service and products that, in the expert view of the adviser, meets the goals of the client.

These types of engagements are typified by this statement:

“Financial planning is the process of developing strategies to help you manage your financial affairs so you can build wealth, enjoy life and achieve financial security (8).”

Implicit in this type of engagement, the client is seeking a particular financial result out of the products and services being delivered, e.g. a financial return or access to tax concessions. Satisfaction of the client’s objectives can normally be quantified. The client normally has the service integration responsibility of making sure the financial plan meets her wealth, life and financial goals.

Normally, in these kinds of engagements, investment risk remains with the client. Appropriateness of advice risk remains with the adviser.

The appropriateness of advice, however, is a matter for the client to determine. An emerging issue is whether the adviser has a professional duty to ensure the client understands the meaning of the advice delivered, and has the ability to make reasoned and appropriate decisions on the basis of the advice. This is a type of capacity risk this has previously also occurred in relation to financial guarantees, and been described in cases such as Garcia v National Australia Bank (9).

This mode of work with clients can be best described as a ‘financial advisory’ led engagement.

Being an Advocate, Representative of, and Gateway to the Client

In this context, the adviser is primarily engaged by clients to assist them to achieve relevant change in their lives to meet particular goals or to address certain risks to which the clients have assigned a priority for response.

While taking in the situation of the client for consideration is no less important in this context, the engagement is initiated with concerns such as:

  • “I want my money to last to give to my grandchildren.”
  • “I am a business owner and am concerned in this downturn about being sued; how can I protect my capital and provide security for my family?”
  • “ I am spending my money on my wife and myself, the kids can simply have whatever is left over when we are gone; just break up what’s left evenly between the kids as simply as possible. Please help us have a fun and fulfilling life, for as long as it may last.”
  • “I have spent all my life building up the family business. Times have been good to us. My children are running the business but my wife and I still own all the shares. How do we balance the interest of ourselves and our children? How do we manage our Estate for ourselves and our bloodline?”
  • “My affairs are in a mess, can you help sort me out?”
  • “I am getting old and do not know who to trust, can you help me manage my affairs?”

It is the interaction of these client engagement situations with s.945A of the Corporations Act 2001 that creates extensive advisory risk for financial advisers (10).  When faced with client enquiries, the financial adviser must decide whether the client relationship is to be limited back to a financial advisory context only or pursued as a broader client advisory engagement.

Estate Planning provides a professional services process through which the appropriate characterisation of the client/adviser relationship can be established. Estate Planning also provides the means for a broader wealth management engagement context to be established with the client, where appropriate.This mode of work with clients can be best described as a ‘client led’ advisory engagement.

Getting to the Heart of the Difference

This has been a key theme of the Family Office Congress held in Australia in 2008 and 2009 (11).   The following modalities for professional engagement with clients were proposed:

  1. investment advisory-led
  2. adviser advisory led
  3. client advisory led.

The first mode provides a narrow scope for client/advisory interaction.

The second mode is normally executed as a sequential and not necessarily interconnected pursuit of tax, Estate Planning and financial planning engagements.

The third mode is normally executed as an initial engagement between the client and her primary or lead adviser, with further advisory input as required.

In the first and second modes, the client is normally solely responsible for the integration of advice delivered into the management of her affairs.

In the third mode, it is the interaction of the client and lead adviser that provides the means for advice integration with the client’s management of her affairs.

The investment advisory-led engagements are primarily involved in helping the clients manage aspects of final security and associated risk in their affairs, albeit with a range of personal goals in view.

The client advisory-led engagements typically involve a broader range of risk areas that can include:

  • personal and family representation and succession
  • family continuity, governance and legacy
  • wealth preservation, enhancement and transfer
  • business ownership and control
  • financial security and compliance (12).

Delivery of this mode of client engagement normally requires some or all of the following service elements:

  • integrated planning – client overall situation
  • family business planning
  • investment advisory
  • family risk assessment
  • family continuity planning
  • family philanthropy – social and community contribution (13).

As clients increasingly recognise the inherent complexities that can arise in the operation of their affairs increases, Estate Planning provides financial advisers with a professional services context for managing and delivering client advisory-led engagements.

In its simpler forms (usually focussed on the personal representation and succession risk focus), it is also a contributing service to the delivery of investment-led and general advisory-led engagements.

Nonetheless, estate planning engagements normally operate in accordance within a settled workflow process that follows these general steps.

The output of an estate planning engagement is generally a written report, normally called and estate administration plan, which details, as appropriate:

  1. Objectives and Risks Considered
  2. The Client’s Situation, as understood for the report
  3. Proposed method to meet the identified objectives and risks (the Estate Administration Plan)
  4. Issues for further discussion or delegation to another professional
  5. Proposed actions to implement the Estate Administration Plan, subject if necessary to the input of other professionals.

The report also will detail as appropriate to the engagement:

  1. Pricing and financial matters
  2. Formal engagement terms unless previously delivered
  3. Excluded areas of work
  4. Areas of responsibility retained by the client
  5. Fundamental limits to the engagement imposed by the client.

The client will retain the responsibility to integrate the result of the estate plan with the administration of her  overall affairs unless that function is delegated in part to another professional such as the financial planner in a ‘lead adviser engagement’.

Impact on Advisers

A two-axis model for financial advisers has now been proposed by James Grubman and Keith Whitaker in which the family and personal context of the client is compulsorily embedded in the features of the financial adviser professional engagement (14).  This recognises  a range of candidate engagement modes in which family, personal and financial risk are counterbalanced in a variety of ways. They illustrate it with  the following diagram (15):

The impact of the consumer-rights focus of the Ripoll Committee and Government policy needs to be considered by advisers.

Grubman and Whitaker rightfully draw comparisons with the evolution of health care advisory models and make these observations:

‘Indeed, many advisors seem to rate their clients along a range from “easy” to “difficult” largely based on how much personal or family dynamics intrude on the relationship.Yet financial advising is, in many ways, analogous to medical care, where competent problem-solving must occur within the complexities of the patient’s personality and stresses.  Just as physicians must work with patients who range from calm to distressed, advisors must be able to work with clients experiencing a wide range of human reactions and problems.

In essence, all financial client relationships always contain two elements: the Client and the Finances. These two elements may be conceptualized along two intersecting axes.  One axis defines the complexity of the financial tasks to be performed, while the other axis defines the complexity of the psychological and family dynamics present (16).’

In order to fully address all risks facing a client, advisers need to respond to all areas of a client’s life, including:

  • family
  • business
  • property
  • social and community.

It is in this context that wealth management must be seen as a multi-disciplinary engagement for financial advisers, where a broad range of professional skills may be required to adequately serve the full range of client needs and objectives.

The range of skills required can involve advisers from several professional domains, including:

  • Financial Services
  • Accounting
  • Tax
  • Law
  • Family Business Consulting
  • Management
  • Organisational Development and Change
  • Family Dynamics.

Bringing coherence and discipline to the management of the client’s affairs in this complex service environment is the key value brought by the Estate adviser. Estate Planning is the initial service framework and approach that guides the pursuit of such engagements. Successful Estate Planning simply results in the establishment of an Estate administration and succession plan that reflects the client’s priorities for the management of her affairs during life, and after her death.  The longevity of clients and their successors, and the finite capital with which they must work, provide essential challenges that advisers must deal with in pursuing these broadly defined wealth management engagements.

In its report titled, ‘Offshore Evolution: Transparency and Solutions in Cross Border Wealth Structuring’, the Society of Trust Estate Practitioners (STEP) concluded that the following key trends would drive the continued development of wealth management as a business focus  not only for the financial and fiduciary services sector, but also clients and families with both single and multi-jurisdiction connections:

  • There will be an end to banking secrecy
  • Tax competition will increase
  • Global tax advice will be a significant driver of structures and for new business
  • Clients will become more involved
  • Multi-family offices will grow
  • Independent advice will win out (17).

Financial advisers need to determine how these trends may effect their current business approach and whether embracing Estate Planning as a competence will enhance their ability to drive growth in their practice.

Conclusion

The role of the estate planner to facilitate the operation of a lead estate adviser and the explanation of the client’s situation and objectives to multiple professionals must not be confused with the undertaking by those professionals of their normal professional roles.

This more developed advocacy of the client’s interest results in a range of benefits including:

  • Clearer definition with the client of the nature of the service value to be delivered by professionals
  • Greater client satisfaction with services delivered
  • Expansion of the client relationship pool within a family group
  • Enhanced family and business sustainability
  • Focused social and community contribution where relevant to client values
  • Vulnerable beneficiary protection that is aligned to the level of care intended by the client
  • Enhanced financial security and compliance
  • Enhanced wealth protection and transfer strategies.
  1. Parliamentary Joint Committee on Corporations and Financial Services, Financial products and services in Australia, 23 November 2009, <http://www.aph.gov.au/senate/committee/corporations_ctte/fps/report/index.htm>, accessed 6 April 2010.
  2. For a discussion of the meaning and relevance of professionalism today, see: George Ramsay Beaton, Why Professionalism is Still Relevant, University of Melbourne Legal Studies Research paper No. 445, 31 January 2010, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1545509>, accessed 6 April 2010.
  3. Ibid
  4. For more information on these linkages see www.step.org
  5. Following the work of Dennis Jaffe. For more information see the article and associated information at http://www.dennisjaffe.com/articles/SixDimensionsOfWealth.pdf.
  6. Perkins & Monahan, Estate Planning: a practical guide for estate and financial service professionals,  2nd ed. LexisNexis Butterworths, 2008,  Chapter 1, para 1.3.
  7. For an example of these usages, please see: <http://www.fpa.asn.au/FPA_Content.aspx?Doc_id=1054>, accessed 6 April 2010.
  8. See:<http://www.fpa.asn.au/FPA_Content.aspx?Doc_id=1056>, accessed 6 April 2010.
  9. See: <http://en.wikipedia.org/wiki/Garcia_v_National_Australia_Bank>, accessed 6 April 2010.
  10. Corporations Act 2001 – Sect 945A, Requirement to have a reasonable basis for the advice,   <http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s945a.html>, accessed 6 April 2010.
  11. See: <http://www.dealersgroup.com.au/p3_Events.html?&event=56> and <http://www.dealersgroup.com.au/p3_Events.html?&event=1>, accessed 6 April 2010.
  12. Based on the work of Family Office Exchange (FOX), as presented by John Benevides at the Family Office Congress, Melbourne, December 2008.
  13. Ibid.
  14. J Grubman and K Whitaker, , A Two-Axis Model of Financial Advising, FFI Practitioner, November 2008; < http://www.jamesgrubman.com/TwoAxisModelofFinancialAdvising_2009.pdf>, accessed 7 April 2010.
  15. Ibid.1
  16. Ibid, page 2.
  17. The Society of Trust and Estate Practitioners & Spence Johnson, Offshore Evolution: Transparency and Solutions in Cross Border Wealth Structuring, STEP Research Report, July 2009, <http://www.ogier.com/Publication%20Library/Offshore_Evolution_-Transparency_and_Solutions_in_Cross_Border_Wealth_Structuring.pdf>, accessed 7 April 2010.

Michael Perkins is a practicing lawyer with over twenty five years’ experience in trusts, estates and private client practice.

Michael works as an adviser to family groups, family businesses and entrepreneur-driven high growth companies. He is accredited as a family business adviser by Family Business Australia. While continuing legal practice, Michael is also a published author and lecturer in Estate Planning at Sydney’s University of Technology and holds the TEP qualification from the Society of Trust and Estates Practitioners (STEP).

Michael is one of the leaders who developed the Financial Planning Association’s (FPA’s) Accredited Estate Planning Strategist (AEPS) Program which is delivered in association with Estplan Pty Limited and the University of Technology, Sydney.

For more Information about Michael and his law firm see www.mjplegal.com

12 July 2012

 

You must be logged in to post or view comments.