Insights
Independent Wealth Management and the Role of the Trustee
It is therefore a prerequisite that the trustee must be independent in all respects and act only in accordance with the needs of beneficiaries, with regard to the objectives defined in the trust deed.
‘Independence’, of course is a word commonly used in financial services to help define the relationship between adviser and client, with various regulatory regimes designed to ensure the adviser does not prefer his own interests. For a trustee, there is an extra and vital dimension to independence, which means being independent between all trust beneficiaries, not allowing himself or herself to be excessively influenced by one or more family members, at the expense of others.
RESPONSIBILITY OF TRUSTEES
The duty of a trustee is to act as a ‘prudent man of business’ in managing assets on behalf of beneficiaries. This applies, of course, not merely to investment portfolios, but to all assets held in trust, such as family businesses, directly held investments and ventures, property, art, leisure assets and many others.
He must exercise his responsibilities in accordance with the terms of the relevant trust deed, having regard to the interests of all the beneficiaries. Indeed he may often have to balance the conflicting interests of different beneficiaries and to reconcile sharply differing views. It goes without saying that trusteeship can demand an exceptionally broad range of knowledge, experience and skills, in order to make the right decisions, whilst maintaining family harmony.
The prudent man of business will seek advice where required, but will take the ultimate decision as required by the trust deed. The question hence arises as to how much expertise a trustee needs in respect of the assets under their control, how they use that expertise and how they get paid for it.
Nearly all trustees, for example, have some understanding of investments, which they use to select and brief external advisers and to interpret and act upon their recommendations. Indeed it is very clear that even where investment management is fully outsourced, key investment decisions, especially asset allocation, are strongly influenced by the views of the trustees and rightly so. It is entirely possible that the influence of the trustees will have far more impact on the investment performance and risks than decisions taken by the professional investment managers.
More controversially, the trustee responsible for a family business may have to reconcile the continuing ownership of that business with the duty to consider the case for diversifying the risk of a single line holding. It implies a need for continual monitoring of the business and having the knowledge, skill and courage to call for a major review which may well be highly unpopular with family leaders.
The same applies to other assets, such as direct investments, property and art. The trustee can always call in specialist advice, but needs the basic understanding and experience to know when such advice is needed. He needs to find and brief the right specialists, and to use the advice correctly in coming to a decision, often in discussion and perhaps negotiation with the client family members.
Just how knowledgeable does a trustee need to be to discharge these responsibilities, as a ‘prudent man of business’ and how does he or she apply that knowledge? Where he has expertise, should he allow his own views to be overridden by external advisers, or should he merely take account of such advice in reaching a decision?
Recognising the need for investment expertise, some larger trust companies have established specialist units to help with asset allocation decisions and to help select and monitor the best third party investment managers. Some have gone even further in hiring specialists to support clients in direct investment and corporate transactions, in property and art management. Many trustees also have significant in-house legal expertise.
The question is where to draw the line and at what point is it essential for trustee independence that the advice required is outsourced to a third party, even if suitable expertise exists in-house?
KEY FACTORS IN DECIDING WHETHER TO OUTSOURCE
The assumption must be that, in deciding whether external advice is required, for whatever purpose, the interests of the trust beneficiaries will be paramount. The following check list may be helpful:
- Do the trustees genuinely have independent expertise ‘in-house’ to contribute to the decision and can it be demonstrated that it compares with external specialists?
- Does understanding of the wider perspective put them in a better position than other external advisers?
- Are issues of convenience, cost efficiency or privacy sufficiently important to be a factor?
- Is a deep and trusting relationship with the trust settlor and beneficiaries a legitimate factor, if they have more confidence in their trustees than an external adviser or asset manager?
- Are there other respects in which the views of the settlor and beneficiaries should be considered and if so why – for example if the family has expertise in a particular field?
- What is the materiality of the decision in terms of risk and range of possible outcomes?
In theory, for example, the case for outsourcing management of an investment portfolio of short-term government bonds, or even of blue chip equities (especially if they track the indices quite closely) is much less powerful than the case for outsourcing the management of a portfolio of hedge funds or private equity, where so much more depends on the judgment and skill of the manager. Equally, it is much easier to justify keeping asset allocation and manager selection in-house, than using specific in-house investment funds or products.
SELECTING AN EXTERNAL ADVISER
Firstly, it is necessary to define the scope of the advice required. Are the trustees looking for specific advice on a particular matter requiring very specialist knowledge, or is it a more general, long-term relationship? If the latter, is it wealth management covering the whole spectrum of the trust assets or is it simply the management of a portfolio of quoted investments and funds?
The trustees will also wish to ensure the adviser is motivated and competent to act in the client’s best interests, and to understand the broader picture, rather than having their judgments distorted by other factors, including their own remuneration, ambition or entrenched professional practices.
- What is the reputation and standing of the advisers, how well do the trustees know them and have they come with good recommendations from other clients in similar situations?
- Do they ‘connect’ with the underlying clients, in terms of understanding their issues and addressing their concerns, rather than delivering a standard ‘sales pitch’ or solution?
- Do they demonstrate competence in all the relevant areas of expertise, without bias towards their own areas of specialism?
- Is their business model aligned to serving the long-term interests of the clients, rather than the short-term remuneration of the individuals providing the advice?
THE CASE FOR A HOLISTIC APPROACH
Many clients and trust beneficiaries seek a holistic approach to the management of their wealth, which means ensuring that the clients’ financial affairs are managed through a single individual or team, with a deep understanding of each client family, their wealth and other circumstances. This individual or team must have the knowledge and experience to cover all aspects of their affairs, with access to information and views from relevant specialists where required.
The word co-ordinator is often used, but this word grossly underestimates the role played by a holistic wealth manager, particularly one who handles complex clients with multiple interests across a variety of jurisdictions, often holding disparate assets through a number of different structures.
The job of the ‘holistic’ wealth manager is not so much to introduce clients to the experts, but to lead and manage the team and drive the decision making process. His or her role includes the following:
- Standing in the shoes of the clients, by developing a deep understanding of their family circumstances, their attitudes and concerns, as well as their financial and business affairs.
- To help the clients develop and outline a strategy, purpose and objectives for their wealth, ensuring it serves a useful purpose for successor generations.
- To identify key issues and key decisions which need to be taken and areas where specialist advice may be required.
- To identify the best and most appropriate specialists, brief them, and work with them to reach conclusions which fit the overall context.
- To integrate the advice into a wider decision making framework, which may include advice from a variety of other specialists, some of which may be conflicting.
- To manage day to day execution and reporting, in accordance with the agreed strategy and objectives.
It will be apparent that the more complex the clients’ affairs, the greater the demands on the experience and judgment of the wealth manager, who needs sufficient understanding of all relevant areas. He or she will also need significant experience of similar clients, so that he can draw on all those practical experiences, covering family issues as well as technical input. This experience comes not just from the number of clients they have served, but from the breadth and depth of their involvement.
Those who advocate the holistic approach would argue that the wealth manager needs supporting specialists in-house, with whom he or she has day to day contact, working together as a ‘team’. This more seamless approach is a better experience for the client, reducing the need to engage with multiplicity of different advisers.
The best solution for the client is not the theoretical independence of a totally outsourced model, but finding the right balance between in-house and external advice. This will include consideration of the viability of the provider’s business model.
A further advantage of the holistic approach is that the provider has both the expert knowledge and experience to identify the right external specialists, when required, and sufficient business to allocate that they are in regular contact with most of the specialists they may wish to draw upon.
All these considerations are highly relevant to the trustee, both in selecting external advisers and in considering the extent of expertise he or she needs within their own team.
CONCLUSION
Because of their special status, trustees have a particular responsibility to preserve their independence and to manage any conflicts of interest. This will include finding the right balance between in-house and outsourced advice and services, to serve the best interests of their beneficiaries.
It is unquestionably right to outsource where external providers can clearly better meet the needs of the trust, but there are many circumstances where an in-house solution is preferable. It is the job of trustees to make judgments and take big decisions, and they should be expected to have the expertise, experience and capability to fulfil their responsibilities without excessive reliance on third party advisers.