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Protecting The Client: Why It's Much More Than Guarding Money

Tom Burroughes, Group Editor , 24 January 2020

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This news service is looking at a variety of topics that collectively come under the title of "protecting the client". In coming days we'll explore a range of issues that explore what advisors and organisations to do protect people's interests, going beyond money and taxes.

If there were a Hippocratic Oath in wealth management, then some practitioners might say that it should state “don’t lose the client’s money”. But that might be simplistic: should not private client advisors also think about protecting the reputation of a client, their privacy and, for that matter, their dignity, such as in old age or when a person is in the public eye? Considering that parts of the traditional proposition of investing money and handling tax have been “industrialised” by technology and squeezed by competition, there is a need for firms to prove their added value. Protecting clients legally, physically and even emotionally is  becoming more important. That is why this news service has decided to probe into a number of areas linked under the banner of “protecting the client”. 

Such protection can take many forms. Perhaps an obvious place to start is that stalwart of English common law, the trust. Trusts enable those who set them up to put a mark on the world in some way that goes beyond just money. And with Switzerland seeking to develop a home-grown trust sector (as is Italy with some recent changes), there appears plenty of life left yet in trusts. True, pushes by governments for public registers of beneficial ownership and increasingly aggressive revenue authority behaviour have not been always positive for the trusts sector. Some trust companies are merging or selling business segments because compliance costs have made the area costlier to work in. 

But the fact that the world’s largest single offshore jurisdiction, Switzerland, is pushing for change (subject to the usual vagaries of the political calendar) tells its own story. And then there is the US. The US remains a large and important country in which to set up trusts, and specific jurisdictions including Delaware, New Hampshire, Nevada, South Dakota and Alaska foster attractive features for trusts. The 2017 tax changes in the US by the federal government, capping deductions for local and state income taxes, have reportedly driven business into trusts. 

Beyond trusts, there is a toolkit that advisors and clients should consider and use more fully than they sometimes do. Insurance provides channels for wealth transfer and protection, as in the case of private placement life insurance, and some life policies as well. Companies and foundations can protect wealth in certain ways. Rather like amateur golfers, some advisors will only use about half of the clubs in the bag - they should emulate the pros and use the full set. 

A big background factor in all this activity is inter-generational wealth transfer. In the US alone, an oft-quoted figure of $30 trillion is due to change hands in coming years. (It is never entirely clear to this publication how such a figure is arrived at, given how business owners, for example, are known for under-reporting assets to the US Internal Revenue Service.) Still, whatever one makes of the specific total figure, a lot of money is at play. And not just a “vertical” transfer from older to younger, but also in the form of “horizontal” transfers between divorced couples, or those left bereaved. For example, this news service has looked at issues such as the “suddenly single” phenomenon – the situation in which a person is divorced or bereaved and must face a new financial life on their own, sometimes with no preparation. 

Protection can take on real emotional and medical significance in cases where, for example, an elderly family member is diagnosed with dementia and there are moves to take out what are called Lasting Powers of Attorney. There has been controversy about the use or alleged misuse of LPAs, and calls for the system, such as the one in England and Wales, to be reformed. This is a very clear-cut case of “protecting the client”. Wealth managers are sometimes entrusted with money from clients who have been paid lump sums from insurance claims for serious injury – raising the need to manage that money very carefully. They also need to consider the best interests of those under the age of adult decision-making when managing their money. 
 

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