If you have been following these articles over recent weeks, you will know
there is no perfect solution for selecting trustees. All the options have
The task of the IFA must be to hold an informed discussion with the client
with the aim of arriving at a way forward which is most acceptable in light
of that client's individual circumstances, needs and personal relationships
with prospective trustees.
Trustees should definitely be viewed as prospective clients of the IFA
firm, whether individually or as professional introducers.
Last week, I finished with the suggestion that the IFA firm itself could
seek to be appointed as a trustee of most or all of the trusts it helps
initiate with clients. On the face of it, this sounds an excellent idea for
all concerned. The IFA understands the client's circumstances and
requirements. He may well know his fellow appointed trustees and should be
firmly aware of the client's wishes as regards the trust's beneficiaries –
for example, which beneficiaries the client would like to be paid and in
Moreover, the IFA firm is impartial (so long as neither the firm nor any
of its employees or proprietors number among the potential beneficiaries)
as regards the eventual selection of beneficiaries.
It should generally be immediately willing to stand down as a trustee if
such a resignation is suggested by the settlor/trustee. But, in the
meantime, it provides knowledge and experience of trust matters and
investment guidance to the trust. It also provides continuity as the IFA
firm should continue as a trustee notwithstanding the death, retirement or
incapacity of any individual within the firm.
Much appears to favour considering the IFA firm as a trustee from the
client's perspective. From the IFA's point of view, there could also be
significant benefits. Its appointment should strengthen the client/IFA
relationship both at the time of appointment and during regular servicing.
It gives a perfect platform for introductions to the client's other
professional advisers as well as his close family and business contacts as
either fellow trustees or beneficiaries, or both.
Finally, it could represent a significant source of professional income to
the IFA as trustee and investment adviser, where the trust holds
immediately investable assets, or in the future where the trust holds only
a life insurance policy.
However, all these considerations are irrelevant as our regulatory bodies
very strongly discourage (indeed, in most cases, simply do not allow) IFAs
acting as a trustee of a trust established by a client, whether the IFA is
seeking to act individually, as the IFA firm or as a company associated
with the IFA firm.
I have for many years been party to discussions and correspondence between
IFA firms and our regulators on this matter and I regret to note in this
article (while having some sympathy with the motives of the regulators)
that IFAs can act as trustees in only a very limited number of
The regulatory fears revolve around potential conflict of interest. The
IFA is in a very favoured position to be appointed as a trustee where it
was responsible for suggesting the idea of the trust to the client. Most
clients will only understand as much about trusts as the IFA tells them and
so the IFA's suggestion of its own appointment will rarely, if ever, meet
with any scepticism or objection.
Given sufficient number of these appointments within trusts of which the
IFA may be a signatory, the scope for embezzlement of huge amounts of
client money is substantial. Moreover, for the really dishonest adviser,
there is scope to include itself as a potential (if not initial)
beneficiary, thereby permitting a diversion of the trust assets away from
the client's intended beneficiary.
As a trustee, the IFA is clearly in a very favoured position to appoint
itself as investment adviser to the trust, thereby opening up a whole new
area for potential double-charging of fees.
Finally, though the regulators have additional objections, in many cases
the appointment of a trustee can be seen to be akin to the IFA handling
client money and few IFA firms are authorised in this respect. Admittedly,
the individual IFA acting as a trustee is doing so in a different capacity
to his acting as an authorised adviser within a regulated firm but this is
regarded as a largely irrelevant distinction by our regulators.
Generally, IFAs can only act as trustee for very close friends and
relatives who are not clients and where the IFA is not an investment
adviser to the trust.
IFA readers who are trustees of one or more trusts where these conditions
are not met should be aware that, if and when this comes to your
regulator's attention, you will be instructed to resign your position. This
might all sound like an example of using a regulatory sledgehammer to crack
a (potential conflict of interest) nut but it is a fact nonetheless. Or, at
least, it is a fact to the best of my understanding. If any reader has also
corresponded with a regulator and reached a different conclusion, please
let me know and I will share your experience in a future article if I can
So, we cannot consider the IFA, should sometimes be wary of the spouse,
must also be mindful of the potential problems of appointing only
(inexperienced) friends or relatives and must be aware of the costs of
appointing professional firms (not only their direct costs but the likely
costs of their appointed investment advisers, where applicable).
Some kind of balance must be sought in working towards the final
nominations of trustees and the client must be made aware of the advantages
and disadvantages of each option.
The IFA clearly has a valuable role to play here, often more than
justifying on this one issue alone the fees or commission arising from the
planning advice or product sale. It is difficult, if not impossible, to see
how an off-the-page sale could hope to match such level of hands-on advice
and I feel this whole area is one in which direct advertisers could catch a
severe cold in the not too distant future.
Next week, I will consider the almost equally vexed issue of the
nomination of initial and potential beneficiaries before pulling together
the individual and combined roles of settlor, trustees and beneficiaries in
key financial planning areas.