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An untrustee steed?

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

drawbacks.

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&#39s 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&#39s circumstances and

requirements. He may well know his fellow appointed trustees and should be

firmly aware of the client&#39s wishes as regards the trust&#39s beneficiaries –

for example, which beneficiaries the client would like to be paid and in

what circumstances.

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&#39s perspective. From the IFA&#39s 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&#39s 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

circumstances.

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&#39s 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&#39s 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&#39s 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

validate it.

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.

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