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Estate planning: Preserving a legacy

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Estate planning: Preserving a legacy
Michael Perkins

If you only think of Wills and powers of attorney and guardianship when someone mentions estate planning, you’re not alone. But you could be missing an opportunity to play a larger role in the management of client wealth over a lifetime — or several lifetimes, through family wealth management.

Traditionally, estate planning has been focused on a very narrow slice of the market. And with Australian universities excluding trust and estate law from law degrees for the last 20 years, we are now facing a shortage of legal professionals with specialist competencies in this area.

However, according to Michael Perkins, a lawyer with SCL Andreyev and technical services manager of Estplan, there are good reasons why financial planners should be considering estate planning anew.

Estate planning is recognised as one of the enabling competencies for financial planning by the Financial Planning Standards Board (FPSB). By broadening the definition of estate planning to include a focus on wealth preservation and transfer, particularly across generations, financial planners not only have the opportunity to provide a more holistic service to clients, they can also serve as the lead adviser in these relationships.

“These days, even the average client has got superannuation, which must be addressed outside the administration of their Will. With blended families, multinational families, family trusts, self-managed super funds, and closely held businesses, there is a lot of wealth that lies outside the direct personal ownership of the clients,” Perkins said.

“Estate planning is the discipline that underpins this broader approach to private wealth management. It is less of a service and more a discipline in how you do your job in the first place.”

A cultural shift

As planners move into a fee-for-service environment, incorporating this holistic type of estate planning into a practice’s offering is one way for planners to add value and justify their fees to clients.

With an ageing population, particularly as the baby boomers — who hold the lion’s share of wealth — pass into retirement and beyond, intergenerational wealth transfer is going to be a key issue for the financial services industry.

“We’re at the forefront of this whole cultural shift to a business model based on family wealth management, because you have to focus on the family of the client, not just the primary client if you are going to manage succession strategies for wealth down the line,” said Vic Ruth, director of Estplan.

The consequences of not finding a way to address this wealth transfer could actually undermine the value of financial planning businesses, Ruth said, as it is highly unlikely that the next generation, without advice, will leave money where their parents had it invested.

“Inheritance run-off and redemptions are going to be a growing problem for institutions and for planners. For example, I spoke to a group recently about family wealth management, and asked them, ‘How many of your clients passed away last year?’ They had 10, and estimated that it cost them $60,000 in fees. But what it actually cost them was $60,000 plus the capital value of the business that was also lost, which is two-and-a-half to three times that figure. That’s a significant loss and it’s going to be very difficult to find clients in the next generation who are going to make up those types of losses,” Ruth said.

Fostering a deeper connection with clients

Financial planners who have already embraced estate planning as part of their service offering, often as part of a holistic values-based planning model, believe it’s a no-brainer.

Bruce Christie CFP®, authorised representative of Centric Wealth Advisers, begins his planning process with a conversation about the client’s values and what is truly important to them.

“I think what’s really important for most clients is the management of their estate in the broader sense. I don’t mean what happens to their capital after they die, I mean how they lead their life and the broader legacy that they then pass onto their family, their children and their grandchildren, which includes values, beliefs, capital, education and experience,” Christie said.

He believes 23 years of experience in financial planning have highlighted what is actually important about the planning process.

“You realise that the important work you’ve done is not around investments or legislation, it’s being able to help clients deal with the challenges life throws at them. So estate planning is terribly important and a major responsibility for financial planners. If we can bring the human, relationship aspects into what we do as advisers, I think we will do a much better job with our clients,” Christie said.

Similarly, Justin Hooper CFP®, managing director of Sentinel Wealth, believes estate planning is a natural part of a holistic approach to financial planning, in that for clients, of highest priority are their most important relationships and the legacy they leave those people.

“Once you have a conversation with a client and find what we call their deep motivators, you uncover how important those relationships are, and then estate planning becomes a category of solutions that has to be offered,” Hooper said.

He also sees estate planning as one piece of the puzzle for the fee-for-service environment, but cautions planners that they must genuinely embrace the estate planning process to truly build it into their value proposition.

“You’ve got to have the knowledge and the confidence, otherwise it’s not going to work. If you say you offer estate planning, but you don’t actually know what you are talking about, you are going to struggle to charge fees for it,” Hooper said.

The consequences of inappropriate or inadequate estate planning are also serious, according to Perkins — including financial mistakes such as losing money through excess tax or having an estate challenged unnecessarily, and arranging affairs in a way where financial abuse occurs.

“Family trusts and super funds can be just as much instruments of financial abuses as powers of attorney and guardianship,” Perkins said.

Key success factors

As with all aspects of financial planning, there are some critical elements for success.

According to Ruth, planners need both the appropriate education and a plan for implementation in their practices.

“There is a whole series of processes they have to have in place to make it work,” Ruth said.

Hooper said his practice has industrialised this process through its ‘Legacy Aspirations’ program, a six-step process.

“For example, the first step is to help clients think through what their wishes are. It’s not as simple as it sounds — you’ve got to help clients think through scenarios in terms of the changing circumstances of their beneficiaries. Then suddenly, their wishes become so much more detailed and relevant and they become so much more appreciative,” Hooper said.

Interpersonal skills are also an important component in the process, according to Ruth.

“What has happened in the last 15 years or so is that advisers’ people skills have diminished, because of a focus on product and solutions, not necessarily people’s needs. Estate planning is a needs-based process, so you need the ability to work people through very sensitive issues involving family. There is a lot of strategy and communication required around that,” Ruth said.

A specialist designation

To help financial planners gain and demonstrate skills in the estate planning specialisation, this year the FPA launched its Accredited Estate Planning Strategist (AEPS) Program. The program incorporates the CFP1 unit in ethics, professionalism and professional practice, and an in-depth six-day Estate Planning course, offered by Estplan in conjunction with the University of Technology, Sydney. There is also a requirement to show evidence of three years’ full-time experience in providing advice in this area and have this submission reviewed by two approved estate practitioners.

Perkins said the first part of the Estplan course is focused around personal representation on succession, as well as areas of family continuity in governance, social and community contribution, and transfer of the family business.

“Between 67 and 72 per cent of all businesses in Australia meet the definition of family business. For those clients that have closely held businesses, the issues about retaining or transferring the business are extremely important, and yet it’s a client segment that is under-represented and under-serviced in my view,” Perkins said.

The course then deals with technical issues and structures such as trusts, super funds, and taxation issues around the administration of estate structures. With multinational families becoming more of a phenomenon, this is another area which requires special attention by planners.

“For the average professional financial planner, they’ve got a one in four chance that the next person walking through their door will have an offshore connection. We have to teach planners that they have to enquire about residence, domicile, and citizenship of their clients, and respond to the complexity that information throws up,” Perkins said.

The course also covers how to respond to family breakdown and changes in capacity in cognition.

Ruth said these areas are important to cover specifically because of the high rate of family breakdown, which adds extra complications.

“Estate planning is hard enough with one family, let along if you’ve got two or three families involved. It’s a matter of working your way through the situation and all the emotional issues that go with that,” Ruth said.

With an ageing population, rates of dementia are also on the increase, and this can render a client incompetent of doing estate planning.

“We cover the issues surrounding capacity assessment, from a professional practice and engagement point of view, because all professionals have a responsibility to ensure their clients have legal capacity before proceeding for an engagement,” Perkins said.

This may be one of the areas that financial planners don’t normally consider — but which can cause huge problems for families if left undiscussed, according to Christie.

“My wife works in intensive care, and the most difficult challenges they face are not with the patients, but with families of patients who have not had clear instructions about what to do in this situation. We need to raise these issues with our clients so they don’t put their closest family members under that sort of pressure,” Christie said.

In addition to the six-day course, Estplan also offers an online foundation course as an entry level, and a two-day general practitioner course, also offered through UTS.

“The entry level course gets people to the level where they know enough to ask questions to identify particular estate planning needs and then refer clients to a specialist,” Ruth said.

“The two-day course is about building competency in strategy without people necessarily becoming the full specialist. The six-day course is for the person who wants to build a significant practice around estate planning and needs to know a lot more about it.”

Introduced in January 2010, the courses have been completed by 215 students to date — indicating the level of interest by financial planners and other professionals in this area.

“As the students move through the designation, we will have a group of branded professionals that are going to play their part in the private wealth management area. I think some recognition has to go to the FPA for their foresight in taking this on because it’s been two years of very hard work,” Perkins said.

Both Christie and Hooper have completed the six-day estate planning course, and found it incredibly helpful in tying together all the parts of a client’s broader financial affairs and the risks that surround them. Both are also very positive about the value of a specialist designation in estate planning.

“To have a formal designation that enables financial planners to feel more comfortable talking about these things with their clients, and then engaging in a collaborative and constructive way with solicitors who specialise in estate planning, really means that the client gets exceptionally good service,” Christie said.

Hooper agrees.

“I see this estate planning specialisation as sorting the advisers from the product implementers. A person who is serious about being the premier adviser for a client in the long-term is going to do it,” Hooper said.

Working in partnership

Building strong relationships with professionals such as accountants and lawyers is critical in the estate planning arena — after all, financial planners cannot draft legal documents or advise specifically on tax issues.

Perkins believes these relationships work best as a partnership.

“In an ideal world, all the professionals around the client believe one thing — that the only person who owns the client is the client. The client will only trust one person the most, and that person is the lead adviser. Once that lead adviser is anointed then the other professionals have to work in conjunction with them. That’s the ideal style of relationship.”

According to Perkins, there are no licensing limitations for estate planning, “provided the financial planner keeps to the primary discipline of understanding the client’s situation, explaining their intentions and using that information to develop strategies that other professionals can respond to. But care needs to be taken that you don’t then go that step further and start trying to second guess the next professional”.

He adds that if this work is done well and passed on to the lawyer by the non-legal estate adviser, around 20 to 30 per cent of time can be saved through not repeating work unnecessarily. Because financial planners are also able to provide more complete financial information, lawyers can also produce a better result for the client.

When it comes to actually building these referral relationships, finding a specialist in estate planning to collaborate with is key, according to Christie, and then testing out their services to ensure they will treat your client in the way you would expect.

While it might sound simple, Hooper has found establishing referral relationships isn’t all smooth sailing — some painful lessons have had to be learned along the way, but it has led to a better process overall.

“In retrospect, we didn’t really brief the [solicitors] properly. What happened was that clients hadn’t thought through their wishes properly, the clients were unfamiliar with some of the jargon and the tools, the solicitors weren’t particularly qualified in estate planning or they had views on how things should be that they imposed on the clients. So it didn’t really work that well,” Hooper said.

“Now we have our own process and we brief the solicitor thoroughly. By the time the client and the solicitor meet, the client understands clearly what their wishes are, how the different tools work, and the solicitor understands what’s deeply important to the client, as well as what their balance sheet looks like,” Hooper said.

Establishing these types of relationships also opens the door for the financial planner to assume the role of lead adviser — adding extra value to the planner-client relationship.

“We are in the box seat to provide the greatest help, because we are always talking to our clients about looking forward,” Christie said. “I don’t think you can overestimate the importance of estate planning in the skill set we bring to the client. We need to understand the broader issues in the first place, and we need to work collaboratively with other professional advisers such as the solicitor and accountant so that the client gets a complete solution, and that solution continues to be reviewed.”

Building linkages and community

Building a community of practitioners specialising in estate planning will help to facilitate these relationships, and Estplan has establish an online community called EP First Class, bringing together professionals to share information and work together in collaborative teams in their region.

The Society of Trust and Estate Practitioners is also building a presence in Australia.

“It’s really signalling that the business of private wealth management advice is emerging as a specialist professional occupation that lies across a number of disciplines, primarily accounting, tax, finance and law. Yet of those financial planning is the only profession that has estate planning as a declared competency. So where financial planners are leading, other professionals are following,” Perkins said.


 

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