The enforced hiatus during lockdown resulted in a flurry of enquiries from wealthy families wanting to create or revisit their wealth structure. It also highlighted that service providers need to reconnect with their clients
Death remains taboo – rarely discussed by most people. And wealthy families are no exception. However, as the novelist Haruki Murakami once wrote: “Death is not the opposite of life but an innate part of it.” That certainly rings true when it comes to handing down wealth to successive generations.
The coronavirus pandemic, with its infection rate and death toll making headlines daily, has focused some high-net-worth individuals on revisiting their succession planning and, in some cases, contemplating it for the first time.
Lockdown resulted in many families spending more time together, physically and virtually, prompting more conversations about the future.
And it also led to something of a wake-up call for parts of the fiduciary profession, which has been over-reliant on decades-old vanilla structures remaining fit for purpose and continuing to generate repeat fees.
The outcome has been a resurgence of interest in wealth planning structures. According to the Wealth-X Family Wealth Transfer Report 2019, $15trn will be handed down to the next generation by 2030, creating a sweet spot for the private client sector. So is the sector ready for this?
Channel Islands practitioners agree that there has been an uptick in business in the past few months. But it comes with a challenge. The sense is that there will be fewer clients but of greater value, disrupting service providers’ traditional business development pipelines.
At a local level, there was a flurry of activity from individuals wanting to make or revisit their wills and some interest in setting up enduring powers of attorney, while international clients were seeking to stress test arrangements already in place.
A sharper perspective
Edward Bennett, Head of the international private client team at Bedell Cristin, says: “Covid-19 brought into sharp focus that an individual could die next week. [In the past] they may have talked about giving away their wealth – but now they may actually have to do it.
"It got people’s perspectives sharpened. For those with existing structures in place, the message was very much one of ‘don’t panic’. Nobody knew which way the pandemic was going to play out, but knee-jerk reactions are not the best response.”
Paul Hodgson, Deputy Group Head of Trust at Butterfield Group, agrees that it was surprising how many wealthy families did not have adequate succession plans in place.
“A lot of high-net-worth people had time with their families, holed up somewhere, and I think that brought it home to them that these conversations needed to be had.
“For patriarchs and senior members of the family, it was a time to re-evaluate a lot of things, and succession became much more front-of-mind. We had one client family where there was a planning opportunity that required a grandmother of 90 to set up a structure.”
It is also clear that, with an enlightened new generation of beneficiaries coming through, this is no time to be complacent – which may make some trustees vulnerable if they do not change their approach.
Some structures have been in place, unchanged, for 30 or more years – established in an era of one-size-fits-all. Since then, alternatives such as foundations, private trust companies and family limited partnerships have emerged.
Henry Wickham, Counsel in the private wealth team at Ogier, adds: “The awful nature of Covid-19 certainly sparked conversations about succession and the potential impact of incapacity. If people had become incapacitated, the structure would have come to a halt.
“Looking at how it works, and thinking about how it’s going to work in terms of future generations, may require some tweaks to provide for longevity.”
Time to reconnect
To meet this challenge, service providers and their clients need to communicate more, according to Harry Lawson, Senior Tax Manager at Deloitte in Jersey.
“I have heard fiduciary providers express the thought that Covid-19 is going to make them sit back and think there is an awful lot they need to do to reconnect and become more proactive with their clients.
“Things had become disconnected and allowed to drift – playing safe with investments, leaving things as they were and taking monthly fees. It is not the time for a vanilla service.”
There is a view that as well as a more proactive approach from wealth managers, some creativity is needed to provide solutions that better fit a family’s needs.
Family members are now better informed, with access to more information than ever before – and they are asking probing questions.
Edward Bennett at Bedell Cristin cites the example of a family in which there had been some fallings out. What started out as a reasonably sized trust fund was being diluted by the growing number of potential beneficiaries over the generations, and the patriarch wanted to hold the family together.
It was agreed that funds would be put aside to buy health insurance for the whole family, which would continue from generation to generation. That effectively removed tension and suspicion among family members.
“If you say you are engaged and proactively coming up with ideas, you become trusted and integral to the way that family operates,” he adds.
Dirth of soft skills
There are many problem families where emotion and sensitivities need to be considered – and this calls for softer skills alongside technical fiduciary knowhow.
The label ‘trusted adviser’ has been over-used and over-promised in the past. Fiduciaries of the future will have to back up their professional knowledge by genuinely acting as a mentor, sage and counsel for families.
Hodgson explains: “We are at the top end of planning. The structural issues are relatively straightforward but what is difficult is to focus on a plan and move forward with it without breaking eggs in terms of family relationships.
“It’s got a lot of psychology in it as well as pure human interaction and relationships. By and large, the super-rich have no better insight into that kind of stuff than Joe Average. In fact, in some cases, they are a lot worse.”
Hodgson says that support in these areas will be an important consideration when training the next generation of service providers.
And Wickham believes the increased use of digital meetings could mark a breakthrough in improved communication.
“Advice needs to be given in an appropriate way, respecting the wealth that has been created and the success of the individual involved,” he says. “Communication through trustees and advisers is often the forum for families to encourage sensible debate.
“During lockdown, people became more comfortable communicating through video conferencing, which has taken away some of the logistical issues of encouraging focus.
“Conversations like that are really helpful because when a pivotal family event happens, there will be fewer surprises and less chance of a dispute.”
What to tell the kids
New dialogue among members of wealthy families raises questions about what and when to tell the next generation about the extent of the family’s worth. Transparency and managing beneficiaries’ expectations are particularly important.
“There’s a huge vested interest in having a conversation or not having a conversation,” Hodgson says. “People quite regularly speak about not telling their children what’s in their will in advance of the solicitor’s office, which is not something that you would ever recommend.”
Emma Turner, Director, Philanthropy Service, at Barclays Private Bank, believes that it’s never too soon to start involving young family members. “You’ve got to accept that children will want to do things differently to you. There’s room for them to continue your legacy but also to develop their own,” she says.
Turner has worked with a family in which a four-year-old was encouraged to start giving to their charity of choice. In addition, an eight-year-old influenced his siblings – who were in their 20s – into joining him in giving a substantial amount to a charity set up by the mother of a school friend who had died.
New causes du jour
The generations in receipt of the huge amount of wealth being handed down hold a lot of influence as to how it is spent, and are often inclined to want to use more of it for good.
As a result of Covid-19, 70% of charities are in danger of failing and the next generation will seek out what Turner refers to as “causes du jour” – which may include homelessness, addictions, mental health and prison reform.
However, Wickham notes that the reputation of some leading charities has been tarnished, losing the confidence of supporters.
“Individuals are wanting to do good but they want structures and projects where they feel they are going to achieve a real impact – and it’s often the areas they are passionate about that they want to get involved in,” he says.
Hodgson believes trustees need to wake up a little more to the idea that the next generation is coming along and will have the ability to influence, rather than saying: “Your grandfather wouldn’t have wanted it to be done in a particular way”.
There is a sense that recent events have opened up not just immediate opportunities for the private client sector in the Channel Islands, but also new challenges. Practitioners would be wise to address these without delay in order to bring greater value to their clients and their own organisations.