Embracing change

  • Author : Jim Parker
  • Date : September 2010
ABOUT THE AUTHOR: Jim Parker TEP is Country Head of Butterfield Trust (Switzerland) Ltd

T here are few who work in the trust world that are not in some way gearing up for the changes that are taking place in the financial sector in Switzerland. Most professionals recognise that the changing face of Swiss banking will have a considerable impact on trustees operating locally.

Legacy trusts: threat or opportunity?

From the trustee’s point of view, the first issue has to be how to deal with legacy cases. Trustees recognise that the longevity of fiduciary structures is an important and positive aspect of the business but, in this changing age, it is vital to start defining exactly how this legacy business needs to be treated.

Some participants in the Swiss (and Liechtenstein) wealth management sectors persistently rationalise the industry’s continuing ability to source and maintain what is, or will soon become, legacy business.

But it is becoming harder and harder to ignore the frequent problems that occur with such cases where the structure is ill-adapted to new tax rules, changing family circumstances, or where the fee structure is no longer correlated with the amount of work and risk involved.

To my mind, we have four options available to help us navigate through today’s shifting landscape and it is up to us as trustees to decide which route to take.

The first option is to do nothing, but a moment’s thought will demonstrate that this route is not sustainable and will expose the business to unacceptable risk going forward.

The second path could be to simply exit the business, but is this a viable approach? Indeed, would the trust instruments themselves, or the relevant terms and conditions in place allow this? Given that the Proper Law of these trusts will definitely not be Swiss, will exiting the relationship contravene legislation in the trust’s home jurisdiction? Bank-owned trust companies will need to examine the financial impact of exiting fiduciary relationships in the context of their overall banking relationships. Independent trust companies will need to seriously consider whether they can afford to exit.

The clear winners in this rapidly evolving, increasingly transparent landscape will be the experts who can strike the right balance when it comes to information flows and the preservation of client confidentiality

So what about selling the legacy cases? This is of course an option to be considered, but how much time and energy should be devoted to finding a buyer and negotiating the right price? The fact is that fewer and fewer service providers will be willing to take on structures that are visibly ‘past their sell by date’ and potentially fraught with difficulties. To compound this problem, many traditional clients who have done business with a single service provider are not keen on change.

Which brings us to what seems to me the only ‘real’ option: to retain and to progressively ‘fix’ the legacy cases. This is the courageous route, as it is by no means easy or without risk. Expect it to be disruptive, time-consuming and expensive. However, once the process is completed, the business, as well as its clients, will be well-positioned for the future.

Partners – what about their position?

This process of reorganisation will involve the long-established professional partners of the trustee: lawyers, accountants, asset managers and, above all, bankers.

Inevitably, internal and external pressures are giving rise to a more restrictive environment concerning reporting and information flows between all these partners, especially private bankers and asset managers, who will require new levels of comprehension for banking and investment management accounts. Trust companies need to be aware that the previously unthinkable day may come when they are unable to open a bank account for a trust.

Trustees’ duties clearly involve confidentiality, yet there is a growing premium placed on transparency from banks and other intermediaries. Trustees will increasingly face situations of conflict between their duties of confidentiality and the information requirements of their partners.

The clear winners in this rapidly evolving, increasingly transparent landscape will be the experts who can strike the right balance when it comes to information flows and the preservation of client confidentiality.

Complexity

According to a report in 2006 by Carte Blanche Communications the high net worth (HNW) population is aging much more rapidly than the global population in general, with HNW individuals 150 per cent more likely to be over 56 years old.

We all know that the trust industry has matured, the client base has aged and in certain cases, died. Increasingly, trustees are dealing with the second and third generations of client families.

Predictably, there have been mixed results from the transfer of wealth and power to this new generation. It is important to bear in mind that generation Y is quite possibly the best educated, technologically proficient and most global one in history. They have a clear bias for compliant planning and they are understandably very uncomfortable with legacy structures – what was good for dad or granddad doesn’t work for them. This presents us with a challenging opportunity.

Statistically, this generation is much more likely to change advisors than their parents were – 92 per cent more likely according to the above study. The report suggests that generation Y is reaching out for the right advisors and it is up to us in the financial sector to build the bridges to connect with them.

What then are the implications for the trust industry when the demanding new generation of clients is combined with the increasingly restrictive Swiss banking model and ever more sophisticated legislation and trans-jurisdictional regulations?

The net result is increased complexity across the board. In order to administer modern, compliant cross-border structures, trustees need highly qualified staff, robust IT systems and reporting capacity, together with an uncompromising yet flexible approach to risk management and pricing.

We have to face the fact that there will be less and less scope for the cheaper, more commoditised solutions of the past.

21st century trust officers

The Swiss trust officer of the future will need to possess even more specialised skill sets to cope with the evolving business model.

The good news is that the young trust officers form part of the Y generation that includes many of our clients. It is up to the trust businesses to recognise the immediate and ongoing needs of this new generation of staff and to commit time and money to their training and development.

Fortunately, STEP Switzerland has worked together with the Geneva Financial Centre to produce a comprehensive training programme, The Swiss Advanced Certificate in Trust Management, which addresses the trust industry from a Swiss perspective. This will go a long way to ensuring the sustainability and success of trust work in this important jurisdiction.

Profitability

My final point is about profit. In common with all businesses, the bottom line of the activities of the trust companies is their ability to generate profits. The changing landscape of the Swiss banking model will come at a price and will result in serious cost implications for our businesses.

Staff and operational platforms will definitely be more expensive. Training and development budgets need to be given the priority they deserve. Yet these challenges open up a fantastic opportunity for providers who are ready to adapt their mindsets.

Trustee services will need to be realistically priced to reflect their responsibilities and the added value they are bringing to the table. This in turn means that clients have to recognise that there is a premium to be paid for the new breed of qualified, expert trustees.

The good news is that more and more clients do fully understand the value of compliant structuring and are willing to pay the right price for it.

So in conclusion, this is no time for the faint-hearted. It is those in the industry willing to embrace change that will reap the exciting rewards.


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