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Five compliance-friendly tips for estate planning

21 September 2020

Jo Smith, Compliance consultant, JSCS, offers some key insights from a compliance perspetrivu when it comes to estate planning recommendations.

Estate planning is a complex area. Over the past almost-30 years that I have been working in Financial Services, I have consulted on many such cases and have often seen how the decisions that need to be made can be complex, not to mention emotional for the families involved.

Advice requires a good understanding of taxation and trust legislation across multiple areas, products, investment, and crucially – risk. A high level of compliance oversight is required to make sure clients’ objectives are fulfilled and they receive the most suitable advice.

Estate planning is an area where paraplanners are often heavily involved with the client and the adviser. Their expertise is invaluable. Paraplanners often become the go-to person in a business for the adviser, playing a very important part in the decision-making and research process that leads to the most suitable recommendation. Indeed, in some businesses they may be the only person armed with the depth of knowledge needed.

With that in mind, and from my perspective as a compliance consultant, these are five key areas advice teams should consider before any recommendations are made:

1. Arm yourself with knowledge

It sounds obvious but advice should never be given on anything the adviser does not fully understand. Many paraplanners are now becoming chartered, which is highly recommended – especially for estate planning.

Those working in this area need to take the time to educate themselves. It is also important to keep your knowledge up-to-date, and make sure you can prove you are doing so. Paraplanners have an opportunity to reinforce to advisers the importance of this point.

CPD is essential and there are plenty of courses around and some great provider technical helpdesks. Make sure you keep on top of news developments, including the detail of any changes to taxation and trust legislation.

Any advice given in an area where the adviser is not fully conversant poses a high risk to the business. In addition, products that are sold least often could pose the highest risk to the business – because the team are less likely to be exposed on a regular basis to the knowledge requirements needed to be fully informed.

2. Does the client understand the solution being proposed?

If a client is to agree to an estate planning solution, advisers need to ensure that the client is able to fully understand all of the relevant information and specifically, risk and access.

Paraplanners need to work closely with advisers to check: is the solution too complex? Is the client able to take on board all the implications of the recommendations? Does this fulfil the client’s objectives and capacity for loss? Sometimes discussion of the complexities can miss the basics. I have seen cases where (for whatever reason), the client had not actually appreciated that certain aspects of their estate plan would not come into effect until their passing.

The rule is simple; if the client doesn’t understand it, don’t sell it.

3. What is appropriate in terms of attitude to risk and capacity for loss?

It is absolutely crucial to consider a client’s capacity for loss and their ability to absorb losses. This needs even more focus when it comes to high risk investments. Including terms and conditions and risk warnings in information packs is not enough. It needs to be thoroughly assessed and evaluated, discussed with the client in detail, and clearly documented. Diligence is essential. There are no short-cuts here.

4. Have you considered percentage of total liquid assets?

In the days of the FSA, suitability templates were developed for firms to test their recommendation against these standards. The template for structured products (considered to be a high-risk product) included a question about what percentage of a client’s liquid assets were to be invested. The rule of thumb was that it should be no more than 20%. The regulator may have changed, but the principle behind the question hasn’t. Looking at the percentage of total liquid assets that may be invested is a very useful test for all types of high-risk products. If it is more than 20%, what is the justification? Also remember that residential property cannot and should not be considered a liquid asset. It is also wise for firms to contact their professional indemnity insurer and discuss this element, as many insurers have a very clear view of what they will cover. No firm wants to find out their insurance will not provide cover for certain cases.

5. Do you know what all the options are?

There is always more than one possible solution in financial planning. Advisers have a responsibility to ensure they have considered all options available to their clients. Paraplanners have a key role to play here in supporting with careful and thorough research.

It’s natural to have a ‘favourite’ solution, but that’s not good enough as a strategy. Ruling out an option because it hasn’t really been evaluated isn’t either. Gifting, life assurance, bare trusts, flexible trusts, investments all need to be considered. Ask questions and speak to technical experts. As with the first point, education is crucial.

Finally, remember that both paraplanners and advisers are required to be knowledgeable, which also means recognising your limitations and when you don’t know all the answers. It is far wiser to say ‘I don’t know’ than pretend you do. Finding out the answers and analysing the solutions is essential. Paraplanners have an opportunity to take this further – taking on board the need for education not just for themselves but reinforcing it for the advisers too.

Make sure also that you are asking the right questions; this is easier if your knowledge is up-to-date and you have an in-depth understanding of the products available and the risk they pose. Clients depend on us to provide them with the most suitable outcomes.

Professional Paraplanner