THE HOME OF THE
PROFESSIONAL ADVISER
Supporting Circumstantial WealthNavigating the challenges of advising 3rd party investors
For Adviser Use Only – Not approved for use with clients
Agenda
• Circumstantial wealth creation• What additional value can adviser add
– 3rd party– Professional introducers?– Vulnerable beneficiaries
• 3rd party investor types– Challenges of assessing investment risk for 3rd parties– Challenges of investment suitability for trusts
• Impact on your Practice– Reactive? Existing clients?– Proactive approach to professional introducers
• Help and support from Prudential
Circumstantial Wealth / 3rd Party Investors
• Critical illness• Court awards• Insurance payments• Trustees
– Generally– Vulnerable Beneficiaries
• Powers of Attorney• Court of Protection Deputy
Trusts for Vulnerable Beneficiaries
•Vulnerable Beneficiary defined:–person who is mentally or physically disabled, or
–relevant minor (under 18) and has lost a parent
•Qualifying Trust if assets capable of use only for disabled person
–even if no interest-in-possession, then no income can be applied for others
•Special tax treatment claimed by Vulnerable Person Election (VPE1)–Sent to HMRC by Trustees
•Trustees effectively taxed at vulnerable beneficiary’s rate–Income Tax
–Capital Gains Tax
•Inheritance Tax–transfer in to qualifying Trust is a PET, not a CLT
–transfer out to vulnerable beneficiary, no IHT
–no periodic charges
–assets part of beneficiary’s estate on death
Total wealth
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60£0
£200,000
£400,000
£600,000
£800,000
£1,000,000
£1,200,000
£1,400,000
£1,600,000
£1,800,000
£2,000,000
Human capital Financial capital
Working Life - yrs
Hypothetical example purely for illustration purposes
Total wealth
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60£0
£200,000
£400,000
£600,000
£800,000
£1,000,000
£1,200,000
£1,400,000
£1,600,000
£1,800,000
£2,000,000
Human capitalWorking Life - yrs
Hypothetical example purely for illustration purposes
Total wealth
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60£0
£200,000
£400,000
£600,000
£800,000
£1,000,000
£1,200,000
£1,400,000
£1,600,000
£1,800,000
£2,000,000
Human capital Financial capital
Working Life - yrs
Hypothetical example purely for illustration purposes
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60£0
£200,000
£400,000
£600,000
£800,000
£1,000,000
£1,200,000
£1,400,000
£1,600,000
£1,800,000
£2,000,000
Human capital Financial capital Total wealth
Working Life - yrs
Hypothetical example purely for illustration purposes
Total wealth
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60£0
£200,000
£400,000
£600,000
£800,000
£1,000,000
£1,200,000
£1,400,000
£1,600,000
£1,800,000
£2,000,000
Human capital Financial capital Total wealth
Working Life - yrs
Hypothetical example purely for illustration purposes
Total wealth interrupted
Trustee Responsibilities vs Attorney / Deputy responsibilities
• Trustees are expected to provide a financial return (…and invest)• Trustees are expected not to take undue risk with assets• Trustees should seek ‘the best return’ regardless of personal opinion• Trustees have the power of delegation
• Attorney / Deputy do not own assets but invest on behalf of owner
• Adviser support?• Understand nature of 3rd party investor• Add value by………………KYC
Objectives
• What does the 3rd party investor need to achieve?
• Income and Growth?• Capital Growth?• Protection?• Critical yield?
• What if?• Stress testing• Implications
• Divergence of risk
Challenges of investment suitability for 3rd parties
• How do we determine the end client?– Individual investor
Adviser
Client
Compliant Investment Process• Aims/Discussions• Attitude to risk• Capacity for loss• Term
Compliant Investment Process
Firms should ensure:
• they have a robust process for assessing the risk a customer is willing and able to take – including appropriately interpreting customer responses to questions and not attributing inappropriate weight…
• tools, where used, are fit for purpose and any limitations recognised and mitigated;
• they have a robust and flexible process for ensuring investment selections are suitable given all aspects of a customer’s investment objectives and financial situation…
Source: FSA, March 2011 Assessing suitability: Establishing the risk a customer is willing & able to take and making a suitable investment selection.
Risk Profiling
Risk Descriptors
Other factors (e.g.
capacity for loss)
Asset allocation
Investment selection
The FCA’s “Vertical Issues”
Risk is not just a number
Return Volatility
Option A -1.03% 16.68%
Option B 13.49% 6.16%
Annualised ratios from 1 Jul 2011 to 1 Jul 2012. Rebased in Pounds Sterling
Source: FE Analytics
Which would you pick?
Risk is not just a number
Annualised ratios from 1 Jul 2012 to 1 Jul 2013. Rebased in Pounds Sterling
Return Volatility
Option A FTSE All Share 18.00% 9.20%
Option B FTSE British Government All Stocks -4.69% 4.99%
Source: FE Analytics
Challenges of investment suitability for 3rd parties
• How do we determine the end client?– Individual investor
Adviser
Client
Compliant Investment Process• Aims/Discussions• Attitude to risk• Capacity for loss• Term
Challenges of investment suitability for 3rd parties
• How do we determine the end client?– 3rd party investor
Adviser
Compliant Investment Process• Aims/Discussions• Attitude to risk• Capacity for loss• Term
Trustee / Deputy / Attorney
Beneficiary
Thematic Review – FCA Key Findings
Potential problem
Cash Flow Modelling
Starting income £ 14,051
Source: Prudential Retirement Modeller
Driving expected returns
EquitiesPropertyCredit
EquitiesPropertyCredit
EquitiesPropertyCredit
• How much risk are they prepared to take?– Expectation of return = 5.6%
• How much risk can they afford to take?– Expectation of return = 6.2%
• How much risk do they need to take?– Expectation of return = 6.5%
This is an example to illustrate balancing risk.
Is there value in smoothing?
Price Bid-Bid line chart over 180 months (from 09 Jul 1999 to 09 Jul 2014), of FTSE 100 Index from UK ABI Insurance universe. Rebased in Pounds Sterling
Data provided by FE. Care has been taken to ensure that the information is correct but it neither warrants, represents nor guarantees the contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Financial Express Limited Registration number: 2405213. Registered office: 3rd Floor, Hollywood House, Church Street East, Woking, GU21 6HJ. Telephone 01483 783 900 Website:www.financialexpress.net
DIY – retain all investment responsibility and construct
own portfolios
Outsource some process using “model portfolios” – investment responsibility
retained, but use of 3rd party fund selection
Outsource all of the process to bespoke or
managedDFM service
Outsource some process using Multi-Manager/Multi-
Asset - retain fund selection, but use 3rd party
research
What is your investment strategy?
Asset allocation
Fun
d se
lect
ion
Less More
Less
Mor
e
HANDSET QUESTION
How do you handle Circumstantial Wealth in your business model?
1. On an ad hoc basis with clients if the situation arises2. I offer proactive support to established professional connections3. I would like to expand my model to provide support to professional
connections
Summary
• Life changing events create the need for valued advice support
• Opportunity to review the support from your practice:- to existing clients- to existing professional connections- to potential professional connections
Important information
This presentation contains some forward thinking statements which should not be taken as fact. Information given is based on our current understanding, as at July 2014, of current taxation, legislation and HMRC practice, all of which are liable to change.
No reproduction, copy, transmission or amendment of this presentation maybe made without the written permission from Prudential.
“Prudential" is a trading name of The Prudential Assurance Company Limited, of Prudential Annuities Limited and of Prudential Retirement Income Limited. This name is also used by other companies within the Prudential Group, which between them provide a range of financial products including life assurance, pensions, savings and investment products. The Prudential Assurance Company Limited and Prudential Annuities Limited are registered in England and Wales. Registered Office at Laurence Pountney Hill, London, EC4R 0HH. Registered numbers 15454 and 2554213 respectively. Prudential Retirement Income Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SCO47842.
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