Financial advisers and estate planning – a perfect fit

Many financial advisers are talking the talk when it comes to estate planning, but will they walk the walk? Tim Stewart reports that estate planning needs to be more than just creating a will and the power of attorney.

Estate planning is very much ‘in vogue’ these days. Nearly every planner’s website lists it among the services offered, and it’s a common sight on shop windows.

The preparation of a will, powers of attorney and the nomination of superannuation beneficiaries are often mentioned – but there is much more to an estate plan than that.

Whether estate planning will evolve into a distinct discipline in Australia remains to be seen.

Peter Townsend, managing director of Townsends Business & Corporate Lawyers, says estate planning is a recognised profession in the United States.

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“We don’t have the population that the Americans have, and our wealth is spread a bit more evenly,” he says.

There are plenty of high-net-wealth Australians who would benefit from a specialist estate planner, says Townsend, but whether there are enough of them to support a crop of estate planning businesses remains to be seen.

But Corporate Will Company director Michael Sayer is more optimistic. He predicted an “estate planning revolution” a few years back.

“It’s started now, as evidenced in the media, in the industry and in education. But we’re really only on the tip of it,” Sayer says.

At the forefront of the education push is business and estate planning lawyer Michael Perkins, who teaches a course on the subject at the University of Technology Sydney that is recognised by the Financial Planning Association.

For Perkins, estate planning (or, as he prefers to call it, ‘family wealth management’) is best described as a professional occupation focused on wealth preservation and transfer for a client and their designated successors.

Estate planning is set to become a distinct discipline that will see the rise of a new breed of multi-disciplinary firms that includes financial planners, lawyers and accountants, says Perkins.

“The multi-disciplinary practice model hasn’t kicked off yet. I’d say the multi-disciplinary/next generation wealth advisory [model] is yet to be built, but I think it’s going to be built over the next year or two. The commercial discussions around that are starting now,” says Perkins.

While the future may well look bright, as it stands there tends to be lot of lip service paid to estate planning by financial planners, says Sayer.

“I would suggest that if you went through their book, they talk about it, but a lot of it doesn’t actually get done,” he says.

According to Melbourne-based financial planner Tricia Peters, there are still many advisers who deal with estate planning by simply referring their client to a lawyer.

“It’s my perception that estate planning is seen to be ‘have you got a will and do you have powers of attorney?’. In the [Statement of Advice] you say something like ‘we recommend that you see a lawyer’,” she says.

“I have clients who come to me who have had their wills done, but when I look over them ... there’s no flexibility and they don’t understand what their assets actually are and what the tax implications might be,” says Peters.

Getting it funded

The first thing that should be considered when putting together an estate plan is getting it funded via an insurance policy, says One Super Fund partner Gerard Wall.

“The only way you can create an asset at an unspecified time in the future upon the occurrence of an event – death – is life insurance. I find this is a neglected part of many so-called sophisticated estate plans,” says Wall.

While Sayer agrees that the funding of the estate plan through insurance is integral to the overall solution, it should not be the focal point.

“The focal point is the estate plan in general and what the client needs to achieve in order to secure their legacy,” says Sayer.

The benefit for the planner is that estate planning enables risk business that might otherwise be missed, he says.

“When we use the estate planning model rather than the direct risk approach, we expose more need and opportunity for risk management,” says Sayer.

A big part of preparing a client’s estate involves putting a business succession plan in place. Who will take over the family if the unthinkable happens?

For Kenyon Partners chief executive Paul Tynan, business succession planning should be the starting point for a good estate plan.

It should be about putting the appropriate buy/sell arrangements in place, as well as ensuring that if something happens to the principal the business can continue, Tynan says.

Inevitably, that involves putting the appropriate life insurance in place, says Tynan – and the fact that life sales have steadily gone down over the last 20 years is evidence that business/estate planning is simply not being done properly.

A team effort

One thing everyone can agree on is that no single party can put an estate plan into place – it is very much a collaborative discipline.

When it comes to down to who does what in the estate plan, Wall reckons the role of each professional can be broken down quite neatly.

“The financial planner’s job is to try and identify if the estate plan is funded properly, and if it is funded that the insurance is owned by the right person; the accountant’s job is to make sure that the client’s affairs are structured appropriately from a tax point of view; and the solicitor’s job is to make sure the documentation is all drawn up,” says Wall.

Having two to three sets of eyes on documents can also be extremely beneficial, according to Peters.

“The good thing about working in collaboration with people who you trust and you’ve worked with before is that you can all look out for each other,” she says.

But Peters has had some less than stellar experiences working with lawyers on estate plans.

The most common issue is that the lawyer completely neglects the client’s superannuation in the Will, she says.

“I’d like 10 dollars for every time I’ve looked in a will and found that [the lawyer has] completely ignored the superannuation. What they also then ignore is the insurance in the super fund,” Peters says.

While the collaborative approach has the advantage of multiple sets of eyes, it can also mean sharing the liability if a client complains about the service they have received down the track.

This is where planners can receive some “pushback” from lawyers, according to Peters.

“They don’t want to share in any liability that might flow through from working with a financial planner who doesn’t know their stuff or who makes a mistake,” she says.

“I’ve actually had lawyers say that to me, and I’ve had to turn around to them and say ‘actually, I’ve got the same problem with you’. Don’t assume that you’re the one who knows what they’re doing,” Peters says.

According to Townsend, the best way to avoid liability claims is to diligently follow the client’s instructions.

“If you follow those instructions and some beneficiary misses out because the mum and dad said they wanted them to miss out, that’s fine – that’s not a problem,” he says.

However, if the parents say they wanted to have a particular person included as a beneficiary but they miss out because the estate plan was arranged poorly or the will was drafted badly, it will come back to haunt everyone involved, says Townsend.

“All of a sudden the beneficiaries are coming gunning: ‘Why didn’t you tell my father he could have had a testamentary trust?’,” he says.

One of the other tricky areas in estate planning is being careful not to ‘drift’ into legal work. Financial planners, after all, are not licensed – or qualified – to draft legal documents.

According to Sayer, the planner should be involved the preparation of a will until the drafting of the document begins.

“If you draw a line down the middle of a page, on the left hand side is the gathering of information, the education and awareness of what an estate planner is ... and on the other side is drafting the documents,” Sayer says.

One common gripe about lawyers is that they don’t have the time or inclination to properly investigate a client’s circumstances and specific needs.

The problem stems from the fact that there is no money in preparing wills as far as lawyers are concerned, according to Benchmarks Consultants financial planner Peter Stewart.

“They see it as a public service. They just do the basics and take instructions from what the client wants,” he says.

It’s only when an experienced planner is sitting at the table with the lawyer and the client that many pertinent issues can be addressed, Stewart says.

If someone else raises issues – like a disabled child, for example – then the lawyer will look at other aspects of a client’s circumstances and the legal instruments that could be used to cater for them, he says.

“I find it’s better to sit in the meeting with the client with the solicitor and raise these issues. Then they can elaborate a bit more on the details of the matter and they can take instructions,” Stewart says.

Financial planners as facilitators

Because financial planners have a deep understanding of their clients’ circumstances, they are often the ideal person to facilitate the estate plan and make sure all the disparate elements are ‘chased up’ The ‘completion rate’ of financial planners tends to be very good, says Sayer.

“Lawyers sometimes find it hard to follow up, or simply don’t follow up. Basically we as financial planners have all the information and we’re good at getting information together,” he says.

According to Wall, planners are good at identifying a general need.

“Solicitors don’t go out there talking to clients. That’s where financial planners are good. We can highlight a general area,” he says.

After the planner has done a detailed fact find and outlined multiple scenarios to a client, the next step is to refer to a lawyer.

According to Thomsons Lawyers partner Millie Telan, most of her work comes from financial planners and accountants.

“Financial planners have nearly all the information, so that’s a good starting point. Accountants have a lot of information about the client too,” she says.

But while lawyers are more than happy to receive referrals from planners for estate planning work, it is difficult to get referrals coming back the other way, says Peters.

Lawyers typically get their work from a large group of financial planners, she says.

“Even though I’ve had terrific feedback about the work I’ve done … you don’t get a lot of referrals. Lawyers want a pool of financial planners to be referring to them, but they are only referring to a really narrow group. They don’t really want that to be known,” she says.

DIY disaster?

When it comes to do-it-yourself will kits purchased from a newsagent, the professionals are unanimous: it’s better than nothing, but only just.

According to Sayer, a will kit might just suit someone who has got “absolute rock bottom basics”.

“A student with a house and no dependants, for example. But the danger of getting it wrong and not minimising tax and protecting assets for future generations is often far too dangerous,” says Sayer.

But it’s not only risky to use a will kit – going to your local solicitor to have a will drawn without the involvement of a financial planner also has its pitfalls, according to Stewart.

“We’ve had lawyers who have retired and there was no copy of the will kept. And there have been circumstances where there’s been errors on the will – names spelled incorrectly,” says Stewart.

Another issue arises when the local accountant or solicitor names themselves as the executor of the will, and then dies before the client (ie, is ‘pre-deceased), says Stewart. In that case, the pre-deceased’s executor becomes the executor of the client’s estate.

“There was recently an accountant who offered himself to be the executor for his clients. He died, and his wife was executor of his estate.

Suddenly she was faced with a handful of people who had died at the same time. She was the executor for people she never knew,” Stewart says.

Talking to a financial planner can also dredge up personal issues that could ‘blow up’ an estate down the track: children from other marriages, drug-dependant children and family members who are spendthrifts, to name a few examples.

“[The client] needs to have someone they trust who they can spill their guts to and say ‘this is my family situation’. They’ve got to be able to be frank,” says Wall.

It can be a tough conversation to have, and many financial planners shy away from it, according to Sayer.

“A lot of financial planners are driven by logic and analysis – they don’t find the emotional part as easy. They’re not going to go there. Like accountants, they don’t want to talk about death and dying,” he says.

Estate planning and FOFA - a perfect fit?

One of the big challenges for advisers under the incoming Future of Financial Advice (FOFA) regulatory regime is complying with the ‘best interests’ duty, according to Perkins.

A good estate plan is measured by the estate administration it facilitates and the achievement of client objectives, says Perkins.

“In doing estate planning we are in the business of satisfying client-defined objectives. That is what is consistent with the best interests duty. That is what is consistent with FOFA,” he says.

Madison Financial Group head of compliance Cheyenne Walker is using the principles around estate planning to help her planners comply with the best interests duty.

The disciple of estate planning fits in well with the Australian Securities and Investments Commission’s language around holistic advice, she says.

“It’s not only about understanding the client, but understanding the client’s families and their needs and beneficiaries,” Walker said.

“What’s really clear with the [FOFA] changes is that it’s not about products, it’s about strategic advice,” she said.

Estate planning also fits in well with the fee-for-service business model, says Wall.

“In the FOFA days ahead, this is a necessary service but a service that advisers will be able to charge a fee for provided they really do add value,” says Wall.

A good business model?

Along with the sound fit with FOFA, there are several compelling reasons for financial planners to get into planning from a business model point of view.

For starters, Perkins points out that if planners get themselves intimately involved in the financial affairs of a client’s family, the client’s parents and children become potential clients.

“If planners start looking at their client base and looking up and down the generations, they quickly find three times the number of people they started with,” says Perkins.

Financial planners can also get themselves mentioned in the will, along with a suggestion that future beneficiaries get in contact with them.

Estate planning also opens up a variety of new opportunities for planners to provide advice, according to Wall.

“Estate planning is not a ‘one-off’ advice service. People marry; people divorce; people have children; businesses start and businesses fail. There should be an estate planning checklist to go through with clients at least annually,” says Wall.

Multi-disciplinary firms

According to Telan, there is a distinct lack of multi-disciplinary law firms that specialise in estate planning.

“One would think that the big firms would have a [multi-disciplinary model]. But their targets are generally big corporates – they don’t specialise in private clients,” she says.

The way Stewart sees it, the reason lawyers don’t specialise in estate planning is simple enough – there’s no money in it for them.

“They’d much rather get into the family law, commercial law, civil law – that’s where the money is. They can’t charge on an hourly rate for doing estate planning to do a will,” he says.

Forte Asset Solutions director Stephen Prendeville says there a few financial planning practices around that specialise in estate planning, but most simply have a component of their business dedicated to the discipline.

From his perspective as a broker of financial planning practices, Prendeville says estate planning practices are likely to be worth more than the run-of-the-mill planning business.

“The reality is that the vast majority of their revenue is from risk and therefore it’s a very robust income stream,” he says.

Specialising in a niche area like estate planning is also a sure way to achieve “rocket science” pricing, Prendeville adds.

“People seek the intellectual property that’s within the business, because whilst most [planners] have an understanding [of estate planning], a deep knowledge is fairly unique within the market – and is therefore deserving of a premium,” Prendeville says.