Many advisers are outsourcing their investment advice and are focusing on financial planning advice – why is this?
Investment management can be difficult to manage day to day. While the rules on tax and regulation are complex and can change frequently, it is not the same as having to stay on top of markets and macroeconomic events.
Financial planners are also looking in closer detail at the risk in their business. Investment advice poses risks for advisers who are not on top of it. Many have concluded that delegating investment management is the best option. It doesn’t mean that the adviser is not involved in the process, it just means that the financial planner can focus more on the real value-added advice, such as understanding a client’s goals and needs and ensuring they understand their tax position.
How can advisers use those regulatory changes to re-engage with clients?
Regulation is moving at a rapid pace. Looking at the UK as an example, there are near-constant FCA and HMRC updates. If advisers are in the international market, they will need to consider UK rules, such as the changes to QROPS, alongside any domestic taxes if they are living in Spain, Dubai or Hong Kong for example. The breadth and frequency of change is a real challenge for advisers.
However, change is always an opportunity. It gives advisers a chance to revisit their clients’ situation and to re-engage. They can take a closer look at whether the financial planning currently in place is still appropriate for their clients’ needs.
In light of the new rules, they can examine the options to plan for the future. For example, in the UK, we have recently received confirmation that the changes in the 2016 Finance Bill are going to happen (they were put on hold because of the snap General Election), and that they will be retrospective.
Everyone’s plans could be thrown up in the air. The domicile rules will be particularly important. The rules on when someone is deemed domiciled in the UK are changing – it used to be 17 out of 20 years and this will shift to 15 out of 20 years. Advisers need to understand the new rules and what they mean for their clients.
There are also changes for international clients with investments in UK property owned through offshore corporate structures. Non-domicile individuals using these corporate structures will now be subject to UK inheritance tax and clients will have to consider how to pay that liability – it will be quite costly in some cases, particularly where clients have a portfolio of London-based property.
How can tax planning make a difference for clients?
There are a number of steps that advisers can take for their clients who are asset rich, but cash poor. For example, they can help ensure liquidity by recommending a life assurance policy within a trust structure to help pass on assets. It is about clients being in control of their financial plans and looking ahead to navigate tax bills.
What are the key uses for trusts? Which client problems do they solve?
The misconception on trusts is that it is all about tax. Far more important for some clients is to be able to decide who may benefit and when. For example, with a trust structure, clients can target who receives their wealth after they die. They may want to disinherit an estranged son or daughter, or prevent step-children or in-laws benefiting from an inheritance.
The latest figures suggest that over £5bn in tax is paid to the Government each year through IHT. Most of this could be mitigated through careful planning. There is a clear opportunity for advisers to help reduce their clients’ exposure. We are seeing growing demand for IHT planning solutions with greater flexibility. For example, we are seeing greater demand for lifestyle trusts, with flexible withdrawals. Higher care costs are difficult for people to predict and manage and this style of trust solution can help them with the income they need.
Also, wills become public after probate has been granted. The trust can be confidential. This is useful in a complex family situation or for someone who is high profile.
Are trusts complicated? Do the rules keep changing?
Governments are generally looking more closely at more esoteric tax planning solutions and some schemes have come under attack. Generally, insurance based schemes are plain vanilla. They are known and understood by HMRC.
What support is available to advisers to keep up to date with all the latest tax changes?
From an adviser point of view, there is a lot of tax and regulatory changes. It is essential for advisers to have a go-to person. We offer technical support. We do it through different channels, updating advisers when the regulations and tax laws change. We look at what the changes mean for advisers and clients. Advisers can then take that information and apply it to individual client needs.
We have a technical hub, called Knowledge Direct. This is a self-service website, available 24-7, which provides advisers with news and information on specialist subjects such as taxation, trusts, inheritance and retirement planning. For example, it explains the tax treatment of all our products for certain returning expats, it has interactive flow-charts, and details of the statutory residency test. We want to use our in-house expertise to help advisers manage tax and technical changes, and always aim to update advisers with the latest news – for example, after the UK budget, we will email advisers about what it means for their clients.