Buy cheap, pay dear
We love a bargain. Indeed, most of us have been tempted into buying something that, deep down, we knew was simply too good to be true. Not too long after making our purchase, our euphoria dissipated as we realised that the item in question was substandard and not fit for purpose.
With tangible purchases, there is a simple remedy: a replacement can be sourced, and often it will be the item that we should have bought in the first place. The new item will, in all likelihood, be more expensive, of higher quality and ultimately better value than the original. Once replaced, the bargain item can be forgotten and the owner can enjoy the new product at their leisure. But can the situation be remedied as easily if the perceived bargain is a service, rather than a tangible product?
Race To The Bottom
Unfortunately for the industry, and ultimately the affected families, a number of fiduciary service providers continue to try to undercut the market with wholly unrealistic pricing when pitching for new business. Providers do this for a number of reasons, namely:
• They are adhering to a short-term business strategy. They have an exit strategy on the horizon and, therefore, are keen to add to their bottom line. The long-term viability of the fee or the structure is not considered, and it is likely that fees will be ramped up to the market rate once the family is firmly entrenched with the service provider.
• They are simply not keeping abreast of international developments, and they are running a structure from a jurisdiction in which regulation or administration is light, or they are not properly adhering to the regulatory requirements and not fulfilling their fiduciary duty. It is likely that there will be ramifications for such a trustee if they operate from a top-tier jurisdiction with robust regulations.
• They do not have the capacity or systems to properly appreciate the work required or associated risks when they are quoting for the structure.
• They are simply desperate for new work to come through the door at any cost, due to their having a shrinking book of business. If a fiduciary structure has not been properly established and administered, considerable cost is likely to be incurred in establishing the tax consequences, and any other ramifications, of the property not having been transferred to the expected new owner. The funds spent establishing the structures are likely to be sunken costs.
Estate-planning structures are increasingly complex on account of the global migration of
families, the changing regulatory landscape, evolving tax legislation, changing family dynamics, and updated and refined trust legislation. This is all compounded by the fact that beneficiaries are more empowered than they have been in the past, due to their increasing awareness of what a fiduciary should be doing, increased visibility of the performance of the underlying assets, and a greater willingness to take a fiduciary to task if they have not fulfilled their duties.
All of these factors place a burden on businesses. If a fiduciary does not have sufficient resources to address these changes, they will naturally fall behind their more technically aware and better-resourced competitors, which may have specialists working in these areas. The necessary reaction to these changes increases overheads and requires expert advice to be sourced, adding to the cost of doing business.
Name Your Price
When families and advisors are searching for a suitable of shore service provider, one of the very first considerations is cost. Fiduciaries need to be resolute in their negotiations, as the importance of being a good fiduciary and thorough administrator has never been greater. Given the changing global environment, it is fair to say that the days of trawling the bargain bin for fiduciary services have passed. It is worth remembering this: if you pay peanuts, you get monkeys.
STEP July 2016