Sam Rubin
Technical

The Value of Estate Planning Advice – Business Growth Opportunities

By Sam Rubin

The last two years have been trying times for the financial planning industry. The Global Financial Crisis (GFC) has diminished many business valuations due to one of the main remuneration models for planning practices revenue, as a percentage of ‘funds under advice’ (FUA) and ‘funds under management’ (FUM). Financial planners should have been utilising this time to reassess their business value proposition to clients and how they charge for their services.

This is becoming even more important for the long term future of our industry with the Financial Planning Association’s (FPA) announcement on 23 October 2009 that its Board has approved the remuneration policy to move away from commission-based fees for financial planning advice by 1 July 2012.

The issue for many financial planning practices is that they have an older or elderly client base with shrinking investment balances. This means less revenue and generally more active management of investment portfolios given their requirements for income. Many planners may have had clients pass away which meant the loss of a client and revenue to the business. Many planners have stated, based on their experience, that beneficiaries require the capital to repay home mortgages, so there are no investment/business opportunities anyway.

Sorry to say, but that is all excuses. The right family advice service solution offered to clients and potential clients that can include services to the children (and grandchildren) will allow you in this situation to only grow your business revenue, as beneficiaries will have more financial options and will need advice. Most importantly, this mainly works in a true fee for service model.

When I ask financial planners what estate planning they provide to their clients, they would usually state that they “complete under the estate planning heading as part of the Statement of Advice (SOA) that the client should update their Will and establish an Enduring Power of Attorney”.

Estate planning should be considered a major component of the SOA given the relationship with the client’s wealth accumulation and asset protection objectives. In today’s society, the definition of a ‘family’ is becoming more and more complex given the level of divorces, single-parent families, de-facto relationships and step-children.

For example, the Australian Bureau of Statistics (ABS) has released data titled Marriage and Divorce, Australia, 2008 issue no: 3310.0 stating that the number of divorces granted in 2008 was 47,209. For females, age specific divorce rate in 2008 was highest for the 35 to 39 year age group (10.6 divorces per 1,000 estimated resident population). Amongst males, the age-specific divorce rate was highest for the 40 to 44 year age group (10.3 divorces per 1,000 estimated population). The proportion of divorces involving children was 48.8 per cent in 2008.

Understanding a client’s current and historical ‘family’ situation is critical to the estate planning process and is just one of the standard estate planning questions that should be addressed by a financial planner.

A financial planner’s role is to understand the client’s objectives and provide suitable recommendations based on the personal circumstances of the client. For example, you would not recommend a client to establish an investment in each of the children’s name for education purposes if you know that the client does not trust any of the children with finances.

Explaining the basic concept of estate and non-estate assets is vital for the client to understand what would be included in their Will. Demonstrating this via a simple table as per below can allow you to discuss the hard issues and incorporate advice within the SOA.

Estate assets can include Estate assets do not include
Shares (public & private) Jointly held assets
Assets that are held as tenants in common Superannuation benefits (paid directly to your dependants)
Cash investments and debts Life insurance proceeds with beneficiary named in policy
Superannuation benefits paid to your estate Income streams (if your dependants are the beneficiaries).
Life insurance proceeds if you are the policy owner and life insured
Business services for financial planners to maximise business value

The ability to reduce your business risk on an aging customer base can have a positive impact on the growth potential of your business value and your overall service proposition to your clients. The following are a few easy services that you could offer to each client to help maximise your business value.

  • As part of your full advice service, you should let your clients know that the only way you can assist by really protecting their wishes and beneficiaries in the event of their death is to have your name or business name included in the Will. This way, you can actively work with the executor and the beneficiaries to maximise the net capital available and personal objectives with each of the beneficiaries.
  • The ability to offer clients a full annual service which incorporates family advice can increase:
    • your business revenue;
    • give you access to the next generation
    • implement a client succession plan by working with the client’s children and grandchildren; and
    • support each of their individual goals and objectives.

For example

Your client, Mr & Mrs Peterson, with investment assets of $750,000 are planning to retire and you currently charge them an annual financial advice fee of 1 per cent or $7,500.

By extending your business model to include advice to the family covering three generations, you could consider charging Mr & Mrs Peterson 1.5 per cent or $11,250 p.a. This additional fee will provide for their children or even grandchildren to have an initial discussion with you about their financial goals and objectives and to determine if you can support them. Any ongoing services offered to any other family members can be charged at a discounted rate given the family fee charged.

This will provide Mr & Mrs Peterson with peace of mind knowing that they are educating and assisting the family members with their finances. At the same time, it will allow you to increase your business revenue and get to know the next generation of clients.

Summary

Overall the role of a financial planner is to facilitate the testator in establishing their wishes and a network of professionals to support the client’s objectives. These professionals include an accountant, solicitor, insurance specialist and a mortgage broker and can also help you with your business via building centres of influence and a cross referral network.

Understanding your client’s objectives and incorporating your service proposition, which should incorporate the opportunities of estate planning advice, can allow you to reduce your own business succession risk and maximise your future business value whilst supporting quality financial planning advice for your clients and future clients.