Institutional client de-risking: An opportunity for private client service providers?

Private client practitioners must consider to what extent they share the institutional concerns. Certain jurisdictions and activities, aside from any regulatory direction, have to be very carefully assessed. With each case, we must ask ourselves, can we manage those risks?

Insightful regulators take the view that it is up to the service provider to consider what risks can and cannot reasonably be managed. In demonstrating this, the service provider must make it clear that market risks have been assessed, fully understood and the ability to manage perceived risks clearly demonstrated.

In some cases, banks are better placed to manage jurisdictional risks than many private client service providers who may not have branches in or access to on the ground information in the relevant jurisdictions. It can be a very useful relationship tool for private service providers to team up with such institutions with this level of knowledge to bolster their own risk assessments, by those already operating within potentially challenging jurisdictions. 

If the banks de-risking is to provide opportunities, how should the private client practitioner seek to manage the risks?

1. There is a general trend towards offshore service providers acting for fewer but more wealthy clients.  Practically, this should promote a far greater level and depth of client knowledge. The underlying clients will need to recognise that any new relationship with a service provider can only proceed on this basis. Whatever the capacity of that relationship, the private client provider must fully understand a client’s source of wealth, source of funds and activities.
2. Trusts are a very specialist area where skilled and seasoned practitioners are generally required to lead a relationship and team.  In many banks, there are extremely able trust practitioners at the higher levels but this has not always been replicated by strength in depth.
3. Most banks have recognised the potential liabilities to be incurred by cross selling their products and not properly managing internal conflicts.  Historically, it was not  uncommon to find that a long-standing investment relationship was subsequently turned into a fiduciary relationship, with the assurance to the settlor that “nothing would change” as a result of the interposition of the trusteeship. It may be easier for private client practitioners to persuade the settlors of the potential value of a trust than a bank - where the principal focus may have always been on the investment advisory relationship.
4. Litigation risks have to be recognised and managed.  It is arguable that trust companies are better placed to manage some of these risks because trusteeships and all the liabilities and associated risks it brings with it are their day-to-day focus. Trust companies increasingly have in-house legal counsel or legal teams, which are often involved with seeking to mitigate the likelihood of litigation.

How do private client teams manage the risks of taking on some ex-institutional private clients?

Taking on any trusteeship from any other service provider carries risks, so taking on clients from a bank or other institution is no different.  The same assessment criteria must be applied.  Wise Counsel would suggest that in an ideal world we should be highly selective as to which cases we want to take on. Whilst acquiring a portfolio may seem highly attractive, one bad case could nullify the positive impact of the remainder. One cannot underestimate the significance of a very thorough due diligence exercise at the outset. 

It will be essential to ensure that any new clients fit within either an existing risk framework or one that can be created to accommodate and deal with a new portfolio.  If it is the latter, it will be crucial to consider how potential risks are going to be managed, whether by visiting jurisdictions, establishing relationships with local practitioners in that jurisdiction, viewing client trading activities on site, etc.

So are there opportunities? Definitely:-

1. In the context of Jersey, keeping cases on island where appropriate will help promote the concept that Jersey is at the very top of the fiduciary service ladder.

2. It will be imperative to ensure that a thorough due diligence exercise is conducted.

3. One must be prepared to fully KYC in the broadest possible sense the settlor and his or her family activities and jurisdiction connections.

4. To assist the KYC process, particularly where wealth has been created over many years and from multiple services, consider creating ‘bibles’ of documents which support a settlor’s source of wealth and source of funds.

5. Do not gamble on risks that in reality you may be unable to manage.

6. Consider whether a meeting with the regulator before taking on a portfolio with certain specific risks would be appropriate.