How to bill clients properly…and still keep them happy

Richard Rowlatt, business development and research assistant with Butterfield discussed the issue at the recent STEP conference and shares his thoughts with The Journal.

Professional trustees charge for their services; however the discussion with the settlor of the trust regarding the level of fees can often be fraught. A clear explanation as to a professional trustee’s charging policy can often avoid future confrontations which can lead to a souring of the trust relationship. This article looks at the reason behind the ‘trustee fee’ and underlines the need for transparency.

Experience shows that while settlors do not generally mind paying for trustee services, difficulties can arise because it is not clear why they are paying and what they are paying for. I believe there are two fundamental aspects to this. The first is to consider why they are paying. To answer this, one must consider the alternative to the professional trustee – appointing a trusted friend as trustee. This friend is likely to be a ‘lay’ trustee, with no particular expertise in dealing with trusts, or indeed in financial matters more generally. The professional trust company, on the other hand, provides the comfort of professional staff who have extensive experience and training in trust administration, as well as a deep knowledge of the local trust law. Trust companies will also generally employ qualified accountants to maintain the trust’s financial records, which is very important for ensuring the correct management and administration of the trust fund. From a practical perspective, professional trustees also have experience in dealing with other professionals who provide collateral services to trusts, such as investment managers, and know how to monitor their particular performance.

The trust concept was devised in the Middle Ages, when a trusted friend was usually appointed to look after the assets of a nobleman going on crusade. At that time, the only duty of the trustee was to hold the assets for the beneficiaries. In more modern times, trustees’ duties have become more onerous, and the global financial markets more complex. It therefore makes sense for a settlor to select a professional to fulfil perhaps the single most important role in their financial planning – the legal owner of the trust assets.

As to the second question, of what it is that the professional trustee is being paid for, I believe that there are two aspects to this. The first is that the trustee is charging for its time in providing the services outlined above – for example the time spent in carrying out administrative functions such as making a distribution to a beneficiary, or drawing up the trust accounts. The second is related to the fundamental nature of the trust arrangement – the trustee becoming legal titleholder to the assets and the beneficiaries retaining a beneficial interest in the assets. The trustee is under a fiduciary duty (the highest duty of care in law) to manage the trust assets in the best interests of all of the beneficiaries. It can be said therefore that the trustee as legal owner of the assets, ‘owns’ the risk associated with them. In the case of a trust holding assets such as cash, such risk is quite low (although it is higher at times when banks are failing completely). Many modern trusts, though, often hold assets such as yachts and aircraft which have much higher levels of risk associated with them (as well as requiring greater administration skills). These risks are generally associated with the possibility of the yacht or aircraft being involved in an accident which damages not only the vehicle itself, but also other property as well. This might leave the trustee liable for a very large claim indeed, a claim which is enforceable against them personally, as owner of the assets. It is understandable that the professional trustee seeks to charge a fee for taking on this risk.

So in light of the above, what is the best way to keep the client happy with their bill? As suggested earlier, in general, difficulties only arise when clients do not understand what it is they are paying for. The most important thing therefore to keeping clients happy is to explain, from the outset of the trust relationship, the basis for charging and why such a charge applies. Put another way, a professional trustee must be transparent with regard to their charging policy – clients do not like surprises. A possible and popular suggestion, which is often adopted, is to charge a responsibility fee which relates to the risks imposed on the trustee alongside an administration fee which relates to the day-to-day activities of the trustee. This way, the client, on receipt of the professional trustee’s invoice, can clearly identify where and why charges have been incurred.

 

Richard-Rowlatt

Richard Rowlatt: In general, difficulties only arise when clients do not understand what it is they are paying for

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