Switzerland Has Added You as a Friend

The OECD-driven tax landscape has changed so much over the last year. In a story which will likely fail to capture notice from anyone, Switzerland signed a bilateral tax agreement with Bangladesh!

That's right Bangladesh. Try finding Bangladesh on the map. No offense but all I know is that is traditionally one of the poorest nations in the world. Every year the UN sends millions in food and essentials in humanitarian efforts.

Is there even a Swiss bank operating in Bangladesh? How many Swiss subsidiaries are operating in Bangladesh? How many HNW Bangladeshians (if that is what you call their nationals) do you have on your client list? Hard to imagine any Swiss tax practitioners will spend more than a nano-second dreaming up some scheme to take advantage of this. Hands up if you would like to be the first in your organization to open up the Bangladeshi branch. I suspect NRIs wouldn't want to go there to do business either.

Clearly the Swiss are scraping the bottom of the barrel in signing up tax treaty partners. Has all this OECD-stuff become nothing more than a Facebook competition....where who has the most "friends" wins??

Would You Like Fries with That?

The title line is a time-tested sales technique that the fast food giants have used to ensure that they maximize selling opportunities.

Now when it come to banks and their trust services, expect to hear: Would you like life insurance with that? Would you like one of our bank's own high yield offshore structured ELN derivatives with that? Would you like a pet dog cremation endowment fund to go with that?

Now look at the recruiting advertisement below. If you require fiduciary services, then you may want to consider shopping elsewhere. Now banks are in business of making money and greed is good but when you are too stupid, politically incorrect or inconsiderate to make it a mission statement then you deserve to be ridiculed. How do you feel about a bank that is hiring someone specifically to squeeze every cent out of your trust? It's one thing to do it implicitly, it's another to do it explicitly.

It is a bit unfair to make a big deal out of an advertisement which the bank may not have drafted or approved as the ad was put out by a recruitment agency but there's enough there to know that this bank wants to hire a "miner", someone who's revenue driven. Can you trust your Trust Relationship Manager if you know he/she is approaching your case with an angle to make money? Your needs or problems are only their problem if there's money to be made. For this bank, making money from trustee services is not enough. Just like selling a burger is not enough. The trust has to be milked. You must order french fries too.

If you're the applicant, you better be prepared to meet assigned revenue goals. Things like fiduciary duty are secondary. Notice you don't even need to have "trust" experience? Just an university degree and client relationship management credentials.

Look at this ad closer:

• "to identify new business opportunities" Is this what being a trustee is about? You create trusts to serve a purpose, not create new business opportunities. How much will they care about things that they can't make money from? Guess how many transactions you will be asked to make with this trustee? After all, no transactions, means no revenue. You would better hope that they have another person that reviews cases to look for things like proper minuting, record keeping, accounting, exposure to tax and regulatory laws, the beneficiaries are where they are supposed to be, what their needs are, etc.......you know.....all the things besides "new business opportunities" that ensure you still have a valid trust or an effective trust.
• "trust cases are properly priced" Loosely translated that means milk the trust for all it's worth and price out the dogs with fleas. I have yet to see any empirical studies on pricing fiduciary risk. The big institutions have models that base pricing on numbers like "time spent" or "AUM" but pricing is largely a number being pulled out of a hat. Just make sure your cases are in the black. So sell a lot of services and financial products and lie on your time sheet. Guess how long before you get the trustee's resignation letter from this trustee if you insist on keeping the trust fund in an annuity or long-term bonds?
• "ensuring client satisfaction" Nice but isn't carrying out your duty as trustee, you know working for the beneficiaries of the trust, a little more paramount? I will side-step the "trustees have no clients" argument. Chocolates can give great satisfaction. Are chocolates always good for your teeth or waist line? Do these seem like the people that will take the chocolates away when they should? We all would prefer doctors that gave client satisfaction but if we had to make a choice wouldn't you rather have a doctor that cured more than anything else. Purpose before pleasure folks.
• "ensuring compliance" Compliance is a nice overused and abused buzzword these days. To put it in a job description is somewhat puzzling. Shouldn't compliance be implicit? Second-nature? Do you need to be told to be a law abiding citizen every day? Do you need to be told "thou shalt not steal" before you walk into the office? I guess you do if the place was a little lax in compliance in the first place or you hire people that don't come from a compliance-oriented industry.
• "all relevant policies & procedures" Notice how you don't need to comply with laws and regulations? Just our in-house policies and procedures. You're only as good as the policies and procedures you have. It's the stuff you do not have a policy or procedure in place for that should worry you. I find it funning they chose the word: "relevant". Were they expecting you to comply with irrelevant policies?
• "able to work independently with minimum supervision" That means your boss knows nothing or they're busy doing other things. It's your show. We all hate micro-managers. We love people that can work independently but where is the line where you can safely send out people that won't embarrass your organization or screw up? If you're someone with some 6-years experience, are you confident or know enough to work with minimum supervision? Who will you learn from? If you're the "client", does being with a AAA bank mean as much as you thought it would when your trust is in the hands of a marginal 30-something working under minimum supervision? Perhaps more accurately, the Trust Relationship Manager is likely working under the direct supervision of someone very senior............your Private Banker. The privilege of working independently should be earned not given.

This bank is probably not as senseless, cold-blooded money grabbers as I make them out to be but don't you just get a sense the business is being run by bankers who have lost sight of the woods for the (money) trees?

See for yourself:

Our client, a top tier Private Bank in Hong Kong, is now looking for a high calibre candidate to fill for the following post:

Trust Relationship Management

Post Date: 14 Dec 2009

Responsibilities

Service a portfolio of client relationships by:

• Reviewing client relationships and trust structures to identify new business opportunities
• Ensuring new and existing Trust cases are properly priced
• Ensuring client satisfaction
• Ensuring compliance with all relevant policies & procedures

Requirements

• Degree holder in law / accounting / business
• Fluent written and spoken English and Chinese (Mandarin) is a must
• Minimum 6 years of experience in client relationship management
• Traveling is required on needed basis
• Able to work independently with minimum supervision & details orientated

Succession Planning

While many trust professionals pride themselves on also being succession experts, helping families navigate through the options and obstacles that occur when there is a death of a family member, many are oblivious to their own organisation's succession plans.

As the year winds down, mark down February 13th 2010. That is Chinese New Year. And what falls around that date are holidays and payment of annual and discretionary bonuses are paid in Asia. Of course there are some firms that don't follow that pattern (and some are off by a month or two) but many do and you need to be cognizant. Revised compensation packages are usually done as this time too.

The bonuses in Asia seem to represent a lot more than what they are or should be. It has become an "obligatory right" rather than performance recognition tool. Everyone likes raises but they like bonuses even more. Personally I think you can get away with a good bonus and no raise but you are not given the same level of appreciativeness if you give a pay small rise with no bonus. People far too often rely on discretionary bonuses to pay tax demands, holiday vacations, etc.. You can say it may be short-sighted, but cash bonuses are king. Other incentives, including stock options, are often frowned upon. The first counter-argument you get is if I wanted UOB shares, I would have bought them myself. Rightly or wrongly, the bonus is an intricate part of the total pay package. Irrespective of the economic climate, bonuses are seen as a direct correlation of how much the firm values the employee. Yes, that is what a bonus should reflect, but it is taken to the extreme in Asia, especially among the Chinese. Little or no bonus and you've "dissed" the person. There is no satisfactory excuse for why I didn't get a good bonus. If you want to disenfranchise a person and/or want them to resign, a lack of bonus gets through louder and clearer and any more subtle approaches or performance evaluations. Once out, people compare and contrast bonuses and self-worth. People are much more willing to talk or brag or bitch about bonuses than actual salaries. You cannot hide that fact that so-and-so got that much and so-and-so got this much. This is not just your institution but across the industry. Everyone seems to know much bonuses were paid by the big players like HSBC and Citi. You need not match the big or frivolous players in bonuses but you need to ensure that you understand what the message you are sending with bonuses. Be prepared for the aftermath and morale changes.

Although I am biased, I think that a "token" bonus or pay rise needs to be paid to everyone you want to keep. To the industry outsider, we are not talking about Wall Street-type, multi-million dollar investment bank pay outs. Trust people are 2nd class citizens when it comes to Private Banking bonuses. We are talking about a few months salary for a team of 10-40 people which will not add up to even US$1 million. If you can't afford that, or can't foresee when you will recover that outlay then you are not in business, you are delaying foreclosure. I am not advocating an indiscriminate payout. I am merely saying that you will be sending a powerful message out when paying (or not paying) bonuses. Take the time to ensure it is the correct message you are sending. Now how you pay the bonus and to whom is the challenge.

Many that award bonuses feel bound by the company's bonus pools and think their hands are tied. You got to fight for what you believe in. Who you retain is as much a succession planning issue as who you bring in or who you let go.

There will those that feel insulted by the bonus they got or didn't get. They will leave. Admittedly, this is a problem that affects mainly low and middle ranks. It may happen instantly if they have something already lined up. The bonus has been the only thing keeping them around the past few months. It may take a while in this subdued market for others, but this bonus rift is usually irreparable. It's only a matter of time. Will you be prepared when they do? Do you have a succession plan? Although a touchy subject, you need to monitor them closely in the interim period. Some will do something spiteful. I can't recall where I first saw it, but I found a related/secondary article by Aaron Lim:http://www.pressreleasecirculation.com/content.asp?ID=152550&ArticleCategory=Technology

The same is happening at your competitors. Is there someone you covet? Are there needs you need to fill? This is an opportune time to recruit.

I suspect that all the large trust companies, particularly the bank-run ones, have some succession plan on paper for senior management. Some companies make it mandatory to have a plan on record. It goes like: if Joe goes, then Mary moves up. Good you have a plan, but is Mary really ready to take over? Too often this succession plan is made by Joe and Joe's boss. Joe's boss knows nothing so it's really Joe's opinion. Joe may have a vested interest too. Sometimes Joe is grooming a successor, giving tidbits and practical experiences and opportunities to do Joe's job. Other times, the deputy is just a glorified title and that person has as much preparation or ability to replace the incumbent as some guy walking down the street. The question you need to ask is do you have a good Mary or a bad Mary or just average Mary?

Most trust operations rely on continuity to some degree. Someone must know the rules and practices. It would be nice if they knew the client too. Unlike private banking where individual people skills are more important than organizational awareness, it is somewhat difficult to plug someone in from a different organization at senior levels. It takes maybe a year for senior people to truly understand your business, from systems, to work flows, to risk appetite, to working with interested parties (lawyers and bankers) to people above and below them when switching firms. You may have to partially carry them and be on guard for them screwing up

on some area. It takes a rather energetic person with initiative to successfully adapt to a new environment. This makes Mary seemingly the best option for succession. However, new blood can do many things for an organization. A new hire may bring new and better ways of doing things. New or different skill sets. They bring new energy and could shake up the status quo. My experience is that new senior hires need to be isolated and protected. Not everything new is for the better. Some in the organization will resist change. You need to be able to isolate and contain. Like a lab experiment, if it goes bad, then only a batch goes with it, not the entire lab. Unless you plan on "cleaning house", changes should be well thought out. A few years ago, one major Swiss bank trust company in Singapore hired a high profile trust head only to see this person bitch about everything and embarked on a mission to make this company a mirror of his old company. Needless to say, it was messy, acrimonious and ended in divorce. So they ended up promoting the long time deputy. The deputy wasn't ready and the company is now on it's fourth Head in as many years. Tailspin.

For smaller trust companies, there is no in-house successor. The key executive was the trust business. The fact is you may never fully replace the person that built that business. A few firms have seen their trust business close down as no one was able to replace the departing trust person. Here, the key to succession is not always tied to finding a replacement. How you are able to shuffle responsibilities and tasks among the people you have may go a long way in ensuring your trust business survives. You may be left wounded but not left for dead. Know what gaps you have to fill and do not fixate on finding the perfect replacement. Here, being market savvy helps. Know who's out there so you don't need uncover every rock when you do need to go find someone. Here's where having a succession-consciousness helps. CPAs are generally quite good act training up their successors as that was a typical CPA firm structure. A typical 8-10year career path where Partners trained the managers. Managers trained the Seniors. The Seniors trained the Juniors. People had to work they way up the ranks. They were forced to delegate. They were forced to work in teams. Only the cream rose to the top. How many organizations hire Juniors with a view that are going to Partners? How many actually have a career path designed? That type of organizational training is virtually non-existent in the trustee business. How much emphasis on grooming and training your next generation of managers has your organization made? For those that do run some training, it is usually the department head talking about a few subjects to the rest of the team. Silo training equal silo employees. Who has the big picture in the organization? Are you sure your department head is good/competent and getting the right message across? Are they molding good successors or just molding people into their own likeness?

Do a quick survey.....ask each of your employees if they feel they are ready to step into their boss' shoes. How many jobs in the organization do they think they can fill? The answer will tell you how much succession planning you need to do over the holidays. The answer will tell you how to allocate the bonus pool. The answer will tell you how to revise the pay packages. The answer will tell you how many new hires you will need.

Hate to see you get caught with your pants down when Chinese New Year comes around.

Independent Trustees....can you trust them?

Continuing with a break-down of the private trust industry (I guess this is the 4th of the series), aside from the bank trustees, there are independent (meaning non-bank owned) trustees peddling their services around the world. There are probably 3 to 4 times more independents than bank trustees in Asia.

While it may seem like comparing your local sole proprietor CPA to that of a big 4 CPA, boutique hotel versus some mega chain or Pizza Hut versus Joe's Pizzeria down the street, it is a little more complicated than that. The range in every comparable measure, from size, to AUM, to professionalism, that the independents offer is absolutely astounding. Joe's Pizzeria may be better run than Pizza Hut. The boutique hotel may have more rooms than the local Holiday Inn. The little CPA may have a $100million trust he's looking after.

There are essentially 3 types of independent trustees:

1. Bank cast offs
2. Professional firm cast offs
3. ex-staff start-ups

Bank cast offs. These trust companies used to part of major bank. By sale or other deal, they became non-bank owned. The most recent case is the Fortis-Intertrust. At one time a bank trustee, now owned by a private equity group. Orangefield was a former ING trust company. These tend to be larger players with a good infrastructure, systems and procedures and international or region capability. Not McDonald's but more like Mos Burger in Asia.

Professional firm cast offs. Many accounting and legal firms set up dedicated service companies to provide a myriad of services such as company incorporation and secretarial, trade/invoicing services, financing and of course trusteeships, so as not to get the partnership (and the liability of its partners) dirty. [Note - Although we often call them "firms", accountants and lawyers that actually practice their trade, are usually required to do so in a form of a partnership. These used to be unlimited liability arrangements as a means of keeping people on their toes. Now, most, if not all, are limited liability partnerships or LLPs. Perhaps fairly limiting their collective liability. Those that are not technically practicing law or public accounting may do so in a limited (liability) company. The easiest way to tell which is which is the name. Partnerships have partner's names in front of the LLP: Price, Waterhouse, Coopers. Clifford, Chance. Companies have "Inc" or "Ltd". Why is that distinction important? Licensed and practicing professionals are sanctioned by their local governing body (Bar Association, Inns of Courts, ICPA, etc.) and are required to carry professional indemnity insurance, have codes of conduct, etc.. Anyone can start a $2 company, run unsupervised, without any insurance and offer you services from accounting to legal research or trust advisory as long as it isn't technically restricted as professional services.] Due to the crack down on potential conflicts of interest, many of these firms are now "non-partner" owned. They just get a retired partner or manager to leave the practice and step up as the puppet owner to get around the rules but you didn't hear that from me. Although they do deal with the general public, most of their business is derived from the founding professional practice who is sure to make a friendly referral. These tend to be small local players but some like Walbrooks (a former Deloitte Touche Tohmatsu service company) can be quite international. Usually quite professional but sometimes lacking in big time capability. A related group are the Company Incorporation/Secretarial/Management firms. They were usually started by Chartered Secretaries, sometimes independent of the other pro firms so they were not technically cast offs. Some of these have grown very large like Amicorp or Portcullis and encompass many services but their bread and butter was CoSec work.

Ex-staff start ups. These can be former private bankers, asset managers, lawyers, accountants trustees or a combination of them, that start up their own firm. Trusts are usually an ancillary service. They tend to be niche oriented, offer fewer services but are "owner operated" and run hands-on, servicing former clients. Often just local with a handful of staff. While more common in Europe and Switzerland, we starting to see a few more of these "mini family offices" in Asia run by former high profile people. Expect more as the economics force more people out of the big companies.

Over time, these distinctions become less important and less clear. As with any industry, there are mergers and acquisitions, breakups and dissolutions. Tricor was an amalgamation of many CPA service companies' and trust businesses but now owned by a bank!

Some also become incestuous with one another. What many outsiders do not see are the brass plate operations: XYZ bank has a trust license in say the BVI but they have only one person there, a cubicle office. Their trustee operation is really sub-contracted to ABC independent trustees. Happens more often then you might think. Sometimes, due to conflicts with big corporate deals on the investment/corporate banking side, the bank trustees need to back out of the deal. Sometimes it's risk, sometimes its non-permissible assets. So they throw a bone to their favorite independent trustee to "front" the trust instead of letting a real competitor win the job. Some arrangements are known, like Abacus (a former Coopers & Lybrand trust company, the "Coopers" in PwC) linked up publicly with Merrill Lynch a few years ago to handle the stuff ML couldn't or wouldn't touch.

The first question asked is usually about can you trust them? Will they run off with my money? In general yes and no respectively. As long as where the trust is set up has trust laws and the trustee is duly licensed and insured then a safety nets exists. Sure there are thieves and cons but on paper you have the protection of the law. Obviously, the smaller the organization the less controls there are to prevent bad deeds in these companies. But some of biggest and most regulated organizations weren't successful in stopping Heinrich Keiber or Jerome Kerviel or the Carroll Foundation Charitable Trust from their naughty behavior either.

Aren't they too small? Some independent trustee companies can rival the international bank trustees in terms of manpower and geographic coverage. In fact, some are bigger. Some are still 3-man operations. Bear in mind that some independents have more AUM, than many local or even regional bank trustees. Some of the largest trust cases have booked with the independents, but you are unlikely to hear about it. Or unless it blows up like the Esteem/Grupo Torras affair with Abacus were several hundred million trusts. Who knows how much is in the trusts billionaire Eric Hotong set up with Hillhead Trustee - a former Arthur Young (the "Young" in Ernst & Young), trust company? As I mentioned above, some of the big banks often use the independents for sub-contracting jobs so who are you to judge? Ask to visit the office and count the number of trust people. Although it varies according to the to complexity of the cases, 1 trust person rarely looks after more than 50 cases. Yes, there are the really simple cases where 1 person can look after 100 trusts, but there are cases where 1 person looks after only 1 or 2 cases. If your trust is going to be part of your empire that is currently using 2 accountants, 1 tax lawyer and 3 administrative staff, you better make sure your trustee has similar manpower to devote to you.

Now as far as the question of whether they give competent advice, that depends on the individuals. Like the big banks, these trustees may have a great brain trust but if the people in your branch aren't good, where does that leave you? Some of the best and brightest tax/legal professionals work in the independents but so do some of the worst. If you have the ear of a former tax & trust senior partner of Big4 CPA or magic circle firm, can you do worse? You can if you get a former tax associate who couldn't land a job elsewhere in the city or was lured more by tax-free salary, tropical beaches and maitai's than career growth. I haven't checked recently but in the early days of the internet, there were some trust companies that actually tried to sell trusts on-line! Fill out the form and charge $50 your credit card and voilà, you supposedly have a trust! God help those that went this route.

Will they go bust? These are people in business and tend to want to stay in business. But everywhere businesses go bust. Who cares I say you? If a proper trust was created, the laws have successor trustee provisions in place. There are almost no fly-by-night operations as cost of getting trust licenses, CoSec/Management licenses, etc is not exactly easy or undertaken lightly.

So what good are they? These players tend to have strong specific skills and expertise. The ones started by tax experts, tend to be tax experts. The ones started by asset managers then to be good asset managers. The smaller ones tend not to do too much and do only things that they are good at or have a niche in. It's like a pie maker. All he bakes are pies. No bread, no cakes, just pies. Practice does make perfect. The larger (or more aggressive) the firm, the more likely they tried to be everything to everyone, meaning when you have a lot of something, you really have a lot of nothing. The major problem with the independents are they are often stretched too thin. The people they have are often more generalists than specialists. They need to put a lot of items on the menu and of course, they can't be good at doing all of them. Unfortunately, some will be incompetent at some also. These players also offer services from top to bottom: company management, trade services, accounting, investment, etc.. Virtually what every non-cash trust needs. They fill the gaps that banks services won't or can't provide. Whereas many banks are shying away from non-bankable assets, most of the independents are ready and willing to do so. At the extreme, these are some independents of the only major players when it comes to non-conventional assets like planes, ships and artwork. Those with strong business acumen, like the CPAs, make better arguably trustees as they are better equipped to manage assets like operating companies. They are more familiar with commercial deals like leveraging, financing, transfer pricing, IPOs, etc. as that what they used to do (or do for their non-trust clients). Sure, bankers know a few things about these things but remember they were sitting on one side of the table and the finance accountants/lawyers were sitting on the other side.

Like cockroaches (in a complementary way), some of the global players are in every inhabitable place in the world. That can be a plus when you need a structure with moving parts in white listed, grey listed and blacklisted jurisdictions. How well their global networks work depend on the organisation. Anyone who has worked in any global organisation can tell you tales of bitter turf wars, non-cooperation and under-cutting. These issues are not uncommon among the global independents. Again, beware of sub-contractors.

Pricing. Without the massive overhead of their banking and pro firm peers, many of these firms' services are less expensive. Without the obscene bank-like revenues, you also end up with lower paid staff. Usually only those without options choose to work at a low pay, low profile player as opposed to a brand name firm. (Not always as the banking and pro firm industry does spit out many good people for no reason other than politics, appearance, age or some other rather irrelevant factor.) There is a some drop off in talent and skill. So you can't always have your cake and eat it too. There is usually a huge drop off in professional development of staff. For some the learning stops as client work is paramount and you end up being outdated very quickly. There simply isn't time or money for frivolous things like training.

Service. Will you get personalized and detailed service? Likely. Sort of like the TV series Cheers....everybody knows your name....well it can be like that. They know you case and details by heart. It shouldn't take 4 "please hold the line" answers before they can track down who's looking after your case. Senior staff turnover is rarely as problematic as it is with the major banks or pro firms. Their senior employees tend to have been with the firm for usually long periods. How many bank RMs and trust officers have been assigned to your case at the big bank? Probably a new one every year. Heck, your RM at the independent could be the owner/director himself. How many Head of Trusts at Citi or Merrill Lynch have you dealt with? Unless you or your family is on a Forbes richest list, probably never. However, turnover at intermediate and junior levels is usually a chronic problem. They often require cheap, multi-talented people who are able to hit the ground running which is hard to find. They often are poor judges of talent and can't afford to hire/retain the best.

Are they above board? Yes and no. Sure the industry is rampant with allegations of assisting tax evasion and money laundering but when you work vice in the bad neighborhoods, there are bound to be some dirty cops. What say you about the shenanigans at UBS and their US marketing efforts? What about KPMG and their tax shelters? Sure, controls and KYC isn't as important as landing the next meal ticket, but hey, Chan Shui Bian (former Taiwan president) allegedly laundered money with some of the biggest banks. So much for their KYC and PEP screens.

Are they good trustees? Yes and no. For some, it's not their core business but just another means to make money. So they make the same mistakes and fall into the same traps as novices do. Some just go through the motions, "window dressing trustees" I call them. Some are too driven by meeting client demands that they forget their fiduciary duties, afraid to bite the hand that feeds them. Being too rigid like the big banks can be takes away from the relationship. Being too flexible may not be in everyone's best interest. Some are the most professional trustees you will ever find.

Are they good at investments? Although some independents have their "investment team" at your disposal or are themselves former bankers/asset managers, you typically have the bankable trust assets placed with a bank. Thought you might get away with rigorous KYC didn't you? The trustee simply opens an account at whatever institution, just like you would. Get the same advice you would. Be offered the same products you would. The major difference is that a trust account, in theory, should be much more conservative and have specific investment criteria than an individual's account. There's no point in setting a up trust to gamble. Remember losing less is a gain.

Bottom line, the independents can have a lot to offer. They can be great, understanding and professional trustees. They can offer a rounder/complete picture to your wealth planning than most bank trustees. The biggest hurdle to finding the good ones. It takes some skilled due diligence. Merrill Lynch vetted over 140 independent trust companies before settling on Abacus. It takes a certain degree of trust, the kind you may be giving the big bank trustees far too easily.

Next up, the financial providers.