On June 26th 2019, the Global Elite came together at The Samphire restaurant, St Helier, Jersey, to debate a long standing topic in the private client community: Generational change and subsequent conflicts of interest for the advisor.

The conversation, led by Graeme Kleiner of Charles Russell Speechlys, escalated from understanding the issues surrounding generational change, to why conflicts of interest arise, to assessing what tools you need in order to manage such conflicts.

What are the main issues surrounding families going through generational change?

  • There is too great a distance from the person who earned the money and with who “values” it, to the later generation who “expects” it. Typically, the conflict is a case of pride over value;
  • The “New Generation” are increasingly at odds with the older generations, declining investment decisions deemed “unethical;” and
  • Increased political pressure, particularly in Europe, is causing family disharmony in 2019.

 

Why do conflicts of interest typically arise when advising families undergoing generational change?

  • Too much importance is often placed on the heads of the family. Advisors need to ask themselves: Are the heads entitled to speak for the whole family?
  • There is not enough clarity on “who” should be represented. There is an unreasonable expectation of many private client lawyers to cling on to relationships. Commercially this can go very well, but also very poorly if there is a conflict in fiduciary roles;
  • Not enough time and care is taken when formally assigning a protector, nor is constant review encouraged enough, leading to an increase in litigation; and
  • From the trustee perspective, conflict of interest is very misunderstood, and the scenarios are seemingly endless (several of these were discussed at length).

 

What tools do private client lawyers need to manage conflicts of interest?

  • The question is not: “How can we manage the conflict and keep the family together?” but “How do I manage the family's advice in an orderly fashion?” After all, it is not the private client's responsibility to keep the family together;
  • It is impossible to predict and pre-empt conflict. Notably, there has been an increased trend for enhanced secrecy in dealing with conflicts of interest, particularly in Guernsey's arbitration proceedings;
  • If acting for multiple parties, you need to be prepared to agree upfront as to how to manage a conflict and only get involved if everyone is aligned;
  • Family charters may be informal, but lawyers should seek to formalise the charter (if possible) in case of conflict;
  • Beneficiaries should be defined in greater detail, not just broad classes;
  • The same issues with families will occur in foundations as with trusts; and
  • Private client advisors need to work harder to access the Next Generation and not solely focus on the patriarch/ matriarch. Some firms have been looking after families for multiple generations, so it is possible. On the other hand, advisors need to accept that the Next Generation may need their own lawyers if conflict is likely.

 

In summary, the Global Elite agreed that conflict cannot be avoided, even if the family is currently harmonious. Planning ahead is vital and the need to consistently review such plans are crucial – after all, short term gain won't help the long term “pain” of conflict. Due to the increase in globalisation, the shift in ethical dynamics for the Next Generation, conflicts will continue to escalate, but increased privacy surrounding such conflicts are an option (particularly in Guernsey). Choose to be a private client advisor who does not “cling on”, but understands that whilst advising the whole family is an option, separate lawyers may be needed for changing generations who have different goals.

Global Elite would like to thank IQ-EQ, in particular, Steve Sokic, for their partnership during the Channel Island discussions.