A matter of trust: the role of the fiduciary professional
This article first appeared in the 2nd quarter 2018 edition of Personal Finance magazine.
It’s almost certain that, at some stage in your life, you, or your dependants, will have dealings with a fiduciary practitioner. Consider the following:
- You should, if you have not already done so, draw up a will. Although anyone over the age of 16 can draw up a will themselves, it is recommended that this is done with the assistance of someone who is knowledgeable about the legal and tax implications.
- An important aspect of your will is the appointment of an executor, who will step into your shoes when you die and wind up your financial affairs and distribute your assets in accordance with your will. Although it is common for a family member to be nominated as an executor, this may not be the best course of action. An executor has to follow a process laid out in the Administration of Estates Act and must be able to demonstrate to the Master of the High Court that he or she has complied with the legal requirements.
- If you have dependants, you should have an estate plan drawn up to protect and preserve your assets from one generation to the next. Your estate plan needs to take a number of factors into account, including: ensuring there is sufficient liquidity in your estate to cover your debts, estate duty, taxes, cash bequests and funeral expenses; providing for your spouse and minor children, which may require setting up a testamentary trust; and succession planning if you are the owner or co-owner of a business.
- If you belong to a retirement fund and have minor children, it is likely that the trustees of the fund will pay any benefit due to a minor child into a beneficiary fund, which will be administered by its own trustees.
The term “fiduciary” indicates that someone has undertaken to act for and on behalf of another in a particular matter that gives rise to a relationship of trust and confidence. The word derives from the Latin “fiducia”, meaning “trust”, says Louis van Vuren, the chief executive of the Fiduciary Institute of Southern Africa (FISA).
A fiduciary could be an individual or company holding assets for another party, often with the legal authority and duty to make decisions regarding financial matters on behalf of the other party. The fiduciary has a duty to ensure that he or she acts in their beneficiaries’ interests, rather than serving their own interests, says Van Vuren. In South Africa, the term is most commonly used to refer to an industry in which the duty of care and trust is paramount, and specifically in the area of estate planning, drafting wills, and administering trusts, deceased estates and beneficiary funds, he says.
FISA is a non-profit organisation that represents fiduciary practitioners and sets high minimum standards for the industry. FISA can trace its origins to 1932, when the Association of Trust Companies (ATC) was formed to look after the common interests of trust companies and boards of executors. By 1963, there were about 50 member companies in South Africa. However, with rationalisation and economies of scale, by the time the ATC celebrated its 50th birthday, membership had shrunk drastically and continued to do so. The association therefore decided to reform itself as body representing individuals who are professionally active in the fiduciary field, rather than be restricted to companies only. The ATC was accordingly reconstituted as FISA in June 2008. In 2012, the FISA constitution was amended to cater for individual membership only.
Van Vuren says there are about 2 000 fiduciary practitioners in South Africa, of whom 750 belong to FISA. Members come from trust companies, and the legal, accounting and financial planning professions.
He says it is in your best interests to use a fiduciary practitioner who belongs to FISA to attend to matters such as drafting your will or setting up a trust.
“Fiduciary services are delivered in a very complex legal and practical framework, and having legal, financial planning or accounting qualifications and experience do not necessarily mean that a person is properly equipped to operate in this area. By using a FISA member, you are assured of a high standard of fiduciary care and competence.”
He says FISA does this by:
- Holding members accountable to a code ethics, which is based on the principles of integrity and honesty. It also requires members to be honest, objective, to think and act independently, deal with conflicts of interest, be knowledgeable and competent, maintain confidentiality, and be financially stable.
- Having a disciplinary code and committee to deal with malpractice by a member.
- Requiring members to keep their knowledge up to date by complying with a continuing professional development (CPD) programme.
Van Vuren says that FISA is by far the largest body organising and representing fiduciary professionals in South Africa. “FISA is respected and listened to by the authorities. We play an ongoing, active role in shaping legislation and subordinate regulation.”
He says FISA participated in drafting the regulations under the Financial Intelligence Centre Act (Fica) and the process to have the regulations under the Administration of Estates Act improved. On the basis of a written submission, the Davis Tax Committee in 2017 invited FISA to make a further oral submission on the proposed wealth tax.
FISA regularly liaises with the South African Revenue Service (Sars) to streamline processes with regard to deceased estate and trust tax compliance. It also liaises with the Master’s Offices countrywide to smooth processes and highlight service issues.
“FISA is often the first port of call for industry commentators and the media to canvass opinion on topical issues. FISA’s annual conference has become known as the event where experts, both academic and practitioners, gather to discuss industry issues and advance ideas.”
FISA’s objectives are designed to support members. They are:
- To promote the fiduciary profession;
- To promote the interests of clients of fiduciary professionals through the setting and enforcement of professional standards of conduct for fiduciary professionals;
- To provide a framework within which members can achieve the qualifications and competence to practise as fiduciary professionals;
- To ensure that members maintain the highest professional and ethical standards in the pursuance of their profession; and
- To promote the interests of members in fulfilling their professional aspirations.
Van Vuren says FISA believes that the standards of fiduciary practice in South Africa need to be raised and the best way to achieve this is by professionalising the industry.
“Just to take one example, think of the countless incidents of lay-person executors causing loss to innocent heirs. If a professional executor who is a FISA member is appointed to work together with a family member, this can be avoided. We cannot say FISA members will never do wrong things, but we can say that we have a disciplinary structure to deal with that.”
As part of its efforts to professionalise the industry, in 2011 FISA registered the designation of Fiduciary Practitioner of South Africa® (FPSA®). From this year, anyone who wants to apply for the FPSA designation must first complete the Advanced Diploma in Estate and Trust Administration offered by the School of Financial Law at the University of the Free State.
By using someone with the FPSA designation, you will know that you are dealing with a person who has demonstrated:
- Academic knowledge by obtaining a formal qualification and the required level of appropriate experience;
- The ability to apply that knowledge;
- A willingness to be bound by the ethical standards of a profession; and
- A commitment to maintain levels of technical knowledge through a CPD programme.
The aim is for the FPSA designation to achieve the same status among fiduciary practitioners as the Certified Financial Planner designation does among financial advisers.
“It will take some years for this to happen, but, from what we are seeing, the FPSA designation is fast becoming a recognised mark of excellent professional knowledge and standards among practitioners and the public alike,” Van Vuren says.
However, he says, FISA does not believe that more regulation is the way to raise standards among fiduciary practitioners.
“More regulation will be counter-productive, and the compliance cost could force many practitioners out of the industry. The industry is already highly regulated in that the administration processes involved in deceased estates and trusts are controlled by legislation, and common and case law. The Master of the High Court appoints and regulates the activities of executors under the Administration of Estates Act and authorises trustees to act under the Trust Property Control Act. The Master also has far-reaching regulatory functions to remove and replace executors and hold trustees to account. Executors and trustees are also required to comply with Sars requirements with respect to tax, and trustees are subject to Fica.”
TRUST COMPANIES ORIGINATED IN SOUTH AFRICA
Few people know that trust companies originated in the Cape about 180 years ago, says David Knott, an expert in estates and wills at Private Client Trust, a division of Private Client Holdings, and a FISA member and FPSA.
After the Cape was settled by the Dutch in 1652, there was a relatively high death rate among the settlers as a result of the treacherous sea journey between Europe and the East, skirmishes with the indigenous people, attacks from wild animals, and the harsh living conditions.
“It soon became evident that someone needed to look after the affairs of the children of the deceased settlers – those minors inheriting from deceased parents, or where heirs were unknown or absent from the Cape. The Board of Orphan Masters (the Orphan Chamber) was established in about 1673 to fulfil this need and operated under Dutch law.
“When the Cape fell to the British, the laws tended to follow English practice as opposed to Dutch. The Dutch marital regime was that of in community of property, with all control vesting in the husband, while the wife’s power was limited to that of a minor. English law was the opposite, with each spouse retaining their separate property and full contractual power. The new government therefore saw little reason for the existence of the Orphan Chamber, and King William IV proclaimed on March 4, 1832 that the Orphan Chamber be abolished.”
Minors, prodigals and absent beneficiaries did not disappear with the demise of the Orphan Chamber, and so, on April 22, 1834, during the governorship of Lord Charles Somerset, the first trust company in the world was established.
“Named the South African Association for the Administration and Settlement of Estates, its functions almost mirrored that of the old Orphan Chamber. The company drafted wills, administered estates and looked after trusts for those unable to attend to their own affairs,” says Knott.
Gradually, the concept of a corporate entity attending to fiduciary matters spread across the Cape Colony before migrating to Australia, New Zealand, Canada and the United States.