THE HOME OF THE PROFESSIONAL ADVISER Supporting Circumstantial Wealth Navigating the challenges of advising 3 rd party investors For Adviser Use Only – Not approved for use with clients

Agenda Circumstantial wealth creation What additional value can adviser add –3 rd party –Professional introducers? –Vulnerable beneficiaries 3rd party investor types –Challenges of assessing investment risk for 3 rd parties –Challenges of investment suitability for trusts Impact on your Practice –Reactive? Existing clients? –Proactive approach to professional introducers Help and support from Prudential

Circumstantial Wealth / 3 rd Party Investors Critical illness Court awards Insurance payments Trustees –Generally –Vulnerable Beneficiaries Powers of Attorney Court of Protection Deputy

Trusts for Vulnerable Beneficiaries Vulnerable Beneficiary defined: –person who is mentally or physically disabled, or –relevant minor (under 18) and has lost a parent Qualifying Trust if assets capable of use only for disabled person –even if no interest-in-possession, then no income can be applied for others Special tax treatment claimed by Vulnerable Person Election (VPE1) –Sent to HMRC by Trustees Trustees effectively taxed at vulnerable beneficiary’s rate –Income Tax –Capital Gains Tax Inheritance Tax –transfer in to qualifying Trust is a PET, not a CLT –transfer out to vulnerable beneficiary, no IHT –no periodic charges –assets part of beneficiary’s estate on death

Total wealth Hypothetical example purely for illustration purposes

Total wealth Hypothetical example purely for illustration purposes

Total wealth Hypothetical example purely for illustration purposes

Total wealth

Hypothetical example purely for illustration purposes Total wealth interrupted

Trustee Responsibilities vs Attorney / Deputy responsibilities Trustees are expected to provide a financial return (…and invest) Trustees are expected not to take undue risk with assets Trustees should seek ‘the best return’ regardless of personal opinion Trustees have the power of delegation Attorney / Deputy do not own assets but invest on behalf of owner Adviser support? Understand nature of 3 rd party investor Add value by………………KYC

Objectives What does the 3rd party investor need to achieve? Income and Growth? Capital Growth? Protection? Critical yield? Income and Growth? Capital Growth? Protection? Critical yield? What if? Stress testing Implications What if? Stress testing Implications Divergence of risk

Challenges of investment suitability for 3 rd parties How do we determine the end client? –Individual investor Adviser Client Compliant Investment Process Aims/Discussions Attitude to risk Capacity for loss Term Compliant Investment Process Aims/Discussions Attitude to risk Capacity for loss Term

Compliant Investment Process Firms should ensure: they have a robust process for assessing the risk a customer is willing and able to take – including appropriately interpreting customer responses to questions and not attributing inappropriate weight… tools, where used, are fit for purpose and any limitations recognised and mitigated; they have a robust and flexible process for ensuring investment selections are suitable given all aspects of a customer’s investment objectives and financial situation… Source: FSA, March 2011 Assessing suitability: Establishing the risk a customer is willing & able to take and making a suitable investment selection.

Risk Profiling Risk Descriptors Other factors (e.g. capacity for loss) Asset allocation Investment selection The FCA’s “Vertical Issues”

Risk is not just a number ReturnVolatility Option A-1.03%16.68% Option B13.49%6.16% Annualised ratios from 1 Jul 2011 to 1 Jul Rebased in Pounds Sterling Source: FE Analytics Which would you pick?

Risk is not just a number Annualised ratios from 1 Jul 2012 to 1 Jul Rebased in Pounds Sterling ReturnVolatility Option AFTSE All Share18.00%9.20% Option BFTSE British Government All Stocks-4.69%4.99% Source: FE Analytics

Challenges of investment suitability for 3 rd parties How do we determine the end client? –Individual investor Adviser Client Compliant Investment Process Aims/Discussions Attitude to risk Capacity for loss Term Compliant Investment Process Aims/Discussions Attitude to risk Capacity for loss Term

Challenges of investment suitability for 3 rd parties How do we determine the end client? –3 rd party investor Adviser Compliant Investment Process Aims/Discussions Attitude to risk Capacity for loss Term Compliant Investment Process Aims/Discussions Attitude to risk Capacity for loss Term Trustee / Deputy / Attorney Beneficiary

Thematic Review – FCA Key Findings Potential problem Cash Flow Modelling Starting income £ 14,051 Source: Prudential Retirement Modeller

Driving expected returns How much risk are they prepared to take? –Expectation of return = 5.6% How much risk can they afford to take? –Expectation of return = 6.2% How much risk do they need to take? –Expectation of return = 6.5% This is an example to illustrate balancing risk.

Is there value in smoothing? Price Bid-Bid line chart over 180 months (from 09 Jul 1999 to 09 Jul 2014), of FTSE 100 Index from UK ABI Insurance universe. Rebased in Pounds Sterling Data provided by FE. Care has been taken to ensure that the information is correct but it neither warrants, represents nor guarantees the contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Financial Express Limited Registration number: Registered office: 3rd Floor, Hollywood House, Church Street East, Woking, GU21 6HJ. Telephone Website:

DIY – retain all investment responsibility and construct own portfolios Outsource some process using “model portfolios” – investment responsibility retained, but use of 3 rd party fund selection Outsource all of the process to bespoke or managed DFM service Outsource some process using Multi-Manager/Multi- Asset - retain fund selection, but use 3 rd party research What is your investment strategy? Asset allocation Fund selection Less More Less More

Publications

Online support

HANDSET QUESTION How do you handle Circumstantial Wealth in your business model? 1.On an ad hoc basis with clients if the situation arises 2.I offer proactive support to established professional connections 3.I would like to expand my model to provide support to professional connections

Summary Life changing events create the need for valued advice support Opportunity to review the support from your practice: - to existing clients - to existing professional connections - to potential professional connections

Important information This presentation contains some forward thinking statements which should not be taken as fact. Information given is based on our current understanding, as at July 2014, of current taxation, legislation and HMRC practice, all of which are liable to change. No reproduction, copy, transmission or amendment of this presentation maybe made without the written permission from Prudential. “Prudential" is a trading name of The Prudential Assurance Company Limited, of Prudential Annuities Limited and of Prudential Retirement Income Limited. This name is also used by other companies within the Prudential Group, which between them provide a range of financial products including life assurance, pensions, savings and investment products. The Prudential Assurance Company Limited and Prudential Annuities Limited are registered in England and Wales. Registered Office at Laurence Pountney Hill, London, EC4R 0HH. Registered numbers and respectively. Prudential Retirement Income Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SCO Authorised and regulated by the Financial Conduct Authority.