Richard McGregor
Imagine if every penny your client would ever have was laid out during your first meeting with them.
Now imagine that client is only 12 or 13 years old. They may also have unpredictable expenses that could occur at any time. For court of protection wealth managers this is not a hypothetical scenario, but a daily occurrence.
Richard McGregor, head of court of protection and personal injury at Brown Shipley spoke to thewealthnet to explain how cash flow modelling and wealth planning for his clients differs from planning for more traditional wealth management clients.
The main challenges
The key challenge is that clients will often not be able to generate any more income throughout their lives, which clearly adds a level of difficulty to financial planning.
There is also the challenge posed by inflation and uncertainty surrounding how care, housing and other costs will increase over long periods of time – some clients could live 60 years or more after the damages award is made.
While there are many challenges, Mr McGregor says it comes down to “combating long term inflation, providing the income clients require to cover their needs, while minimising risk.”
Where do you start?
“The principle of financial planning [with court of protection clients] is the same. What you are doing is firstly looking to understand a person’s financial position and what is feasible for them over the long term.
“Then you construct a strategy around that analysis that will help them meet all their long-term objectives,” Mr McGregor explained.
Minimising risk plays a part in the strategy too, but Mr McGregor was keen to highlight that it is a misconception that all court of protection clients are “super low risk”.
The idea is to take on the least amount of risk necessary to get them through their life. A little risk is sometimes necessary to generate the returns required.
The position is then assessed every year. This takes into account any large expenses, like a new wheelchair, and allows the wealth manager and client to make any necessary changes to the portfolio to adapt to changing circumstances.
“We can’t see into the future,” so these reviews are crucial, said Mr McGregor.
What if the money does not last?
The pay-out clients receive is calculated to run out when they die. This is very different to traditional wealth management, where much focus is placed on inheritance planning.
But, Mr McGregor warned, “the money often runs out”.
This is partially due to the way awards are made. Often the defence insurance will argue for contributory negligence – if it can be ascertained that the victim was partially responsible for the accident. For example, if you were not wearing a seatbelt and were involved in a car accident.
In this case, the victim would only be awarded a portion of the total money required to last their lifetime, as calculated by the courts.
The legal community “do a fantastic job” at trying to calculate the amount required. But it’s impossible for them to get it spot on as no one knows what will happen in the future.
“Mathematically, that means that the person is practically guaranteed to not have enough money to get through their life. That is a challenge that lawyers have to deal with and that we have to work with. We have to do our best to budget in the right way,” Mr McGregor said.
“This is where financial planning is so crucial, and must be looked at each year, so we can try and manage that position as effectively as we can.”
If a client does run out of money, luckily there is state support available in the UK.
What if the client is not on board?
There is also a risk that the client will not play ball.
All court of protection clients have a professional deputy and it is important to make sure they understand their responsibilities and objectives in this role. But, following the 2005 Mental Capacity Act, even if a person lacks capacity, they must be involved in the decision-making process as much as possible.
There is also the issue of children who were injured but have capacity. At 18 they gain total control of their finances. This would be a burden for anyone, let alone someone whose money has to last their whole life.
The important thing is to work with families to help them understand the process and explain the objectives. Being a specialist team, Brown Shipley has significant experience doing this, which many solicitors find reassuring when recommending a wealth manager to clients, Mr McGregor explained.
However, despite copious amounts of education and support, some will not want to follow the plan or will spend too much too soon, and there is nothing wealth managers can do about it.
“The law doesn’t prevent people from making unwise financial decisions,” Mr McGregor acknowledged.
Adapt meetings
One challenge when dealing with court of protection clients, many of whom have brain injuries, is working out “how to explain relatively complex things in simple terms.”
This is further complicated by clients suddenly being faced with an amount of money “that’s not comprehendible to most”. The key is to help clients understand what this means and what should be done, without using patronising, threatening or uncomfortable language, Mr McGregor explained.
He also adapts the whole structure of meetings to optimise them for clients. This can include visual aids, regular breaks and simple graphs and is tailored specifically to each client’s needs.
“This has nothing to do with your ability to be a great investment manager or not, but it is something that [makes lawyers and clients] want to work with us as specialists, because they feel we add value in other ways.”
