In the last two years, equity wealth held in private hands has declined in the US by some $7trn , while the number of HNW individuals — defined as those with net investable assets of $1m or more — has declined by half a million.
While overall private wealth has declined, the assets that remain and the hands in which they are held are set to become more geographically diverse. While the majority of HNW individuals are still based in the most economically active areas, a significant number are now based in Asia, Latin America and the Middle East, and forecasts suggest that their numbers in these areas are set to grow.
While GDP growth in Western Europe and North America is expected to remain relatively sluggish, major economic expansion is expected in the developing world, particularly in the key Asian economies of India and China, and in smaller economies such as Azerbaijan — currently the fastest-growing economy in the world — Algeria, Ukraine and Vietnam.
Meanwhile, an increasing number of private clients are taking on non-domiciled status, increasing the demand for a multinational service from their professional advisers.
And it is not only the increased global mobility of their clients that is presenting private client lawyers with new challenges. Increased life expectancy means many wealthy parents are now seeking to hand down portions of their wealth to their children before they die.
The rise in divorce rates in the Western world has created a trend for more dysfunctional families, with a corresponding impact on questions of inheritance and succession. Meanwhile, advancements in biotechnology have raised new issues relating to developments such as posthumous conception and cryogenics, resulting in the birth of whole new areas of law.
A survey of private clients suggests that most wealth management advisers have risen to the challenge, with the majority of HNW individuals surveyed awarding their advisers seven to eight out of 10 in terms of overall service. But while clients express overall satisfaction with the technical and business advisory skills of their advisers, clients are less happy with lawyers’ ‘softer’ skills — their responsiveness to client needs, their accessibility and their anticipation of upcoming issues.
Traditionally, lawyers handling the affairs of private clients operated effectively from both large and small firms, depending on the clients they were targeting and the skills they had to offer. Working out of a larger firm offered significant advantages: the cross-selling of services between business and personal advisers within the same firm, for example, or the backing up of wealth management skills with additional resources in larger property or tax practices. However, the cross-selling of services has become less pertinent as the nature of the clients involved has changed. Large and wealthy families are now rarely at the head of major corporations, meaning fewer corporate advisers are likely to come across the highest net worth individuals in the course of their business.
At the same time, the increased complexity of corporate and private client law has meant that clients are less likely to be receptive to the cross-selling of services.
Life in larger business law firms is also proving less than satisfactory from the perspective of the lawyers themselves. Many private client lawyers complain that the lesser financial clout their work commands with the larger firms, compared to major transactional work, diminishes their status within the larger firms.
Smaller firms will generally struggle to match the recently-inflated salaries offered by the leading transactional firms, making it difficult to attract the best recruits at the bottom end of their practice. They will also lack the supporting expertise that can be offered by larger firms. “It is essential for the private client attorney to be able to draw on a multitude of skills,” Whitaker says.
“He cannot be expected to be an expert on everything, so there is a need for him to have access to other sources of advice on income tax, real estate, even corporate issues.”
In a world in which private clients have become more geographically diverse than ever before, niche firms will struggle to offer the global reach necessary to advise clients whose interests span several countries, or even continents.
The need to network, to build formal and informal relationships, ever more vital for specialist private client firms.
These relationships are not limited to other law firms. The increasingly sophisticated demands of private clients have led to the development of private client lawyers as hommes d’affaires, with the capacity to provide an integrated business service to their clients. This in turn has led to greatly increased collaboration between the lawyer and other wealth management professionals seeking to offer a more comprehensive service.
“Clients recognise that wealth management is getting more complex,” Treyz says. “They are looking for more holistic advice, a more integrated delivery. One way to achieve that is to put all your advisers under one roof [in the form of a multi-disciplinary partnership (MDP)], but more often we rely on virtual teams of accountants, lawyers and financial institutions responsible to our clients.”
While ‘virtual teams’ undoubtedly have professionals who can offer a much broader service to their clients, lawyers have voiced concern over the competition they now face in the provision of estate planning services, particularly from accountants and trust companies.
Some of these organisations have trumpeted their breadth of expertise as representing the realisation of that elusive ‘one-stop shop’ dream. But lawyers are keen to emphasise the value of their professional expertise. “Clients like the balance they get from having an adviser who can see all perspectives but who can still offer an independent point of view,” says Withers partner John Riches.
But the biggest advantage that lawyers have over accountants and trust companies has come under unprecedented fire in the last two years. Legal professional privilege is being attacked by regulators who are determined to crack down on global crime. The passage of the US’ Sarbanes-Oxley Act, which increased demands on lawyers to report their clients’ criminal activities to the authorities, represented a shift in the perceived responsibility of lawyers from protectors of their clients’ interests to protectors of the interests of society as a whole. This change in emphasis has been reinforced by a raft of new legislation aimed at combating crime, under which lawyers are expected to put the interests of law enforcement above those of their clients.
In the UK, the Proceeds of Crime Act makes lawyers responsible for reporting to the authorities all criminal activity that they become aware of during the execution of their professional duties, effectively removing the cushion of privilege.
In many jurisdictions, the position of lawyers is unclear. In Canada, section 5 of its Proceeds of Crime Act, which dealt with legal professional privilege, was effectively suspended by the courts in November 2001, after a judge concluded the section constituted “an unprecedented intrusion into the solicitor-client relationship”.
The implementation of the UK’s Proceeds of Crime Act is also proving controversial. As yet, there is little case law available to guide UK lawyers, and few are unequivocally confident as to their understanding of what the Act will actually mean in practice. What is clear, however, is that lawyers’ uniquely privileged position in the ranks of professional advisers is now in danger of being irreparably eroded.