This may sound like the first line of a joke but in fact it highlights a very real question for the fiduciary sector about how to distinguish between private client services, corporate structures and funds and whether, in fact, it makes any sense to even try to do so.

They may be “handy” labels within which to segment and report business and they are regularly used to differentiate between the quality of earnings in valuing trust and company service providers (“TCSPs”), but the reality is that the lines between products and services have become increasingly blurred as clients use ever more diverse and sophisticated structures to invest their wealth across asset types and geographies.

Considering the fund question first, there is a fine line between a “club deal” and a “private fund” and the line becomes ever finer as the offshore jurisdictions compete to make it easier and cheaper to launch fund structures that are intended for a restricted and sophisticated market. Jersey has the Jersey Private Fund regime (or “JPF” which incidentally replaced COBO-only funds, private placement funds and very private funds), Guernsey has the Private Investment Fund (“PIF”) while the Isle of Man offers Exempt Schemes. Confused? You will be.

These structures do have some things in common, however. All the relevant regulations limit investors to a maximum of 50, although there are differences in how and how widely funds can be marketed, and require a regulated local manager or service provider. Of course, there is a risk-based logic to these regimes because the rules around distribution limit the danger of losses to “widows and orphans” while there is always a regulated party in the jurisdiction to hold responsible in the event of a loss or error. If you want to operate with fewer “constraints”, you could consider a Private Fund in the BVI (which is limited to 50 investors but does not need any local functionaries) or a Special Limited Partnership in Luxembourg which has no limit on investors and does not need a regulated manager if it is a closed ended fund managing less than €500m (subject to other conditions).

Alongside these funds, however, TCSPs are managing unregulated entities that use feeder structures to pool investments for a common purpose, often acquiring residential or commercial property (but also other assets). They share many characteristics with private funds including number and sophistication of investors, structures to limit liability or risk (e.g. cell companies), restrictions on marketing and administration by a regulated business but these club deals are typically characterised as Corporate business for reporting purposes.

Extending the chain of ownership further out from the Special Purpose Vehicles that are used to facilitate the club deal structure, shows why the difficulty over definition does not stop at funds and corporate vehicles. If a TCSP also administers a discretionary family trust (for example) for one of the investors then it may well classify the investor as a Private Client (including the value of the SPV) and report on that basis. If it does not administer the trust then the structure is likely be entirely “Corporate” even though the same underlying Private Client may be the ultimate beneficial owner. And that is without even considering the possibility that the TCSP will actually “double count” the investment under both headings…

But does it really matter how the various structures are classified? Well as noted above it can have a significant impact on the valuation of a trust company business because investors place a higher multiple on corporate earnings. Plus an over-reliance on Private Client income is often cited as a reason why more TCSPs are not listed despite consistent, long-term cash flows. However, within the sector this is recognized as an artificial and overly simplistic distinction.

Far more important are client service and risk management.

Many clients do not know or understand the differences between categories and are steered to a TCSP by an adviser based on a network of relationships. However, once on board there is a real risk that the TCSP will pigeon-hole its client under one the three categories, assigning responsibility to a “specialist” Corporate (or Private Client or Fund) team and thus fail to recognize or capture the crossover opportunities that the relationship offers. Far more useful is to fully understand the real beneficial ownership or control at the top of a structure, whatever it is used for, and to try to form a relationship that enables the business to meet the needs of that party (or parties) wherever they arise. At VG, we try to remember that our clients should not be limited by our own definitions or structure.

Similar to client service, effective risk management rests on understanding the breadth and depth of a relationship. If you cut that relationship into the pieces of a jigsaw it is impossible to see the full picture or understand the implications of an action. This is why the Jersey Financial Services Commission (and other regulators) has reverted to a model that uses a single relationship team across disciplines – it needs to assess risk and compliance in the context of the business and all its activities as a whole.

So what is the punchline? Well by all means categorise your income and relationships but remember that categories may mean nothing to your clients and you need to be able to see the whole joke at once!

Mark Hucker, Managing Director