Split the difference
5 November 2012 | By Joanne Harris
Offshore law firms have long supplemented their legal offerings with fiduciary business, but will that model last?
In March offshore firm Walkers, announced it was disposing of its fiduciary business, Walkers Management Services (WMS).
WMS was being sold to global trust company Intertrust. Intertrust acquired 100 per cent of WMS’s shares and the fiduciary’s staff and management moved across to the trust company. The financial terms of the transaction were not revealed, but WMS was understood to be bringing in around $50m (£30m) a year and employed more than 100 people.
The deal highlighted that a split is occurring in the offshore sector over whether law firms should operate as one-stop shops, offering both legal advice and the support of a fiduciary business, or focus solely on law and leave fund administration, corporate governance and so on to specialist fiduciary and trust companies.
Walkers is the second major firm to sell off its fiduciary arm in the past few years. The sale of Mourant International Finance Administration (Mifa) by Jersey firm Mourant du Feu & Jeune in 2009 paved the way for Mourant to merge with Guernsey’s Ozannes, as it cleared away potential issues surrounding the structure and ownership of the business.
But moving away from the single-firm model is not something everyone wants to do.
Bedell Cristin managing partner Richard Gerwat explains that the one-stop shop has its roots in client demand.
“If you go back to the origins of the finance industry in Jersey or any of these centres there were groups of lawyers who evolved a cottage industry providing fiduciary and corporate advisory financing because that was what was requested by the people they were getting instructions from,” he says. “Through the 1970s and up to about the mid-1980s these businesses grew up as adjuncts to law firms.”
Gerwat says the shift from cottage industry to multimillion-dollar business came in the 1980s when regulatory change meant that law firms and their attached fiduciaries had to evolve to serve more complex products, such as structured finance vehicles.
“The capital in these firms was growing and they recruited people who would be able to provide these more sophisticated administrative functions,” he says.
With the complexity and volume of business growing, many law firms began to see their fiduciaries as separate entities to the legal function. Clients may come to the firm for both services, but the structure of the fiduciary is quite different from that of the law firm.
Not all firms provide the same type of fiduciary services. Conyers Dill & Pearman chairman John Collis says there is a spectrum from “proactive” to “reactive”, with the more proactive fiduciary businesses offering a wider range of services than the reactive ones.
Collis puts Conyers at the reactive end of the scale, providing mostly corporate services such as document filing. Unlike some of its rivals - Maples and Calder, for example - Conyers’ fiduciary does not carry out fund administration or provide fund directors.
The main difference between a law firm and its associated trust company or administration group is the income source. Fiduciaries rely heavily on annuity income, giving them a stable and consistent source of revenue, while a law firm is more hand-to-mouth.
“A combination of these things has led to the marketplace coming to understand what the fiduciary business is and increasingly seeing it as separate,” believes Gerwat.
Ogier Fiduciary Services chief executive Paul Willing agrees that the stable revenue stream is an important factor in the success of the fiduciary business.
“The beauty of a fiduciary business is that once a client puts in place an offshore structure they need to maintain it for the life of that vehicle,” he says, adding that the lifespan tends to be seven to 10 years.
“Ultimately, a lot of fiduciary clients will provide a string of annuity relationships as well,” Willing adds.
Appleby chair Peter Bubenzer says the firm has used the stable income stream as a way of building and growing over the years.
“It’s a stabilising force for the business - it keeps us invested where we’ve launched new ventures and secure in our more mature markets,” Bubenzer says. “To us, it’s been quite evident that the need to provide fiduciary services could help us gain a greater share of the market of clients looking for offshore services. It’s been essential in the development of the organisation.”
Collis says that having fiduciary clients helps a firm sustain long relationships with them.
“It’s important for firms because it maintains a link to a client,” he says, pointing out that providing “relatively simple and inexpensive” services for a company or fund keeps a firm in the client’s mind even when they might not need more high-value legal advice.
Using the two sides of the business to grow the whole has proved a successful strategy for many of the big offshore firms. Walkers’ global investment funds head Rod Palmer says that when the firm established WMS it was what clients wanted, and helped the firm expand.
“Back in the early 2000s clients wanted speed-to-market,” he says. “The one-stop shop model was efficient for that. It did enable us to grow the business.”
But Palmer adds that, as time went on, Walkers felt it was becoming harder to compete in the fiduciary business as well as on the legal side.
“We took a strategic decision to focus on our core business, which was legal,” he says. “Part of that rationale was that strategically we saw increased competition in the management services space, particularly from the large global fiduciary and management services companies.”
Palmer says that the large trust companies such as Intertrust are able to provide a much broader range of services than law firms can hope to, as they have more capital to play with and are present in a wider range of jurisdictions.
Another catalyst, he says, was the changing mood of the investor base following the financial crisis. Investors have shown themselves to be more concerned with corporate governance issues - wanting to ensure the independence of their fund directors and so on - than was the case a few years ago. Palmer claims a number of Walkers’ large institutional clients indicated that the one-firm model was no longer for them.
Keep your distance
Others disagree that independence is an issue. “The law firm and the trust company deal with each other at arm’s length,” argues Gerwat of the Bedell Group model.
Maples and Calder partner David Brooks, who chairs the firm’s fiduciary and fund services company MaplesFS, and MaplesFS global co-head of fiduciary Peter Huber argue that Maples Fiduciary is an autonomous business, with independent operational management teams including its own general counsel. The duo also point out that clients can go to whichever service provider they like.
“If Maples and Calder is asked to make referrals to fiduciary services providers it will typically name two or three potentials, one of which may be Maples Fiduciary,” say Brooks and Huber. “The majority of Maples Fiduciary mandates are won from either existing fiduciary relationships or in competitive situations and after full disclosure of the Maples ownership structure. This is also disclosed in every offering memorandum where a Maples Fiduciary director is appointed.”
They add that Maples and Calder the law firm acts as counsel to the fund rather than the manager; MaplesFS directors also owe their duties to the fund. Therefore, there is no conflict of interest should both firm and fiduciary be appointed for the same fund.
Willing says legal clients may be more inclined to choose an independent administrator than fiduciary clients are to pick a different legal adviser, but says Ogier clients still prefer the one-stop shop.
“The majority of clients we work with actually prefer having the integrated service,” Willing claims.
Bubenzer says: “The vast majority of clients want the combined service. Work not tied to legal and fiduciary is a much smaller proportion of what we do.”
However, Palmer argues that focusing on being a law firm has proved popular with Walkers’ clients.
“We’ve definitely gained traction as a result of the strategic focus on being a law firm,” he says. “It really forces you to focus on delivering the best possible client service. With the other model clients tended to judge you based on the full spectrum of service delivery. Being a law firm enables us to deliver on the service level.”
Palmer acknowledges that the law firm-only model is rather different from the combined service model, but says Walkers’ clients took the news of the WMS spin-off well.
“I did a lot of the client calls and generally speaking I was surprised how positive the response from the clients was,” he says.
According to Palmer, this was mainly because the WMS team shifted over to Intertrust with little change in service and, in some cases, no change in location.
“Clients have been reassured that we’re giving them the same business - it’s the same team doing the same job,” he adds. “Overall, it’s been received well.”
Whenever a law firm spins off a fiduciary the rest of the market tends to speculate as to the reasons. Historically, the structure and development of offshore legal and fiduciary businesses meant that much of the ownership rested in the hands of the senior partners who had set it up. When the business was sold the same senior partners won a chunky payout from the proceeds.
Partners, as well as some other management and staff, received a share of the proceeds from Mourant’s sale of Mifa and the market has speculated that some retiring Walkers partners have done well from the sale. Palmer will not be drawn on the topic, but other firms say they have looked at the succession issue ahead of it becoming a problem.
Gerwat explains that at Bedell staff are given incentives to make them feel involved in the business. Although there are some law firm partners who have a share in the fiduciary, they are really only shareholders and have the same privileges as a shareholder in any business.
At Ogier, Willing says the firm restructured the ownership of the fiduciary around five years ago. He declines to go into detail about the way Ogier dealt with it, but believes the firm is now safe from succession problems.
“In the vast majority of firms it comes down to the structure of the partnership and the arrangements that exist for dealing with retiring partners,” he says. “Unless the partners can find some way of dealing with succession there can be challenges. It’s something we’ve spent a huge amount of time and effort resolving.”
Likewise, Bubenzer says succession is not a problem area for Appleby. He says the ownership has opened up from an original small group of equity partners.
“The theme I hear is that, if the senior cohort of owners take a commercial view that it’s in their interests to dispose of the fiduciary part of the business, they’ll cash in their chips and ride off into the sunset,” agrees Appleby group managing partner Michael O’Connell.
Conyers’ Collis says because the firm focuses on low-level, paralegal-type services and treats its fiduciary as another department of the law firm, ownership is not an issue.
While there is talk in the offshore sector that other big firms will decide to spin off their non-legal arms, most are outwardly committed to the model.
“We’ve always taken a long-term view of our fiduciary business - it’s never been on our radar as something up for disposal,” says O’Connell. “It’s always been something that we regard as an integrated part of our offering. I think it gives us a really good long-term understanding of our clients’ business and enables us to become part of our clients’ teams. It also allows us to be responsive to their needs.”
Gerwat agrees. “We have no plans to dispose of our trust company,” he says. “We don’t think the model is broken at all.”
Willing adds: “From my point of view Ogier will be an integrated business for the foreseeable future - it’s the right approach to providing the type of services our clients want.”
Ogier is in the process of launching Ogier Fiduciary Services in Luxembourg, following the launch earlier this year of the law firm there.
“We have significant growth plans for both the law firm and the trust company,” confirms Gerwat, saying the plan is to try to diversify what both sides do without necessarily always following the same strategy.
“They’ll look to continue leveraging off each other as they try to grow,” he says. “There are locations - such as Dublin - where we have no expectation of practising law. It isn’t the case that one will slavishly do what the other is doing all the time. I see them working closely together.”
MaplesFS’s Brooks and Huber say the corporate services business that forms a large part of what most offshore fiduciaries do is a vital part of the Cayman service.
“This is the business of company formation and annual maintenance,” they explain. “All the Cayman law firms - other than Walkers - do this business and have done for the longest time. It’s widely regarded as being a critical part of the service offering of the Cayman law firms.”
The pair add that the range of services provided by MaplesFS is important to clients.
“We like our model, and our clients like it too - and we have no plans to change it,” they say.
While Palmer agrees that some firms will hang on to the fiduciaries, he predicts that the services offered will change.
“You’ll see a pared-down management services business,” he says. “It won’t be the broad range you saw historically, covering everything from registered offices to provision of directors, from fund administration to provision of trust services. You’ll continue to see some law firms providing some of these services.”
Collis also thinks this will be the shape of the industry in the future, with law firms helping clients out on day-to-day corporate services.
“Short of companies moving themselves to do it they will always need some form of support in that and I think law firms will remain the simplest and principal provider of that service,” he says. “Doing it properly and well is important in terms of securing solid client relationships between offshore firms and their clients.”
But Collis does think that competition from other providers of fiduciary services - banks, accountancy firms and the big trust and administration service companies - could lead to other firms pulling out of the more complex side of the fiduciary business.
“There are very few people competing at the reactive end of that service, but at the proactive end there are lots,” he points out.
Competition and succession issues may drive some firms out of this market, but for the moment the rest are content to leverage off their fiduciaries and make the most of the benefits of being a one-stop shop.