When the prime minister’s your client

Testamentary, inter vivos, insurance and alter ego trusts are all effective vehicles for a variety of planning needs.

There’s another type that’s rarely used: the blind trust. If you reel in a client who needs it, you’ll be doing well.

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With few exceptions, blind trusts are for high-ranking politicians and public officials—prime ministers, cabinet ministers, ambassadors and heads of Crown corporations. Their positions give them access to market-moving information, and in some cases they have direct influence over major outcomes.

“This creates a potential conflict with their investments,” says James Love, president and CEO of Legacy Private Trust.

Love notes high-level corporate insiders may also need these trusts. For instance, say a telecom company recruits the CEO from a competitor, but she’s a major shareholder in her original firm.

“She could have options that aren’t yet exercisable, so she can’t simply get rid of them,” notes Love. “A blind trust may be set up to administer these assets. This removes the risk to her new firm and keeps people in the press from saying she didn’t hit her performance numbers because she’s a big shareholder in her competitor.”

In the case of politicians and other public officials, the process begins with an assessment of the client’s portfolio by the ethics commissioner.

“All assets that may give rise to a conflict must be transferred to a blind trust,” notes Elaine Blades, director of fiduciary services at Scotia Private Client Group. She adds the transfer happens on a tax-exempt basis.

The officeholder must then select a trustee. This is often a firm like Love’s, which handles several blind trusts.

“Typically, they transfer the assets from their brokerage to us,” he says. “We review the portfolio and if it’s satisfactory we won’t make changes; but if there’s an especially risky holding we don’t want to be responsible for, we would make a change.”

Love notes this is rare. “These clients are extremely busy, so they have good investment advisors handling their assets. Portfolios typically look good on the way in.”

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He prefers the client’s current advisor to handle day-to-day management of the blinded assets. “Most trust companies require this piece to be handled by their own teams; but we’ve found clients usually like to keep their advisors, so we maintain this relationship.”

Details about the contents and management of the trust are off limits to the client. For example, if the advisor trims or sells a holding, he can’t tell her.

But in most cases clients can get information about the portfolio’s overall performance. “You’re permitted to report its aggregate value. But they have no influence over or knowledge of what’s bought and sold,” says Love, adding that in some cases clients may be permitted to see percentage weights for asset classes.

Advisors and clients sometimes have personal relationships, increasing the risk that a word about the portfolio may slip out. If an advisor plays golf with a client every other week and talks investments on the course, those discussions need to stop.

“We carefully explain the ethics commissioner’s strict protocols so there’s no misunderstandings,” notes Love, adding he’s never had any problems with the advisors he’s worked with.

Ultimately, though, the trustee is responsible for administering the funds, so the advisor’s decisions are always screened.

“Say the advisor thinks an investment has run its course and wants to sell it,” says Love. “We only sign off if the recommendation is consistent with the client’s investment objectives, which she lays out at the beginning. But it’s not often we have to override an advisor’s call.”

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