Offering trust services is becom-ing a crucial step in capturing and retaining wealthy clients these days, and advisors are
finding various ways to offer those services through outsourcing relationships with banks or independent trust companies, or by investing in, or even selling their practices to, a trust company or a bank.
Alliances with trust experts are vital because starting a trust company from scratch is no cakewalk. Most advisors can't pony up the capital required to build their own trust shops, and the trust business is highly regulated. You also need trained and experienced personnel to run the business; it's more complex than money management. And rarely are start-up trust companies overnight successes; it often takes years for these types of firms to create positive cash flow.
All types of financial services firms--credit unions, banks, independent advisors, accountants, lawyers, and insurance companies--are wrangling for their piece of the estimated $10 trillion to $20 trillion in wealth that's expected to be transferred over the next 20 years. This transfer, along with the well-to-do left over from the bull market, has also sparked the creation of independent trust companies. "The emergence of independent trust companies over the last few years is profound," says Mark Tibergien, Seattle-based director of business succession services at Moss Adams LLP. He says the Association of Independent Trust Companies (AITCO) has seen increased activity, "especially among advisors who want to add this [trust] capability. Every advisor that I know who serves the high-net-worth market is trying to find a [trust] solution."
Matt McGinness, an analyst with Cerulli Associates in Boston, notes that "As advisors' clients are more demanding, the advisors have to look outside for solutions. Trust services are outside of their core competencies. In investment management they are top notch, but they are not as well versed in trust services."
One remedy advisors might want to consider is a turnkey trust outsourcing solution being offered by National Fiduciary Services (NFS), a national independent trust company in Houston, Texas. NFS, formerly Southwest Guaranty Trust Company, has devised a private labeled service that lets advisors brand their own trust identity. Bob Fletcher, an executive VP at NFS, believes the program is unique. "There are those [trust companies] that offer back-office and referral programs that say, 'you send me a trust prospect and I'll do a fee-sharing arrangement with you.' But in our case, we are providing a complete turnkey outsource solution. We are going into an advisory firm and having them adopt a trust company name so they can brand on that identity." NFS charges a setup fee--which includes a needs assessment, a feasibility study, market analysis, a business plan, and training--and also has a fee-sharing arrangement based on the assets being managed.
Fletcher says that instead of going through the hassles of forming a trust business, advisors outsource the entire trust operation to NFS so "they can have their cake and eat it too." They can offer trust services and still manage money. The advisory firm maintains the trust accounts while NFS acts as the trustee. "And then NFS would turn around and appoint the investment firm as the investment manager," he says, while NFS acts as the corporate fiduciary.
NFS is also considering co-branding of mutual fund prospectuses, Fletcher says. "Lets say a financial organization selected a certain mutual fund company for asset allocation. We can brand that name so that it says Commonwealth Equity Fund or whatever," so long as the mutual fund company offers that type of arrangement. "The idea is to reinforce that brand and build that into your target market."
Originally launched as a state-chartered trust company in 1953 with the name Southwest Guaranty, NFS applied for a national charter in 1997, and is now a privately held national trust bank regulated by the Office of the Comptroller of the Currency (OCC). As a national trust bank, NFS performs only trust and investment management services; it doesn't accept deposits, make loans, or issue credit cards. NFS has been toying with the idea of a private-labeled trust outsourcing service for a few years, and put it into action when the OCC issued a final rule in August permitting multi-state trust operations.
Fletcher says NFS is targeting all types of financial services firms. "We are working with several national organizations for banks, credit unions, and insurance companies as well as regional accounting firms and will be meeting with a San Diego law firm regarding private label trust companies for family offices." If credit unions--which are often unfairly labeled as rinky-dink financial services firms--are getting serious about outsourcing trust services, other firms should wake up to the idea, too.
"It's an extremely competitive market, and I think what's going to distinguish those who succeed and those who fail is going to be how they define their business model," Fletcher says.
Moss Adams' Tibergien says NFS's turnkey trust solution is intriguing, though not unique. "I think the idea that NFS is targeting non-traditional advisory firms is a good one. I know the CPA firms--especially those with an estate planning practice--will find this to be very appealing if the cost is right."
Michael Miller, a planner with the private wealth management firm Capital Planning Corp. in Bellevue, Washington, says that by outsourcing trust services, his firm is signaling its high-net-worth clients "that we can't do it all ourselves; we can't have all the best services internally." His advisory firm is now solidifying a relationship with SEI. "SEI has a trust company and its packaged trust services are priced very competitively because SEI is manufacturing the asset management product, yet it still has that sense of independence," he says. "To me, that's a very viable trust solution because you have an excellent asset management product and very competitively priced trust services; it's all wrapped into one consolidated statement."
For independent advisors using Schwab, Lockwood, SEI, or Russell platforms for separate account management, Miller says "it would be nice if those platforms, price competitive wise, would offer trust services. SEI charges $1,500 if you use its asset management product, and then there's a slight markup on non-SEI assets, but it's very competitive."
Trust companies like Bessemer Trust or Mellon Financial's trust services also bundle trust services with asset management to offer a price advantage, Miller says. "I think that's where the independent advisor is really at a disadvantage: when they are trying to take a separate account manager that they might use and have that inside an independent trust company that they've outsourced. The fees can get a little steep."
Lou Stanasolovich, a planner with Legend Financial Advisors, Inc. in Pittsburgh, says his firm is shopping for a trust outsourcing solution. So far, the planning firm is considering Irwin Bank, a local financial institution that manages about $100 million in trust assets, and Capital Trust of Delaware, an independent trust company that doesn't manage money. Although Irwin Bank is small, "people like local access," Stanasolovich says, and the bank has a very low fee schedule.
"We don't have the expertise," Stanasolovich says, "and I guess if we were a larger company we could" open a trust company. But "there's not a whole lot of need for a trust company unless money is placed in an irrevocable trust. We don't have that need. It's important enough to have that [trust] option available because we may have clients from out of state or we may have clients that do have a need for it."
Merging with Laird Norton Trust Company was the answer for Tyee Asset Strategies in Seattle, Washington. Kaycee Krysty, president of Tyee, says the advisory firm's young and wealthy clientele in the Northwest were perfect candidates for trust services. "Our concern was to find [a trust solution] that really committed us to an open architecture situation where you could always get the best for the client." She says Tyee steered clear of start-up trust companies with no track record, and opted for locally based Laird Norton because it had "history, staffing, and the infrastructure to do the trust business right."
Krysty says Tyee shopped for a trust solution for nearly a year before aligning with Laird Norton in July. She recommends other firms do their homework as well. "Whatever kind of arrangement [an advisory firm] has, the values, culture, and approach are really key. Your client may be signing up for this service for 35 years or more. You need to ask: Who is the organization? Are they going to be around? Are they going to be right for the client?"
After all, the trust business is no walk in the park. "The trust company business is much more difficult than the money management business," Krysty says. "A lot of folks in money management think they can just add trust services and think it's going to be easy; it's not."