How would you like to offer services akin to the nation's largest banks and trust companies -- with one key difference: You remain the central point of contact for your client, and you continue to manage the assets and advise the account.
When Patricia Hinds, a Minnesota-based advisor I know through Securities America, told me she was using something called Advisor Directed Trust, I sat up in my chair. Financial advisors I've spoken with in the past have expressed increasing disenchantment with trust departments at large banks. At the same time, as the population ages, more and more baby boomers are planning their own estates, as well as those of their parents. And trusts are a part of the answer.
Personal trusts are a powerful estate-planning tool, helping people preserve their assets for future generations. There are many reasons people create personal trusts:
o Control wealth distribution to heirs
o Reduce potential estate-tax liability
o Avoid probate
o Maintain privacy
o Allow tax-efficient gifts to charities
o Provide for needs in the case of illness or incapacity
Special-needs trusts are being used more frequently to provide income for disabled children after their parents die. Trusts are also used to protect assets -- a smart move given the number of lawsuits filed every year in the United States. Trusts aren't just for the very wealthy; they can be useful to many individuals who have investments, real estate, life insurance policies or other assets to pass on to future generations.
Trusts are versatile planning tools that allow clients to direct how their assets are managed during their life and upon their death. As written legal arrangements, trusts allow them to appoint a person or corporation (called the "trustee") to administer and distribute assets based on their wishes. Choosing a trustee is a significant decision. While the client can designate almost any individual to oversee the administration and distribution of their assets, even financially sophisticated individuals or family members can find managing a trust a complex and burdensome experience. This is why many clients feel more comfortable making a corporation responsible for administering their trust assets according to the terms outlined in their trust. The advantages of experience, objectivity, reliability, longevity and professional administration are hard to deny.
The problem with traditional trust company services? Once the client appoints a corporate trustee for their trust, the financial advisor no longer has a direct role in the investment management of the trust assets. This is a loss for both the advisor and the client. "Clients who have come to trust their financial advisor must now work with a new entity," Hinds says. "Oftentimes, the big bank experience is cold and impersonal. Other times the client may wonder if he's getting the best advice. Sometimes there's a focus on proprietary products. Staffing turnovers can also be an upset."
That's why Hinds was pleased to learn about Franklin Templeton Bank & Trust's relatively new program. With an Advisor Directed Trust, clients can appoint Hinds as the investment fiduciary for their trust. As the investment fiduciary, Hinds has full and exclusive authority for managing the investment of the trust assets while working to develop an investment plan that serves the trustor's long-term objectives. As the trust's investment manager, Hinds' compensation can be in the form of commissions, 12b-1 fees and/or investment management fees
In most of Hind's cases, Franklin Templeton Bank & Trust (FTB&T) serves as trustee, co-trustee or successor trustee. The trustee's role is to provide trust administration and the safe-keeping of trust assets. Because Hinds is an investment advisor representative through Securities America Advisors, an SEC-registered investment advisor, Hinds can take a discretionary role in the investment selection and asset management of both individuals and trusts. She does not have to use Franklin Templeton's mutual funds -- Advisor Directed Trust accepts most investments, including mutual funds from most fund families, stocks, bonds and other marketable securities. Another plus: FTB&T has agreed to open a trust brokerage account with the broker/dealer firm, which means the custodian does not have to change.
Interestingly, banks like Wells Fargo are now offering advisor directed trusts; however, according to Lori Lewandowski, a senior trust administrator with Wells Fargo Bank, the bank must custody the trust assets. In addition, Hinds says that Wells Fargo monitors the types of investments because typically the trust has an income beneficiary and a remainder beneficiary. They want to make sure that the investments are equitable to both parties.
Richard D. Hageman, vice president of trust services with Franklin Templeton Bank & Trust, said in a telephone interview that they do not take a discretionary role. "We don't compete with the advisor. We only do directed trusts. The advisor is the sole fiduciary responsible for the investments he directs for the trust. Our open architecture and the fact that we don't look over the investment advisor's shoulder makes us different. We don't function like a traditional bank trust department," he said. According to Hageman, FTB&T works with RIAs and about 40 independent broker/dealers. The advisor must be willing to accept appointment as the trust's investment management fiduciary to use FTB&T's Advisor Directed Trust service.
A competing company, AST Capital Trust Company, offers two basic options for advisors who wish to partner with them. "There are two types of investment advisors: those that have discretion and are able to make investments in a client account without receiving permission from the client and, alternatively, those who cannot take discretion and typically have the traditional 'advise and consent' client relationship," says Gregory W. Tschider, president of the firm. Tschider says AST can create an "advisor appointment agreement," which would allow a broker to manage the assets in trust and retain fiduciary responsibility similar to other client accounts in the advisor's book.
"Personal trusts are rapidly gaining in popularity as effective wealth-management solutions," says Wendy Harrington, CEO and president of Franklin Templeton Bank & Trust. "As baby boomers build their long-term financial plans ... it's increasingly imperative that advisors have the ability to offer comprehensive services to their clients who have or will be moving their assets into trusts."
Advisors who are dedicated to providing personalized, comprehensive advice may want to partner with an advisor-friendly trust company. Ask your clients if they are happy with their current trustee situation. According to AST Capital Trust's website, a trust transfer need be no more cumbersome than an IRA transfer.
Marie Swift is president of Impact Communications.