From the April 2007 issue of Wealth Manager Web • Subscribe!

Nurturing the Legacy

It's all about control. Wealthy retirees and the Baby Boomers coming up fast on their heels are used to calling the shots in their lives. So it should be no surprise that, increasingly, they look to maintain that same level of control from the grave.

For most of these clients, that means using a trust or a series of trusts to hold on to the reins, directing the flow of assets into the next generation. Trusts have been around forever, but never with the amount of money about to be passed on as today's retirees--the wealthiest in history--begin reflecting on their own mortality and reviewing the prospects of their offspring.

When the stakes are only a few thousand dollars, no one is overly concerned about how the next generation spends their inheritance, says David Ness, president of the Raymond James Trust Company. When wealthy clients are reviewing million-dollar estates, however, suddenly it matters to whom their kids are married and how they are living their lives. "If they repealed the federal estate tax tomorrow, that would mean that wealthy people just have twice as much money that they don't trust their kids with," Ness says.

This reality has sparked a booming business for lawyers and the bank trust companies they work with. Unfortunately for financial advisors, there is a downside. Advisors who spent years developing relationships with these clients and helping to create their wealth are liable to get left out of the equation. That's because it is usually the estate planning lawyers who are talking to your clients about various trust options and the importance of naming a corporate trustee to provide continuity in their estate plan. Unless the wealth advisor is the one directing the conversation and managing the transition, all he can do is sit back and watch the assets flow out of his book and into the trust when that client dies.

Obviously, advisors can't give legal advice, and they definitely don't want to assume the fiduciary duties and legal liabilities of being a trustee. But thanks to changes in state and federal regulations and the emergence of trust-only fiduciary services, advisors now have more options available to help their clients design estate plans using trusts while maintaining the investment management of the trust assets for generations to come.

More Options, Greater Flexibility

Some of the most important changes in trust oversight regulations stem from court battles over the 1994 federal Prudent Investor Act, which is now standard operating procedure in many states. Prior to the act, trustees were not allowed to delegate investment management to an outside investment advisor. They usually managed the assets themselves, typically in a plain-vanilla portfolio of stocks and bonds. Under the act, however, the trustee actually has an affirmative duty to delegate investment management to a professional if the trustee does not have the requisite skills and experience to manage the assets.

"The act was a sea change for trust management," says Milo M. Benningfield, an attorney who heads Benningfield Financial Advisors in San Francisco. "But until recently it was a sea change that has been ignored by a lot of estate planning attorneys and by trustees, particularly individual trustees."

It was ignored in part because trust administration issues are complex enough already and because key investment concepts such as Modern Portfolio Theory and diversification are foreign to most people outside of the investment arena, Benningfield says.

Litigation is changing all that. Increasingly, trustees are finding themselves caught between the direct beneficiaries of trusts--who want the income and access to the principal now--and the remaindermen--the secondary beneficiaries who want to see the trust's principal stay intact until they can get a piece of the action.

Balancing those two interests, as required under the Uniform Principal and Income Act, requires a whole new set of portfolio management skills and oversight responsibilities that many trustees simply don't have.

"Litigation over failure to properly diversify and a host of other issues will continue to grow following the enactment of these laws," says Martin M. Shankman, an estate planning attorney in Teaneck, N.J. and author of The Complete Book of Trusts. "This should serve as a tremendous push of clients towards licensed planners and investment money managers," he adds.

Follow the Money

Beyond the regulators, though, the financial services industry as a whole has seen major shifts over the past few years, and the trust business is moving in tandem with the rest of the sector, says Martin J. Sullivan, managing director of Investors Bank and Trust in Boston.

The first trend is that the private client business is being carved up between the mass affluent--clients who have less than $1 million in investable assets--high-net- worth clients with $1 million to $10 million, and the ultra affluent--clients with $10 million or more. The ultra affluent market is the fastest growing segment of the financial services industry, and companies are investing heavily in support of that top tier, including building internal trust operations focused on meeting the needs of their ultra affluent clients.

At the other end of the spectrum are the smaller trust programs designed for the mass affluent. Most big bank trust departments have created models that funnel trusts with less than $5 million into a central propriety mutual fund and direct beneficiaries to an 800-number instead of providing a personal trust officer.

The third trend shaping current trust business is the move to open architecture and the use of multiple managers for a single trust, Sullivan says. That, he adds, requires a very robust trust operation that can take in trades from a variety of advisors and handle a wide variety of assets, from hedge funds to real estate.

"That is how our business has grown so dramatically," Sullivan says. "When we are dealing with a very large trust and they go open architecture, we can handle that very easily."

With the client market being split up into neat sections, the financial services industry is following the money. The big banks and wirehouses have already made their moves. Banks, which long enjoyed a virtual monopoly in the corporate trustee business, have set up or acquired investment management operations to better compete with the established money managers. In turn, traditional asset managers have opened their own trust companies.

In between are the private trust companies and regional brokerage firms who are trying to carve out their own niche. Laird Norton Tyee in Seattle started out as a traditional trust company. But in 2000, the firm acquired a wealth manager in order to compete more effectively in this new era, says Barbara Potter, executive vice president and managing director of fiduciary services.

"Our goal was to modernize the approach," she says. "As a trust company, we were formed in the traditional sense. That limits you, though, because your portfolio managers are only set up to handle one style of investing."

With the new emphasis on diversification and open architecture, Laird Norton needed to expand its investment services for its trust clients and provide comprehensive trust and estate-planning services to high-net-worth investors who want both. To that end, Laird Norton set up an in-house team of fiduciary experts to work directly with advisors and their clients. They find this to be a particularly effective strategy to capture assets from clients who are beneficiaries of a trust themselves.

"If they have an outside trust relationship, we can include that information in their cash flow analysis and in their net worth statements," she says. Down the road if that trust allows the client to change trustees, Laird Norton already has established a relationship that allows them to step in and take over.

On the flip side is Raymond James Trust Company, which was set up 15 years ago by the Florida-based broker/dealer specifically to help its advisors hold on to their assets under management.

"We were originally conceived--as were all the trust companies affiliated with advisory firms--as a defensive weapon," says R.J.'s David Ness. "Our clients are individuals, and individuals have a nasty habit of getting sick or dying, and there isn't always a proper fiduciary for Mom and Dad's money within the family."

Created to stem the outflow of assets when clients died, the company is now in a position to help its advisors take advantage of the changing laws that allow beneficiaries to change trustees. It also gives advisors the opportunity to compete for other business that requires fiduciary services, such as charitable trusts, insurance trusts or donor-advised funds.

"Our piece of the trust business is the pure fiduciary relationship," Ness says. The financial advisor directs the contact between the client and the trust company, and when the trust company takes over as fiduciary, the advisor keeps the assets under management and maintains the relationship with the beneficiaries.

"From the financial advisor's perspective, they are used to dealing with the widow or another successor fiduciary who is completely unregulated," Ness explains. "And dealing with the widow is really no different than dealing with the husband."

The rules change when you are dealing with a corporate trustee, but by keeping the trust relationship in-house, the client relationship doesn't have to change much. The trust company assumes fiduciary discretion over the investment process, but the advisor maintains day-to-day responsibility for managing the assets. That means that the beneficiaries receive the same personalized service they have always enjoyed.

The challenge for the trust company, however, is convincing the advisor and the client that hiring a corporate fiduciary instead of naming a family member or friend as trustee is worth the cost. And that depends on the purpose of the trust, says Alan Goldfarb, director of financial services at Weaver and Tidwell Financial Advisors in Dallas. His firm clears with Raymond James, and he uses the trust company when the client situation calls for an outside fiduciary.

"It becomes a matter of cost as well as convenience," he says.

For instance, Goldfarb recommends the corporate trustee whenever he wants a cushion between the client and the money. Consider the client who dies leaving a trust to be split between two children--one who manages money well, and one who is a spendthrift.

"Having a third party tell the [spendthrift] daughter that she can't have any more money makes it easier for us," he says.

Carving up the Business

Protecting the client relationship is the top priority for every financial services firm because the ultimate goal is to accumulate and retain assets under management. "That's how people get paid in this business," says Lyle Wolberg, president of Telemus Wealth Advisors in Southfield, Michigan, "and with the massive amount of money getting ready to be transferred from one generation to the next, the stakes have never been higher."

"The older generations don't feel like they can trust the next generation with their money," he says. "But once they establish a trust, the question becomes: Do they name a friend or a family member to act as trustee, or do they name a corporate fiduciary?"

Most wealthy clients are more comfortable naming a corporate trustee either because there is no one in their family that they trust to manage the wealth effectively or because they want to ensure a continuity of oversight into future generations.

"That's where the bank trusts make their money because they can keep the assets into perpetuity," Wolberg says.

The challenge for wealth managers, then, is to stay in front of that money flow, directing it into a corporate trust structure that will still keep those assets on their books. That's why more advisors are teaming up with trust-only services--companies that are willing to assume the fiduciary oversight while handing off the investment management to advisors for a share in the fees.

Wolberg directs clients who need a corporate trustee to Investors Bank and Trust. Formed 30 years ago by Eaton Vance to protect the assets of its wealthy clients, the basic business model hasn't changed since it became an independent trust company, says IBT's Sullivan.

"We see the financial advisor as our client," he says. "Our trust services are just another arrow in their quiver. We can expand the bandwidth of their products through our trust services so that they can bid on more business."

IBT assumes all of the administrative oversight, including meeting with the financial advisor at least once a year to review the portfolio's performance and ensure that the objectives of the trust are being followed. As the fiduciary, the trustee also has to make sure that the advisor's fees stay in line with industry standards.

"We have to hold the advisor to the 'Prudent' standard," Sullivan says. "Beyond that, though, the advisor takes the lead when dealing with the client."

Santa Fe Trust Company was set up specifically to capitalize on the growing demand from independent advisors for trust-only services, says Robert Oehlschlager, Santa Fe's executive vice president and director of business development. Based in New Mexico, Santa Fe has formal relationships with around a dozen independent broker/dealers, plus Fidelity Investments, but it's not unusual for the firm to get a call from a wirehouse advisor who has a client with either a small trust or a complicated asset base.

"Merrill Lynch doesn't want to take on a trust that is less than $1 million," Oehlschlager says. "And a lot of corporate trustees don't want to deal with non-traditional assets in a trust, such as a home or a limited partnership."

That's Santa Fe's sweet spot. They will work with the advisor and the client to make sure all the trust documents are in order, and then come in as trustee when the grantor of the trust dies. Santa Fe's job is to make sure that the terms of the trust are carried out according to the state laws governing each document and then oversee distribution of income and principal as laid out in the trust. The rest they leave to the money manager.

"We macro-manage the account," Oehlschlager says. "We will say, 'Here are the needs of the beneficiaries, and here is what state law says.' We spell out an investment policy statement and then delegate investment authority as trustee to the investment manager, who becomes an agent of the trustee."

Once the investment policy is set, the advisor micromanages the portfolio, choosing the specific investments.

As with most trust-only relationships, the advisor and the trust company set and collect their own management fees Typically, the trustee also tacks on a third fee for tax preparation. Fees usually add up to a little more than the client might pay a big bank to manage the trust and the assets, but in return the client receives customized investment management.

"And when they call us, someone answers the phone," Oehlschlager says.

Choosing Your Partner

For advisors, the best way to help clients now and build relationships into the second and third generations is to understand how and when a trust can help them accomplish their goals. Are they primarily worried about estate taxes, or do they have a special needs child who will require long-term care? Is the problem a complicated estate with a lot of moving parts, or that they simply don't trust their new son-in-law?

Next, find the right trust service to meet both your clients' needs and your own business agenda. Graham Taylor, senior marketing service representative with Mutual Service Corp. in West Palm Beach, Fla., helps advisors do just that.

"The most important thing in choosing a trust service is that there is an absolute Chinese wall," Taylor says. "You have to make sure that the trust company will not come over that wall and try to take over the investment management."

There are plenty of trust companies out there willing to make that promise, so it's important to do due diligence. The first place to look is in their back office. What systems do they have in place to deal with your clients? How will their processes interface with yours?

"You need to make sure that as the investment advisor, you are kept informed of everything," Graham says. "If someone has applied for a distribution, you need to know about it because that could impact the portfolio."

Next, check their legal credentials. You are not looking for an estate attorney here, but you need someone who can advise you and your client if there is a red flag in the trust documents or hidden somewhere in the trust assets--a piece of real estate, for example, that could have environmental issues or an asset that hasn't been titled properly.

Finally, you should check the turnover among trust officers. You and your clients need continuity in that relationship.

"Advisors need a general knowledge of trust issues, but the relationship with the trust officer is probably the most important element," Graham says.

The fact is that no one knows your clients better than you. Helping them design the right estate plan and then choosing the right corporate fiduciary to manage their trust in the future will cement that bond and carry it into the next generation.

Rebecca McReynolds ( is an Arizona-based freelance writer. She is a frequent contributor to Wealth Manager on a wide variety of financial topics.

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