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.