If we had conducted our survey of independent trust companies a decade ago, to receive a dozen respondents from a universe not much larger than 12 would have been significant. Today–and beginning on page 47–you’ll find 68 survey respondents, spread across the nation. That the number of independent trust companies continues to grow in pace with the spread of financial advisory firms is no coincidence, for the virtues of one can be of benefit to the other. As we’ll see, more and more advisors are making use of these independents–for a host of laudable reasons–or starting trust companies of their own.
Some of the independent trust companies in our survey, such as Santa Fe Trust in New Mexico and Commonwealth Trust Company in Delaware, provide administrative trust services only, eschewing investment and advisory services entirely. They generally “partner” with financial advisors–as opposed to competing against them–as well as with attorneys, CPAs, insurance professionals, and broker/dealers. Other independent trust companies specialize, such as Denver-based First Trust Corp’s focus on self-directed retirement plans. Still others offer ? la carte services, or do it all–everything from court-created and personal trusts to estate administration and financial planning–whether as trust companies offering advisory services or as advisory firms offering trust services through their own trust companies.
Regardless of client base, corporate structure, and services, what these trust companies have in common, and their reason for being, is their independence from big-bank trust departments and the trust divisions of large brokerage firms and insurance companies. What does this mean to financial advisors? Through either their own independent trust company or by utilizing the services of another, advisors will be able to address the trust needs of their clients while allowing the advisor to retain control over the management of client trust assets that might otherwise go to or remain in a large bank trust department, thus diminishing the advisor’s fee. Advisors taking the independent route stress the importance of being able to maintain a seamless client relationship, and say they are able to provide their clients with better and more flexible trust services.
While Commonwealth Trust was launched in 1931 solely as a trust company and claims the honor of being the oldest independent in America, the majority in our survey didn’t get started until the 1990s. (Some that are listed with “ancient” start dates actually began their lives as law firms.) When the ban on interstate banking fell in the early 1980s and big banks began to morph into mega banks, concerns were raised in some corners of the financial services world regarding the ability of these new institutions to provide trust clients with true personal service and local market servicing options. David Roberts, president and CEO of advisor-owned National Advisors Trust Company, in Overland Park, Kansas, and a former executive VP at UMB Bank’s personal trust division, encapsulates these sentiments thusly: “Financial advisors and their clients have often felt intimidated, ignored, or handcuffed by large, impersonal brokerage firms or trust companies.”
Also being called into question are issues of fiduciary responsibility. “When a trust company is owned by a bank or by another financial institution, there are inevitably some pressures brought to bear in the operation of the trust company from the entity that owns you,” says Tom Batterman, president of Vigil Trust & Financial Advocacy, an independent trust company and advisory firm in Wausau, Wisconsin. “This may influence the judgments you make as a fiduciary.” For example, the urge to invest trust assets in a bank’s mutual funds can be irresistible when the bank operates both a trust company and a mutual fund affiliate. Being independent, Batterman maintains, leaves a trust company free to make totally objective decisions about how it is going to execute its fiduciary duties. As for quality of service, Jim McMackin Jr., VP and director of marketing for Commonwealth Trust, says that “the vehicle of service gets lost in a bureaucracy, whereas here, we live on service.”
McMackin feels that the proliferation of new independent trust companies (he notes that most are not purely administrative operations like Commonwealth’s) “clearly tells you that people are unhappy with bank performance and large trust companies.” He likens the phenomenon of independent trusts to the growth of small community banks, which continue to spring up across the nation, despite research indicating that the number of banks in general should be dwindling because there already are too many of them. People flock to these new small banks for the personal, friendly, “community” service they seem to offer. This comparison prompts Batterman to characterize his trust company “as the community bank of the trust industry.”
All In the Family
Membership in the Naperville, Illinois-based organization AITCO (Association of Independent Trust Companies) has shot up 20% over the past five years, according to Batterman, who serves as AITCO’s president. Involved in the association’s formation in 1989, he notes that there were “seven of us at that first meeting.” Today, AITCO boasts some 200 members, among them trust companies, those considering setting up a trust company, trust departments of community banks, financial advisors (offering investment recommendations and other services), and vendors providing services to the industry. Independent trust companies are governed by the same state and federal requirements applicable to the trust departments of large banks.
But the growth of and interest in independent trust companies aren’t simply the result of feelings of community togetherness. Nor are they strictly centered around issues of control, service, and fiduciary responsibility. There are other factors at work, and it is at their juncture that financial advisors enter the picture.
Jeffrey Lauterbach is chairman, president and CEO of The Capital Trust Company of Delaware. While Capital Trust was created by charter over 100 years ago, the company exercised its trust powers in 1999, and opened for trust business in 2000. Like Commonwealth Trust, it is located in Wilmington, Delaware. (See “Wealth-Friendly Delaware” sidebar on p. 42). While Capital Trust’s primary business is trust administration–serving as a back office for more than 100 advisors while, with some exceptions, allowing them to manage the trusts–it is the trustee of the U.S. Charitable Gift Trust, a national donor-advised fund distributed through advisors by Eaton Vance. The company also has a separate line of business pursued primarily through attorneys.
According to Lauterbach, much of the growth of independent trusts is driven by demographics, a causal factor shared with independent financial advisors. “You not only have the Bob-Hopers dying off and passing wealth to the Baby Boomers, you have this group of independent advisors that didn’t exist to serve the Bob-Hopers until the last 20 years,” says Lauterbach. “And they have matured [along] with both of these groups of people.”
Naturally, it is in the advisor’s best interest to align himself with an independent trust in order to maintain control of client assets and personal relationships that otherwise would be lost. Commonwealth Trust’s McMackin says that a good 95% of his company’s new business is in personal trusts, and that 75% of that business is brought in by attorneys–McMackin calls them gatekeepers–”who get more actively involved in long-term planning and estate issues than advisors.” This happens because advisors, often unfamiliar with the trust business, are not always comfortable establishing trust services for clients. “The next step is to go to the attorney,” he says, “and the attorney then controls the process, which gets it out of the hands of the advisor.”
The Urge for Going
Commonwealth’s typical experience with financial advisors is that of an advisor with a client or potential client who has an existing trust somewhere, “and wants to move the trust to Delaware and pick up the investment side as well as having us become the trustee.” It’s a scenario that represents 75% of Commonwealth’s interface with financial planners and advisors. But he sees more and more planners getting, or trying to get, involved with independent trust companies, especially over the past five years.
“They see, first of all, the risk to their existing portfolio if something happens to Pop [the head of a client family], and the money goes into a trust over which the planner has no input or control,” says McMackin. “And second of all, the baby boomers are getting older and closer to transferring assets, and it gives a planner that knows the business and knows how to do effective estate planning a real opportunity to add incremental service to their clients.” In this regard, retaining control over a client’s trust assets isn’t solely about an advisor levying fees on assets. Batterman at Vigil Trust, for example, notes that 90% of his income comes from advisor services as opposed to trust services–which is just the way he wants it.
National Advisors Trust Company’s Roberts finds an inherent problem in “putting your best customers, who are typically your trust customers, into an entity that has basically an investment advisory service built into it.” Sooner or later, he says, “someone’s going to look at it and say, ‘Hey, that’s where the profitability is,’ and someone else is going to say, ‘Maybe they should talk to us [for financial advice]? It’s difficult for both entities to maintain perspective on that relationship, and I don’t think that either one of them ever gets real comfortable with it.
As for big-bank trust departments, not all disallow input from advisors, but they’re not about to share a client’s asset fees. Batterman points out, however, that some clients and advisors are better served by going to large banks and their large trust departments, just as others are better served by going to smaller banks and their independent trust companies.
The approach an advisor takes regarding his involvement with trust companies and their services is dependent on how serious the advisor is about being in the trust business. For the advisor who has an occasional client with a trust need, who is comfortable with his state regulatory environment, who is confident that his client’s bank trust department is not amenable to keeping the advisor around to advise on client assets, a good alternative, says Batterman, would be to hook up with an independent trust company willing to act as an administrative trustee only. In this capacity the independent trust would handle all the legal and accounting issues, including trust interpretations and distributions, while allowing the advisor to invest client assets and keep the fee revenue stream flowing smoothly.