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Financial Planning > Trusts and Estates > Trust Planning

The Trust Threat

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Ron Wiser is not a typical financial advisor. For one thing, his Kalamazoo, Michigan firm has more than $800 million under management. But more interesting, about $100 million of that is in trusts, which he manages through relatively new directed trust products. With seven CFPs, three CPAs, and a trust attorney on staff, Wiser’s firm will probably never be typical in the independent advisor world. But his strategy of building a firm around retaining client assets when they go into trust just might be the practice model of the future, particularly since he expects that eventually, 80% of his AUM will move inside trusts.

About two months ago, I wrote a whitepaper on independent advisors in the trust business, which was sponsored by Franklin Templeton Bank & Trust. Before that, I’d loosely followed the wave of firms offering to help advisors get into the trust business led by my friend Jeffrey Lauterbach when he was at Capital Trust of Delaware; attended some of the advisor-owned National Trust Company’s meetings; and watched Schwab flounder around with U.S. Trust, which it is now jettisoning. (See news story in this issue). But until I did some research, I didn’t really appreciate the magnitude of the problem facing independent advisors, nor the power of the solution found by advisors like Wiser.

For years now, we’ve all heard the predictions about what’s going to happen to the $40 trillion to $100 trillion we’ll take with us when 76 million of we Baby Boomers retire: the annuity business will skyrocket, the economy will falter as our children struggle to support our unprepared generation, advisor portfolios will start to shrink as clients enter their distribution phase, yadda, yadda, yadda.

But two facts seem to missing from the radar screens I’d seen: Folks who tend to be clients of financial advisors–that is, affluent Boomers–will likely receive a windfall in the form of a pension distribution or buyout, sale of a business or employer stock, inheritance from their parents, and possibly some combination of these.

More importantly, those clients won’t merely spend down their burgeoning portfolios. Sooner or later they’ll probably move substantial portions of their wealth into trusts; to reduce estate taxes, provide for children and grandchildren, and avoid the publicity of probate. According to a study by Tiburon Strategic Advisors, 72% of households with over $1 million in their investment portfolios currently use trusts as part of their estate planning. Of course, the vast majority of trust assets is managed by banks and trust companies.

Beginning to see the problem? According to Cerulli & Associates in Boston, the average age of an independent advisor today is 55, which means plenty of advisors in the country are older than that. Since advisors tend to have clients about their own age or older, it seems reasonable to assume the vast majority of advisory clients are Baby Boomers either approaching or in the early stages of retirement (whatever that means to them).

So within the next five to 10 years, many advisors can expect to see client assets move out of the portfolios they manage and into trusts. To make matters worse, when client assets do move into bank trusts, they won’t move gradually. Which means a great many advisory practices could see the majority of their clients move assets into trust almost overnight.

So What’s the Problem?

The effect of this asset migration on an advisory practice could be nothing short of devastating. Since the good folks at Moss Adams tell us that fixed overhead at many practices runs about 40% of revenues, a 50% drop in those revenues translates into owners’ income falling by two-thirds or more. At the same time, those lower revenues means the firm will lose about half its value as well–about $1 million for the average practice today.

To make the picture even worse, when advisory firms lose assets to banks, the advisors usually end up providing free services to help those clients straighten out the mess that many trust officers make out of the account. So not only are you losing substantial income, but your workload goes up, on which most advisors charge little or nothing.

By this time, you’ve probably figured out where I’m going with this: the salvation for what looks to be a large number of advisory practices is to add trust services. The good news is that directed trust products now offered by Franklin Templeton, Santa Fe Trust, Capital Trust of Delaware, and others, enable advisors to continue to manage client portfolios once they are placed in trust–and get paid to do it.

I know, most advisors have resisted adding trust services, and for good reason. For one thing, it’s a complex area; you’ll really need to dedicate at least one professional in your practice to become a trust expert. For another, there hasn’t been a way to get paid to do it. But now that directed trusts have solved the economic problem, it’s time to rethink your service offering. The survival of your firm may depend on it.

Although the thought of delving into estate and trust law is daunting, as far as I can tell the biggest barrier to adding trust services is finding the right corporate trustee to work with. With today’s product du jour–living trusts–anyone can serve as trustee: a relative, friend, or even the advisor herself. But to get most of the benefits advisors’ clients are looking for, they’ll require an irrevocable trust with corporate trustee, which means either a bank or trust company.

As you might imagine, finding the right bank to work with can be a challenge. Ron Wiser provides some guidance. A director of a local bank himself, Wiser used to work with local banks on his clients’ trust accounts. “It was a nightmare,” he says. “We’d set up a trust with the understanding we’d handle the investments, then some new guy would come in, and the next thing you know, the accounts would all be shifted into some high-load, inferior bank product.”

So Wiser looked for a better way to do trust business. The key to finding the right trustee, he says, is to use a firm that regularly works with financial advisors. Unfortunately, determining which institutions really do work with advisors, and which merely pay lip service to the concept, isn’t as easy as it might seem. “All the trust departments in town will “work” with me,” says Wiser. “That is, until the client dies, and the assets suddenly are rolled over into a bank-owned brokerage account.”

Looking for Some Good Trustees

To find the right trustee, advisors need to ask a lot of questions: How old is their directed trust product? How long has the trustee worked with independent advisors? How many advisors? How many assets? Under what arrangements? What are their typical advisor clients like? Can you get a list of those advisors?

As with most service providers to advisors, there’s no substitute to getting referrals from peers whose judgment you trust. The advisors who offer trust services are a small community, and word spreads fast when someone finds a trustee who knows how to work with independent advisors and respects their client relationships.

There are other factors to consider when choosing a trustee, as well, including the states in which the trustee is chartered, which B/Ds or custodians they work with, fees, support, and what kinds of assets can they handle (advisors who manage unusual or alternative investments need to be sure the trustee will allow them).

Like most decisions advisors make, adding trust expertise and finding the right trustee are not insurmountable problems, they merely take some diligence. The consequence of not adding trust services can be far more dire, particularly in smaller firms, where losing a few key clients (the most likely to need trusts) can undermine the economics of the entire firm. Faced with the alternatives, many advisory firms today will do well to seriously consider adding trust services. Says Wiser: “Independent advisors are foolish not to get into the trust business. They just don’t understand how easy it would be to do it.”

Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].


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