The Trust Threat

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.