To remain competitive and retain clients over generations, more advisors are concluding that they must offer personal trust services as part of their financial services portfolio. Especially for advisors moving to the family-office business model, such services need to be on the menu to satisfy the appetites of their high-net-worth clientele.
Why is there more of an opportunity now for advisors to provide personal trust services? One reason is that the demand for such services is expected to grow rapidly over the next 10 years. Many observers say the aging of the population will result in an unprecedented wealth transfer from one generation to the next, creating a greater need for trust services.
Another is that affluent families seem willing to look beyond traditional trust providers. "What's happened in the last 30 to 40 years is that commercial banks have gotten away from the service model they once provided in their trust departments. They've decreased services and increased fees. People have become very disaffected, and it's provided an opportunity for advisors to step in," says Jeffrey R. Lauterbach, chairman, president and CEO of Capital Trust Company of Delaware, based in Wilmington.
Figures from The Diversified Services Group Inc., a financial-services research and consulting firm in Wayne, Pa., support the idea that the dominance of traditional trust-market players is eroding. According to DSG, the number of collective investment funds dropped 27% at traditional depository trust companies over the three years ending in 1999, but increased 24.7% at non-depository trust firms. Non-depository trust firms also increased their share of total reported trust revenues to 17.8% during that time, DSG says.
DSG, which is updating its study of the trust market, found the regulatory and competitive landscape has changed so that new entrants with new distribution models are capitalizing on the opportunity to segment and serve the changing market for trust services.
A major issue for advisors is how to provide personal trust services. An advisor can start his own trust company, but that involves getting a charter from the Office of the Comptroller of the Currency (OCC) or the Office of Thrift Supervision, raising millions to get the firm going, meeting regulatory requirements and setting up all operations. Recognizing these potential pitfalls, many firms remain undaunted and have devised different ways for advisors to offer personal trust services. Their business models vary, and the right choice depends on the individual advisor.
Perhaps the simplest option is for a planner to link up with an advisor-friendly trust company that allows him or her to act as investment advisor to clients' trusts while it acts as trustee. Several trust companies now target advisors with such arrangements.
Lauterbach says Capital Trust Co. usually works with advisors in one of three ways. With new trusts formed in Delaware, for example, it's possible for the grantor to name a planner as investment advisor and Capital Trust as trustee, Lauterbach says. Another possibility is for investment authority to be delegated to the advisor by the firm, he adds. A third option is for the advisor to be named agent of record and with Capital Trust having investment responsibility. Lauterbach notes many broker-dealers won't allow their advisor reps to accept investment discretion. In those cases, the advisor would propose investment ideas based on client preferences, he says.
Lauterbach says Capital Trust doesn't require that it custody a trust's assets. However, six to 12 months of a trust's cash needs must be held in a Capital Trust account for the payment of taxes, beneficiary distributions and fees. "What we've done is we've built a company to assist advisors in providing trust services. We're a wholesaler. We don't take retail accounts. This can be very comforting to advisors," Lauterbach says.
Santa Fe Trust in Santa Fe, N.M., also delegates investment responsibilities to advisors after both parties agree on overall goals. "It's like having a financial advisor down the hall. We try not to interfere with their style. We're trusting their expertise," says John T. Sandager, chairman, president and chief executive officer.
Santa Fe manages no assets in house and never has. Sandager says the main issues an advisor should consider when choosing an independent trust company are: 1. Is the firm truly a partner and not a competitor? 2. Will it allow the advisor to continue using its current provider for trading and custody and permit more than one custodian without penalties? 3. Does it provide what's needed for advisors to strengthen relationships with their clients? 4. Does it support an advisor's education and understanding of trust management?
Phoenix National Trust Co., based in Hartford, Conn., also is targeting advisors, but it's focusing on independent broker-dealers. The firm has 11 agreements with broker-dealers to provide trust services and about $800 million in assets under administration. Phoenix will pay up to 30% of the revenue it gets from trust clients back to the broker-dealer, says Lynn M. Ryan, senior vice president.
Trust grantors can come directly to Phoenix to establish relationships. "But we encourage them to meet with financial advisors. We are best known as being as producer-friendly as possible. We encourage them to go back through their financial advisor, attorney or accountant," says Charles "Chip" Olson, president.
Phoenix National also is hoping to attract independent broker-dealers and other advisors to its trust services with other resources it can bring to the table through its parent, The Phoenix Companies Inc. Phoenix, whose history goes back to 1851 when it was founded as the American Temperance Life Insurance Co., offers wealth management that includes life insurance, annuities, investment management and trust services.
Olson and Ryan agree the trust business offers tremendous opportunities, and they hope to double the number of agreements they now have with broker-dealers in two to five years. "We think it's a business that requires scale," Olson says. "You're stripping out the asset-management piece, which generates a good portion of the revenue. But I think we can offer trust services profitably."
Another player backed by a big name and vying for trust business through advisors is Nationwide Trust Co., a subsidiary of Nationwide Financial Services Inc., which owns one of the country's largest life insurers. In February, Nationwide unveiled the Nationwide Family TRU Trust, which distributes a percentage of a trust's market value to beneficiaries as opposed to its annual income.
David Kearsley, Nationwide Trust's vice president of personal trust, says the Family TRU Trust leaves more control with the grantor and investment advisor than many traditional trust arrangements. The grantor chooses a payout percentage and a registered investment advisor who is in charge of the trust's investment strategy. The grantor also selects a family trustee to make decisions regarding discretionary distributions.
It's the only type of trust Nationwide is offering, and the trust must be newly established. The Family TRU Trust will support different kinds of trust arrangements, but the only one available now is an irrevocable life insurance trust. The company has signed up 14 independent broker-dealers so far, Kearsley adds.
The firm is targeting advisors with clients who have $2 million to $5 million in net worth and investable assets of at least $500,000. "It's the Nationwide market-the millionaire next door. ... What we've done is identified a niche we want to serve. By focusing our service, we're able to do a better job for that niche," Kearsley says.
Making A Bigger Investment
Most advisors interested in providing trust services to clients are likely to work on an account-by-account basis through a trust company. But for those who want to get involved with the trust business in a bigger way, there are other options.
For example, National Advisors Trust Co. in Overland Park, Kan., is a trust firm formed by more than 80 advisors and is looking to sign on another 40 in a secondary offering. (See sidebar.)
National Fiduciary Services NA (NFS), a privately held national trust bank based in Houston that manages or administers more than $2.2 billion in assets, offers advisors another model, which it calls "Private Label Trust." Raymond R. "Bob" Fletcher, executive vice president, explains NFS establishes an operating division at the advisor's location."The advisor leverages our resources, including our national charter. We work through a liaison person they appoint, or we can put a trust officer on site. It depends on the type of commitment they want to make."
Fletcher adds, "I think the basic difference is our model puts someone in the trust business. It gives them the branded identity and allows them to leverage their own relationship with clients and their own leadership position. You do what you do best and outsource the rest." The model does not require a merger, and the advisor can act as money manager and transfer or sell the book of business. "This is really for someone ... thinking of forming a trust company but who doesn't want to have to capitalize it, lose focus or take the business risk," says Fletcher.
The firm charges initial set-up and monthly fees. Fletcher says he has advisory firms, credit unions, community banks and other prospects interested in Private Label Trust, but no deals have been signed yet. It wasn't until last year that the OCC, which oversees national banks, adopted a final rule clarifying the ability of national banks to engage in fiduciary activities on a multi-state basis.
Going into the trust business takes time, and most of the NFS' prospects are slowly evaluating the service, Fletcher adds. "We recognize they are not in a big hurry. We are in the marketing phase."
Like NFS, National Independent Trust Company (NITC) is for advisors who want to run a trust business. Firms that join become operating divisions under a separate brand name that share infrastructure, including trust accounting systems, administrative and regulatory oversight, an insurance package and internal auditing, says D. Kyle McDonald, NITC's president and CEO. Divisions operate under NITC's bank charter. Advisors also are charged set-up and monthly fees. Unlike NFS, each division has an ownership stake in the overall company. So far, NITC has signed up seven firms as divisions in Florida, Oregon, West Virginia,Tennessee,Louisiana, Minnesota and Wisconsin. They have more than $900 million in assets.
The home of NITC is Ruston, La.-based Argent Financial Group, which is NITC's largest division and provides its infrastructure services. McDonald, also Argent's president and CEO, founded NITC a couple of years ago with Tom Batterman, president of Vigil Trust & Financial Advocacy in Wausau, Wisc.
But in August, NITC announced that Vigil would withdraw as a division no later than the end of 2003. "I really can't say much more than it was a difference in how we wanted to go about implementing a shared independent trust company concept," Batterman says. He says he's working on a project now to start another cooperative independent trust company with an operational center in Wisconsin and offices in areas throughout the country. Stay tuned.
Advisor Trust Company Looks For Investors A Second Time
National Advisors Trust Co.-formed by more than 80 leading financial advisors-is beginning a secondary offering to bring in $2 million in capital from approximately 40 more advisors. The move comes surprisingly soon after the firm opened last year with more than $6 million in capital.
Rosemary Hueser, director of marketing for the Overland, Kan.-based firm, says the funds will be used to offer new products and services and increase the asset base. Offering prospectuses are available to accredited investors, she says. The offering is expected to be open for six months, but can be closed before, Hueser adds. When the bank did its initial offering, which raised more than $6.8 million, advisors had to buy at least 40 shares, worth $40,000, to become shareholders.
Although advisors are entering the trust business in many different ways, National Advisors Trust is a unique undertaking. It is believed to represent the largest group of advisors to have pooled their resources to form a trust company. It only provides services to advisors who are shareholders, and its fees are far lower than most trust companies. Its main purpose is not to make a profit but to provide services for its shareholders. National Advisors Trust also negotiates with vendors to offer various services to its advisors at better rates.
"The reason we formed National Advisors Trust Company is to provide low cost and high service for custodial and trust clients," says Ray Ferrara, CFP, a former board member who is president and CEO of ProVise Management Group LLC in Clearwater, Fla. "The feeling we have is that trust services are going to increasingly become an important part of high-net-worth individuals' financial plans, and we want to make sure the services they're receiving are what we want them to be and not at the exorbitant levels of bank trust departments."
Hueser says the bank now has about $375 million in assets. About two-thirds of the total are in custodial accounts and the rest are in trust relationships, she says.
Several advisor shareholders say they think the company has done very well for a start up, although the start was slower than they had hoped. Still, they are optimistic about the bank's future. "I think it's going very well. It's a new company, so there have certainly been speed bumps, procedural issues and what have you," says Peter Wheeler, president of Wheeler/Frost Associates in San Diego and managing director of the Family Office Network, a virtual family office network for advisors.
Rich Kahler, president of the Kahler Financial Group in Rapid City, S.D., says he was very impressed with the plans presented at the firm's annual meeting in May, but has been disappointed in its back-office services. "The back room has been a nightmare for us," he says.
Hueser and others say most of the back-office kinks have been worked out. "There always are operational issues," she says. "All of ours were on a timeline, and they've long since been taken care of."
Board member Tom Connelly, president and chief investment officer of Keats, Connelly and Associates Inc. in Phoenix, says he believes what's been accomplished since the bank was chartered in October 2001 has been pretty incredible. "This is the first advisor-initiated venture on this scale. That is certainly worth preserving for that aspect alone," Connelly says. "Working with advisors is kind of like trying to herd cats, so it's kind of amazing it's been successful at this point."