Some advisors have built a strategy on making a complete transition from RIA to trust company.

As financial advisors seek to expand the breadth of their services, to a level that can be safely called comprehensive wealth management, trust services are becoming more and more a part of the advisor's domain.

But is it worth it for advisors to go even further-by transforming their practices into trust companies?

The answer depends on what type of practice you have, and what type you want to offer, but some advisors have indeed built their strategies on such a transformation.

It's a step that shouldn't be taken lightly, of course. Advisors who have done it say it requires money, patience and intense due diligence, with a lot of time shuffling paper, talking to regulators and raising money, usually several million dollars or more. If the trust charter is approved, extra staff is typically required to keep the heavily structured, and regulated, trust operations running smoothly.

There's also the burden of increased responsibility that comes with asset custody and administration. In the end, the advisor also has to deal with another crucial detail: He's not just running an advisory firm anymore. He's also running a bank.

"It doesn't bother people in the trust business who are used to the bureaucracy and the meetings that must take place," says Gene Balliett, of Balliett Financial Services in Winter Park, Fla., who made the transition himself several years ago. "To the average investment advisor, it's a shock."

Yet there may be a tradeoff to the spent time and money that could make a transition worthwhile. Among the possible benefits, they say, is increased client trust and retention, tighter operations and the ability to self-custody client accounts.

That's aside from the benefits that the trust services themselves bring to the table, such as the firm being able to act as a trustee on the behalf of clients, as well as an advisor, and the ability to retain client business through multiple generations.

"I do think there are tangible marketing benefits to being able to call yourself a trust company," says Tom Batterman, president of Vigil Trust & Financial Advocacy in Wausau, Wis., which offers a service that helps streamline the transition from RIA to trust company. "People feel like they're dealing more with an institution than a normal investment advisory firm."

Among the advantages to converting part or all of a firm to a trust company structure are its ability to create client account anonymity and the ability to pool assets across customer accounts. As a result, some advisors think they can lower their long-term cost structure by creating omnibus accounts, pooling assets while separating principal and income, explains Jay Lanigan, president of Fidelity's RIA unit.

Building stronger client relationships was the main impetus behind the creation of AMG Guaranty Trust in Denver, when it was formed through a merger of Asset Management Group and the trust department of Guaranty Bank and Trust in 2001.

Earl Wright, one of the founders of AMG and president and CEO of AMG Guaranty Trust, says AMG decided 10 years ago that it needed to respond to clients demands for trust services. "Our clients were asking us to be trustees and we couldn't be," he says. In addition, the firm was losing accounts of $5 million and larger to trust companies, particularly upon the death of longtime clients. "We felt it was kind of a foolish business model to end up having the clients we had been quite successful with ending up transitioning their assets away from us," Wright adds.

So it was in 1996 that AMG began a serious study of its options, hiring attorney Sheryl Bollinger to come up with the best way for the company to adopt trust services. That included considering everything from offering partial trust services through a third party to completely transforming the firm into a trust company.

One of the first decisions they made was to seek a federal charter under the jurisdiction of the Office of the Comptroller of the Currency (OCC), primarily because AMG already had offices in four different states. The main goal was to put the company in a position where it could act as a corporate trustee for its high net worth clients, Bollinger says.

Another question to deal with was whether to roll everything up into one company, or retain the SEC-regulated RIA end of the business and set up a sister company or a subsidiary. That question, however, was answered almost from the beginning by the guidelines AMG set up for the changes.

"We believed in keeping it simple," Wright says. "We wanted to know, 'What is the simplest way could do this and make sure we don't have a lot of regulatory agencies to deal with.'"

That set the firm on a course to be one entity regulated by the OCC. What ended up helping is that AMG was already in compliance with many of OCC's operational and reporting rules, Wright says. "We've held ourselves to fiduciary standards since we organized in 1974," he says.

Perhaps the key turning point in the firm's transition came in 1999, when firm officials thought they had decided to undergo a soup-to-nuts application process that would have resulted in the formation of a new trust company. That plan changed, however, after the firm consulted with a local bank and decided on merging with its trust division.

The plan called for the trust division to merge with AMG, under AMG management, with the bank receiving shares in the new company equal to 16% of ownership, according to Wright. For AMG, it provided a streamlined way to transition into a trust company. The bank, meanwhile, got an ownership interest and a source for comprehensive wealth management for its high-end clients.

The merger also allowed the new trust company to offer a broader variety of services than it otherwise would have, including services for special needs and corporate trusts, says Bollinger. "If there was no merger opportunity, we probably would have started with much more limited trustee services," she says.

Now, three years after the merger was completed, Wright says that 90% of the trust company's clients said in a recent survey that they would refer people to the business. "We are driven by what we think our clients' needs are," he says.

Batterman says that although the application process can be cumbersome, and expensive, he doesn't feel operating as a trust company is more expensive than with an RIA. "It may actually be cheaper," he says.

One reason, he says, is the savings that can be achieved by eliminating the fees of a third-party custodian. For example, he says, a trust company doesn't have to deal with the "shelf space" deals that mutual funds pass on to investors. "The trust company can go directly to a fund and settle all transactions without any costs," he says. An RIA could, conceivably do the same thing, but would have to open an account directly with the mutual fund.

Another advantage, he says, is that trust companies can more easily provide clients with one statement containing all their assets, and custody non-registered investments, such as private equity vehicles. "Basically trust companies and RIAs are pretty much in the same business," he says. "It's just that one of the big differences other than the ability to be a trustee is the responsibility for asset administration. Regulators are looking for a trust company to actually secure the custody of the securities."

Trust companies such as National Independent Trust Company (NITCO), give advisors something of a shortcut into the trustee business. Advisors who transition under NITCO, for example, become operating divisions of the company, which provides back office services, administrative and regulatory oversight and internal auditing. NITCO charges a monthly $2,500 fee, plus an annual charge upwards of 20 basis points on assets for the service, according to D. Kyle McDonald, NITCO's president and CEO.

One advisor who has tried to make the transition to a trust company says regulators are not the only people who will have a big impact on what happens. Clients are also key, he says.

"I made the mistake of not asking my clients what they thought about my company becoming a trust company. I just did it," says Balliett of Balliett Financial Services. "Lo and behold, they were less than thrilled."

It turns out that has partly to do with the fact that 90% of Balliett's clientele is comprised of physicians. As a general characteristic, Balliett says, his clients like to hold their finances close to the vest and have a strong do-it-yourself streak.

"So they typically have two or three more people or companies managing their money for them," he says. Whatever the reasons, most of Balliett's clients didn't care for the change, which he made happen through NITCO's services, and as a result he lost some business.

As a result, he cautions any advisor considering a move into the trust business to make his or her intentions known to clients early in the process. He also recommends that advisors have a clear plan for how they're going to attract trust clients, including building relationships with estate planning attorneys, CPAs and even community banks. "Anyone who would start his own trust company needs deep pockets and loads of patience," he says.