Trust companies that work with financial advisors tend to be smaller firms that cater to advisors' needs and concerns. Such companies generally provide a host of services, and a particular selling point is that even when one is named as trustee, the advisor still can manage the trust's investments.

But now some powerhouses in the financial services industry see potential in this marketplace and are wooing advisors as well. Pershing LLC, a subsidiary of The Bank of New York, and Fidelity Investments this year introduced trust programs for advisors, each of which hopes to capitalize on their existing relationships with thousands of clients.

Jersey City, N.J.-based Pershing made the move on July 1 by offering to its 1,100 broker-dealer customers-representing 80,000 investment professionals-the directed trust services of The Bank of New York, which has been providing trust services to the wealthy for 170 years. Later this year, Pershing plans to roll out the same offering to 150 registered investment advisors (RIAs) who participate in its Investment Manager Services program, says Ron Fiske, managing director of product management and development at Pershing.

In January, Boston-based Fidelity expanded its WealthAccess platform to include a trustee services program for RIAs. In April, Fidelity added other services that allow RIAs who do business with trust companies or have acquired one to interface custodial data to trust accounting and asset management systems. Fidelity is the second-largest provider of custody and brokerage services to the RIA marketplace, with $109 billion in assets on behalf of more than 2,270 advisors as of June 30. Fidelity Trustee Services are available to all of its RIA clients who custody assets at Fidelity.

Both The Bank of New York and Fidelity already offer comprehensive trust services-including investment management-directly to retail investors. But both still believe the advisory market is worth going after. Growth in the number of trusts and more interest from grantors and trustees in having trust investments managed independently will be a boon for financial advisors, observers believe.

"Just in terms of trust business, we think it's an attractive business," says John Dowd, The Bank of New York's chief trust officer and senior vice president of private client services. "Trusts are in greater demand today and will be in the future because of the aging demographic of the boomers. Trusts remain the most basic tool for transferring wealth, and the percentage of assets held in trusts by households aged 65 years or older will increase now until 2019." By then, 70% of personal trust assets will be held by households headed by individuals aged 65 years or older, he adds. Dowd notes he got his figures from the VIP Forum's study "Through The Looking Glass: Ten Observations on the Future of Wealth Management."

Although the number of trusts and interest in them is mushrooming, it's very difficult to accurately determine their total assets. That's because trust assets are held in accounts at a variety of firms-including banks, brokerages, mutual funds and trust companies-which are monitored by a host of different state and federal agencies.

Big banks, however, traditionally have held the lion's share of trust assets. The Federal Deposit Insurance Corp. (FDIC) estimates that the largest financial institutions hold close to 98% of all trust assets. About 2,000 banks and thrifts now report trust asset information to the FDIC, and at December 31, 2003, they had $37.34 trillion in trust assets, says FDIC spokesman David Barr. That number represents an 83% increase from the $20.35 trillion in trust assets reported to the FDIC five years ago, and a 250% increase from $10.61 trillion ten years ago.

However, the number of U.S. banks had fallen 48% by the end of last year-to 7,842 from 15,084 in 1984, according to the FDIC's Future of Banking Study "The Declining Number of U.S. Banking Organizations: Will the Trend Continue?" Although the result has been fewer banks offering trust services, Barr says the FDIC hasn't seen a big change in the degree of concentration of trust assets at banks overall.

That may be true, but the trust business has not been left unscathed by bank mergers. The Wall Street Journal reported in July that bank consolidation has led to discontented trust customers and a wave of lawsuits that have accused trustees of misdeeds including financial mismanagement and putting their own interests first. Customers have complained of frequent changes in their trust officer, relentless marketing and poor communication.

Donna Cournoyer, vice president of trust services for Fidelity's Registered Investment Advisor Group, says bank consolidations have fueled interest in individual trustees versus corporate trustees, and many of those individuals are turning to advisors to manage their trust investments. However, she adds, the growth of independent trust companies targeting these RIAs may result in renewed interest in using corporate trustees, particularly those who are able to meet the unique needs of RIAs.

It is The Uniform Prudent Investor Act, adopted by about 40 states, that allows fiduciaries to delegate investment management although they must continue to monitor performance. As a result, an advisor doesn't necessarily face losing the investment management of a client's assets that have been placed in a trust administered by a corporate trustee. Now many smaller firms-mainly start-up trust companies or established state-chartered ones-focus on serving advisors who manage trust investments, and that number is continuing to grow, Cournoyer says.

The trend toward outside investment management has meant bigger firms want to establish more relationships with advisors, too. "We've always been a full-service trustee, but ten years ago certain clients wanted outside investment advisors, so we had to adapt to the demographic change. That's going to continue to happen. More high-net-worth individuals want to go with their preferred investment advisors," Dowd says.

Both Bank of New York and Fidelity offer advisors integrated systems and a variety of trust services. Pershing's Fiske notes the firm built a link between its custody platform and the bank's trust record keeping capability. "Advisors can maintain the assets on Pershing's platform and get Bank of New York's oversight and trust record keeping. That allows advisors to handle accounts in an integrated fashion," he says.

When Pershing's broker-dealer and RIA clients provide investment management to trust portfolios, the Bank of New York will act as trustee. The bank also will provide trust administration services in cases where there's an outside trustee.

Fidelity has added trustee services as part of its strategy to provide an array of products to serve wealth managers who work with high-net-worth clients, says Gary Gallagher, senior vice president of Fidelity's Registered Investment Advisor Group.

Fidelity offers four levels of service to RIAs, Cournoyer notes. Its Administrative Trustee Services allows an advisor's client to appoint Fidelity Personal Trust Company as trustee, while the advisor manages the trust investments. The trust company handles custody, accounting, tax filing and reporting. With its agent for trustee services, Fidelity supports an outside trustee, such as a family member, by providing administration services including tax returns, accounting and reporting. Through its specialized accounting and reporting services, advisors can provide their clients with brokerage reporting, including principal and income separation, tax-lot accounting and other record keeping services. Its trust custody services are for independent RIAs who have converted to trust companies or are using trust company services. "Under this service we are taking our core competencies of brokerage clearing and execution and adding two capabilities. We do clearing through an omnibus account and we are applying interfaces to the trust accounting system," Cournoyer says.

Just how far the shift will go toward independent investment advisors managing trust portfolios is difficult to say. The FDIC's Barr notes that while the prudent investor act allows fiduciaries to delegate investment management, the fiduciaries must consider the cost to accounts of hiring an outside investment manager. "It will depend on each institution's assessment as to whether such an arrangement is both cost effective and in the best interest of beneficiaries," he says.

Cournoyer agrees. "When you start to unbundle services, when you have the trustee providing administration and the advisor providing investment management, you have to look at the total fee. When you look at that, it has to be competitive with what trust providers would offer," she says. "I do think advisors provide very specialized services. There shouldn't be any duplication, and the price has to be competitive."