Custodians square off in a newly competitive trust services market.
The baby boomers are coming.
In financial planning circles, that seems to be one
of the predominant rallying cries these days, with study after study
noting that baby boomers are getting ready to transfer a gargantuan sum
of money to their heirs. These boomers are going to need estate and
trust services to handle the trillions of dollars in assets that are
going to move from one generation to another over the next three to
four decades-a little fact that some have advisors have taken as a
wakeup call.
At the same time, there's been an explosion in the
number of nonbank trust companies, and a new emphasis on advisors
adopting a comprehensive service model in which they play a key role in
their client's estate and trust service needs, as well as retaining
management over their clients' trust accounts.
Custodians, meanwhile, are feeling the pressure and
ramping up trust services for what they feel will be increased demand
among advisors. The Bank of New York has been in the trust business for
175 years, and has provided trust services to advisors on a limited
basis since 1998 through its advisory custody platform.
It wasn't until September 2004, however, that the
bank launched a serious trust services program for advisors, through
its Pershing clearing and custody unit. The service, now made available
through the Pershing platform, is currently being used by advisors at
50 broker-dealer firms, says Tom Scaturro, Pershing's managing director
and director of sales and marketing for trust services. "It's a major
part of our growth strategy," he says.
In addition to playing a part in the frequently
cited asset transfers of the baby boomer generation, trust services
provide advisors with longer lasting relationships, Scaturro says. On
average, he says, a trust account lasts an average of 15 years.
The Bank of New York's average is higher, with an average account life
of 22 years.
What's changed to make the market more open to
competition is that consolidation in the banking industry has left some
trust customers unhappy with their services.
"In the past, nobody ever made a change," he says.
Pershing has about $750 million in its directed
trust accounts, with more than $200 million of the total moving to
Pershing since the 2004 launch of its expanded trust services.
Other custodians also have utilized established
trust companies to provide services to independent advisors in recent
years. Charles Schwab, which acquired U.S. Trust in 2000, provides
services through that company as part of its wealth management
offerings.
Fidelity launched its trust services program three
years ago, starting with an administrative trustee service and, since
then, adding fiduciary reporting services and a trust custody service.
The company is also on the verge of launching a
referral program, which will start out as a list of nine trust
companies to which Fidelity will refer clients who need more than one
trust relationship. "Advisors have complicated trust relationships and
it's very common for them to need multiple relationships with multiple
trust companies," says Donna Cournoyer, Fidelity's vice president for
trust services.
In cases where more than one relationship is needed,
the referral program will provide advisors and their clients with a
central accounting and recording platform, and uniform standards in the
areas of technology and investment oversight. "All firms that
participate will agree to delegate investment authority to advisors who
have existing relationships," Cournoyer says.
Fidelity has about $30 billion in trust accounts on
its platform and 6,500 accounts, through relationships with about 35
advisors, she adds. Education programs are becoming an increasingly
important part of Fidelity's trust services offerings, she says.
"We have a lot of ongoing seminars and education
around this area so advisors can not only identify opportunities, but
learn how to talk to customers about it," Cournoyer says. "The types of
trusts that have evolved over the last five years have become much more
complicated."
Ameritrade offers trust services through
relationships with two Delaware-based companies: American Guaranty
& Trust and Capital Trust Co., says James Wangsness, Ameritrade's
senior vice president of advisor services. Wangsness, who formerly
worked in the personal trust division of JP Morgan, says that most
advisors who make use of the company's trust services are dealing with
the transfer of existing trust accounts.
"There aren't a lot of new trusts being written," he
says. "The business is not in writing a new trust, it is actually in
the advisor taking over management of an existing trust."
Wangsness, however, feels there is not yet a
universal need for trust services among advisors-primarily because the
typical client has no need for trust strategies until their assets
reach multi-million-dollar levels. "I think there is a little more talk
than there is real action here, except for firms that have a true
high-net-worth clientele," he says.
Yet Ameritrade, which has put a focus on serving the
smaller-sized advisor accounts that have been shunned by custodians
such as Schwab and Fidelity, still sees a growing need for trust
services, he adds, due to increased demands for trust and estate
services and charitable giving expertise. "This is a place where we
will be moving," he says.
Smaller companies are also seeing an up tick in
demand for trust services among advisors. National Advisors Trust has
reached $2.8 billion in trust assets, three years after its founding as
a trust company specifically focused on the needs of independent
advisors. The company supports 125 advisory firms, about a dozen of
which were added in the past year. The company only serves advisors who
are shareholders.
The company's affiliated advisors manage assets
totaling about $60 billion, and National Advisors Trust believes it has
the potential to eventually custody up to 25% of that amount, says
company president David Roberts. He adds that advisors with the
capability to add a planning component to their investment advisory
services are the most likely to adopt a trust services offering. "I can
tell you there are more that are getting into it," Roberts says.