Some agree banks' loss of investors' trust assets is advisors' gain. Now, for that marketing plan.
After 30 years of trying to find trust providers
that weren't going to compete neck-and-neck with him, Carl Brooks
thinks he's finally got things all figured out on the trust front. And
it's a good thing, too, because clients' trust assets are literally
falling into Brooks' lap.
"Just a couple of months ago a client walked into my
office upset that a bank trust department had cut him off," says
Brooks, executive vice president of Carroll Financial Associates in
Charlotte, N.C. "He'd been my client for years and I never even knew he
was the beneficiary of a $600,000 trust. This is happening more and
more."
Brooks, whose investment advisory firm manages $1.2
billion in client assets, is on the receiving end of an enviable trend:
As investors and trust beneficiaries grow increasingly disenchanted
with banks' trust services, they are asking their investment advisors
to take over, often unsolicited. While broker-dealer executives
report asset growth in trusts of 15% to 20% annually, bank trust
departments are seeing a decline, from a peak of $1.1 trillion in 1999
to $986 billion today, says Ann C. Mahrdt, director at Chicago-based
Spectrem Group, which tracks the bank trust market. The number of
actual trust accounts is dropping even faster at banks, Mahrdt says,
declining from 941,000 in 2002 to 720,000 today.
"We expect to see a lot more transfers," says Susan
Anderson, president of ING Trust, which Brooks uses. It's a fit, since
Brooks' firm is registered with ING's affiliated broker-dealer
Financial Network Investment Corp.
With an onslaught of new broker-dealer trust
offerings (either created or acquired) and explicit trust language that
cements the asset management relationship advisors have with their
clients, Anderson and many broker-dealer executives say they are
already seeing rich new assets come in the door, almost all of them
from existing advisor clients.
"I think the real change will come about because
advisors will let their clients know that they have trust services
available," says Anderson, whose company manages $26 billion in
institutional trusts and $125 million in retail trusts, the latter of
which has been brought in by ING's 9,000 affiliated advisors in the
past three years. "Right now the bulk of trust assets are sitting in
sleepy banks, but as baby boomers inherit $30 trillion to $40 trillion
in wealth, those assets will move to where the service is best and we
think that's with independent advisors."
Other broker-dealer executives agree. "Here's the
trust sales tip of the day," says Tom Berry, LPL's senior vice
president of private client services. "Almost every one of our trusts
is coming from existing clients, but you have to ask."
Berry, who oversees the trust company that LPL
acquired three years ago, has seen assets grow to $250 million on the
retail side in two years, with advisors bringing in more new assets
through June of this year than in all of 2005. (The company manages a
total of $30 billion in trust assets, including IRAs).
"All of our advisors have in-depth financial
knowledge, but it's very common for them to be surprised that clients
even have trusts assets," says Berry, who predicts the influx of boomer
inheritances and growing trust education will shorten advisors'
learning curve quickly. "We had 300 advisors show up for a three-day
symposium on trusts earlier this year in Scottsdale. Three days, and
all that was discussed was trusts. I think that shows the level of
interest advisors have," Berry says.
LPL is also hosting 12 two-hour trust seminars in
major cities throughout the U.S. this year. The seminars are designed
to help advisors identify trust opportunities. The first step, Berry
reiterates, is that advisors need to ask if clients have trusts.
Looking for IRS form 1099 in client income tax statements is a
clear-cut way to determine if a client has trust income. Some investors
may not recognize that the $300 or $3,000 they get in monthly income
from a bank comes from a trust. Often, since they are a beneficiary and
not an owner, they don't report the trust to their advisor, even if
they recognize it as such.
"The next logical question for advisors to ask is
'Hey, did you know I can manage that trust for you?'" Berry says. "
There is a good chance that you may find the bank is using private
label or proprietary banks fund with high fees and unpublished
returns."
While wrestling trust assets away from banks can seem like a daunting
task, ING, LPL and some of the other broker-dealer trust companies we
spoke with will essentially do much of the legal wrangling for advisors
and their clients. Brooks says the $600,000 trust his client recently
told him about took about three months to move from one of the
country's largest banks to ING Trust.
In addition to the joy of being able to find
additional and significant client assets just by asking, Berry says
that trust assets are "stickier" than other assets, with an average
life of 17 years, and as a result will improve the business valuation
and sales price an advisor can get for his or her firm.
Another fact for advisors to consider while they work on their trust
sales pitch: They may well be able to improve a trust client's
investment performance, reporting and control, but it is most often
poor service from banks that drive clients to deliver trust assets to
advisors and broker-dealers.
"I think one of the biggest problem is that trust
clients don't know who their contact is at banks. With all the bank
buyouts, we are now seeing clients, the beneficiaries of $5 million
trusts, who have to use 800-numbers for service," Berry says.
Currently, with $127 billion in trust assets (23% of
which are institutional assets kept in trust), Schwab is the 500-pound
trust gorilla among independent advisors. Yet remarkably only $3
billion is kept with U.S. Trust, the trust bank Schwab acquired six
years ago for $3.2 billion in stock. This reveals the assets that
advisors have delivered to Schwab, and the fact that advisors do not
like to lock assets away in a trust bank for fear that the bank will
steal asset management.
Cathy Clauson, Schwab's vice president of product
development, says that the company is expanding its broker-dealer
system for doing tax and income reporting, cashiering and beneficiary
services so none of the advisors who uses its services will need to
move trust assets to a bank. "We think the majority of assets in the
U.S. will transfer in a trust, so we're very serious about getting a
pulse on the trust market and what advisors want," says Clauson, who
has been overseeing a series of advisor focus groups across the country
over the past two years. The clients of Schwab advisors currently keep
20% to 30% of their assets in trust, and Clauson says that will grow
dramatically in the years ahead.
Another interesting Schwab finding: While East Coast
clients tend to represent old wealth and be the beneficiary or trustee
of a trust managed by a bank trust company, West Coast investors are
vastly different, Clauson reports. "We see much fewer corporate
trustees on the West Coast," she adds. "Even in
irrevocable trusts, clients tend to be trustees."
Dave Ness, president of Raymond James Trust
Companies, which has $1.25 billion in assets, says the firm is seeing a
trend toward naming corporate trustees. "I think when Dad dies and
leaves the money in trust to Mom, the question becomes 'Who will be the
trustee, the kids or us?' And I think more and more, as account sizes
and complexity grow, the answer is us," says Ness.
Even if advisors find a local bank that will
accommodate their trust needs, "you're one merger away from being
fired," says Ness, who says he recommends to advisors that they build
an "A" team of estate planning lawyers and CPAs to enable them to
compete.
Allowing clients to name a family member or friend
as a trustee can be a dangerous proposition for an advisor, says Bob
Oehlschlager, founder and executive vice president of independent trust
company Santa Fe Trust. Why? "Because when that family member or friend
dies, control will revert to a trust bank, who will fire the advisor
immediately and take over investment management." Santa Fe trust does
no investment management.
Oehlschlager says that advisors owe it to clients
and themselves to be proactive about doing estate planning early,
before there is a potential cancer or Alzheimer's diagnosis. "Don't
wait," says the trust executive, who says his company is taking in $80
million to $100 million in new trust assets each month after nine years
of operation. "Most are in irrevocable trusts and the beneficiary wants
to move the trust so they can work with their trusted financial
advisor," he adds.