Seeing the writing on the wall, even the banks are increasingly reaching out to RIAs and outsourcing money management to offer more of the open architecture that advisors prefer. "You're seeing more open architecture on bank platforms," says Michael Roberts, an executive vice president of personal trust business at Reliance Financial Corp. "But keep in mind that it's a very, very small percentage. Ultimately, it will be very, very difficult to compete against an RIA because of their structure."
The brokerages are still rolling out aggressive campaigns to aid RIAs with trust assets, with either the custody or the trust administration. Schwab in late 2007 and early 2008 rolled out two offerings to aid advisors with trusts. One is a principal and income reporting offer that allows a family trustee to deal with accounting and payouts. The other offering is the one in which Schwab acts as the trustee. This offering has brought in $1.3 billion in assets in three years, says Cathy Clauson, Schwab's vice president of business integration and trust services.
"This is where the Charles Schwab bank takes on the responsibility" rather than a family member, says Clauson. "So maybe your trust is fairly complicated. Maybe it's a situation with a very wealthy family, potentially with multiple wives and multiple children by those wives, and you want someone who's going to treat them fairly per the letter of the trust. And you don't want to burden the family member with that."
For those who are unsure about where to turn, novel methods to the problem of choosing a trust arrangement are cropping up. Some RIAs have even pondered the idea of setting up their own in-house trust companies. Brent Beene, an advisor at Regent Atlantic in Morristown, N.J., says that his firm considered that very thing after its favorite trust-only company shuttered its doors.
"I sit on the management committee here at Regent Atlantic," says Beene, "and we've often considered, should we start a trust company? Should we acquire a trust company? And our conclusion is that it's just not a business we want to be in. You definitely have to have a certain number of staff dedicated and it really is a different skill set than most certified financial planners have. It's purely administrative, and to run it successfully you'd have to staff it up pretty well. It's just hard to find that being profitable as a stand-alone company."
It's a regulatory burden as well. Roberts, the executive vice president of Reliance Trust, which, like Flinn's firm, has a model focused mainly on trust administration (though it does some custody as well), says that a couple of RIAs have approached his company asking how to start their own trust firms. They bristle when they see how much compliance work there is and the deep capital resources required, he says.
"It's very sobering if you start looking into it and you're really going to do it correctly," he says. "The compliance and regulatory environment of the trust industry is, as it should be, much more stringent than being an investment advisor. Most regulators at the state level are increasing their capital requirements to ensure that firms are able to absorb risk and protect those client assets. That's a big number. If you have to pony up $2 million and park it in your firm as capital, you know that's $2 million you could have put to work hiring ten more advisors."
Another option for advisors is joining a more communal model like the one offered by National Advisors Trust, a nationally chartered trust company that started a few years ago with 80 member firms and has since grown to 130. The firm has gone from $3.7 billion under management in March 2009 to $7.2 billion in March of 2011, says CEO Ronald G. Ferguson. The firm says that 70% of its assets have come from transfers. Most of these are from large bank trust departments where he says the minimums have gone up or the service levels have gone down for accounts under $5 million.
"I think RIA firms were looking for a noncompetitive trust partner that would allow them to service their clients in a multigenerational fashion," says Ferguson.
National Advisors Trust offers services to both shareholders and non-shareholders, though the shareholders get a break on fees. The minimum investment to become a shareholder is a purchase of 50 shares at $1,000 a share. But with that you get not only lower fees but access to services like custody as well as other new programs: