Advisors ramp up their game to ensure assets stay with them.
Unlike some of his colleagues in the planning world, Marr Leisure isn't
waiting for trust assets to drop into his lap randomly. In fact, he's
in the process of converting almost all of his clients' assets to trust
assets, using Schwab Institutional's soon-to-be-introduced platform for
trading and accounting. It's technology that Leisure helped beta test
earlier this year.
"We're preparing now for the end game in 2011 when the estate tax roars
back," says Leisure, who helms Leisure Capital Management, an advisory
firm managing $250 million in Costa Mesa, Calif.-almost all of it trust
assets. "We're doing all the legwork up front so we can have the
accounting done and increase the cost basis for clients, a critical
element when kids start inheriting assets after 2010," says Leisure,
who marvels at how well trusts fit his wealthy clients' needs and help
him acquire new assets. His average client these days has investable
assets of some $2.5 million.
Broker-dealers are marveling at the growth in trusts, too. With trusts
assets climbing over 20% at many broker-dealers at the half-year mark,
firms are unequivocally happy to be in the trust business these days,
too.
Opportunities for advisors abound, especially those working with baby
boomers, says Cathy Clauson, Schwab's vice president of product
development. To assist them, Schwab Institutional will roll out its new
trust accounting and tax reporting platform and its Schwab personal
trust division and corporate trustee capacity by year-end. Through the
second quarter, advisors have custodied a tidy $34 billion in new
assets with Schwab, for a 28% increase, Clauson says. Overall, Schwab
holds $287 billion in trust assets, which constitute 40% of the firm's
overall nonretirement funds. Clauson says she believes that the
industry is just at the very tip of explosive growth when it comes to
trust assets.
Currently, there are some $3.3 trillion in trusts nationwide. That's
expected to more than double to $7 trillion by 2010. Another phenomenon
worth watching, according to Chicago-based Spectrem Group, is the fact
that banks are losing ground steadily to broker-dealers. In fact, the
number of trusts at banks has declined more than 25% since 2002,
Spectrem is reporting. Banks' loss is broker-dealers' gain, analysts
agree.
The reasons for the growth in advisor-managed trusts and other types
are multifaceted, Clauson and other trust executives say. One
motivation is advisors' newfound and growing interest in the trust
arena. While a percentage of advisors who have worked with the very
wealthy have managed trusts for years, a growing sophistication and
complexity in people's lives, along with escalating wealth and an aging
population, make trusts a necessity for a far wider swath of the U.S.
population these days. And advisors are taking advantage of it, Clauson
says.
"I spoke with an advisor in New York recently who said they're checking
all their clients' trust documents to see how assets would transfer
upon the client's death, and found that a number of banks that don't
even exist anymore were named as successor trustees. That's not good
for anyone," Clauson says. "It's a real service that advisors can
provide if they're asking if trusts need to be updated or changed, and
determining whether relationships need to be built with successor
trustees or if new, advisor-friendly corporate trustees need to be
named."
How critical is this diligence? Very critical, say advisors, because if
a client dies and the named corporate trustee is a trust bank, there is
every likelihood that the bank will take over asset management. "That's
why it's important for advisors to do this legwork before and not after
clients are infirm or pass away," says Tom Berry, senior vice president
of LPL's private client services. "The last thing in the world clients
want most of the time is for strange folks to take asset management of
their legacy away from their trusted advisor. But if these issues
aren't addressed before illness or death, it's very difficult to stop
that train."
Berry, who oversees the trust company that LPL acquired several years
ago, saw more than $120 million in new trust assets flow in the door in
the first six months of the year, for a total of $675 million on the
retail side. He says he expects to see "a continuation of the 100%
growth per year in the next several years. What will lead to explosive
growth is advisors and their ability to create trusted relationships
with clients and their heirs," Berry says.
Scott Groom, founder of Groom's Wealth Management in Mill Valley,
Calif., says the many advantages of working with LPL's integrated
platform and trust company enticed him to leave the wirehouse where he
had worked for many years. "I find it allows me to serve my customers
at the highest level," he says. "It's completely collaborative and
turnkey, and we have totally open architecture, which is often a
weakness at wirehouses or banks where you have one or more of their
proprietary funds dragging down performance."
The drag on performance is a competitive advantage to anyone working
independently with one of the broker-dealer platforms, Groom says. "We
often find with existing clients that their trust needs are being
poorly served with proprietary investments, so moving the trust allows
me to manage the assets," he says. "At the same time, it allows us to
attract and win trust business. As fiduciaries, we have a
responsibility to insert LPL's private trust company into clients'
trust documents so we can perpetuate the relationship we've developed
over the years."
Groom also credits the synergy LPL's trust platform provides with
allowing him to grow his assets. The firm currently manages $90
million, with $10 million in trust assets "and another $20 million in
client trust assets we'd like to move because of poor servicing and
investment performance. Once you get the ball rolling, it hits you: Why
not go after $10 million and $20 million accounts?"
Groom says trying to win and manage trust business when he worked at a
wirehouse was "the polar opposite-incredibly cumbersome, with limited
investment choices."
Fidelity's Gary Gallagher says the phenomenal growth in trust assets is
still just in its infancy. "With all the wealthy boomers and the need
for estate planning, we're just beginning to see growth in trusts,"
says Gallagher, who is Fidelity's senior vice president of product
management.
Fidelity has seen its trust assets increase some 71% to $58 billion in
the past 18 months, says Gallagher, who credits advisors, along with
trust banks, with delivering the bulk of the assets.
Staying on top of the market is critical for advisors, he adds, since recent research has shown that 70% of investors with assets of $1 million or more use trusts and 60% of households with $500,000 to $1 million use them. "I think it's still an area where advisors are embracing trusts at different levels, but what's important to remember is, if they're not talking to their clients about trusts, someone else is," Gallagher says.
Schwab's Clauson agrees, and says advisors are in a fantastic position
to make sure clients' needs and wishes are met. "Advisors are very
client driven," he explains. "At a time when clients need them most,
after a death in the family, the last thing you want when the living
trust passes is for a corporate trustee to pull the account, so the
advisor is cut out of the picture and can't ensure the widow is getting
paid and investment management done with a level of independence."
The complexity of people's lives is also spurring the creation of
trusts. With second and third marriages and financial responsibilities
woven throughout a multitude of blended family situations, it's very
difficult for many families to do legacy planning and ensure their
estate and income wishes are carried out without trusts, Clauson says.
"That's one of the reasons we've created a corporate trustee capacity,
so that advisors and their clients have some place to turn and don't
have to rely on Uncle John, who may never have liked your second wife
or one or more of your kids."
Dave Ness, president of Raymond James Trust Companies, is predicting a
21% increase in the firm's trust assets by year-end, and is expecting
to add close to $350 million to the $1.250 billion trust assets
custodied at the firm. "There are a couple of trends worth noting,"
Ness says. "Our average account size has grown to just over $1.2
million, reflective of so many folks in this country getting richer. At
the same time, everyone is getting older, so we think a certain amount
of trust business will come your way just by virtue of being in the
business a number of years."
Still, Raymond James is hoping to increase that growth exponentially.
More than 2,000 advisors have been through the Trust 101 School that
Raymond James offers. We're running this about six times a year in
desirable geographic locations and believe this will help more advisors
really penetrate the trust market," Ness says.