Now that truly independent trust companies are shaking up the financial landscape, some vendors have hit a strategic wall. It’s time for the giants to wake up and for “me too” advisor-friendly firms to further differentiate or die.
[caption id="attachment_15538" align="alignright" width="255"] Click cover for free download profiling the 23 trust companies most eager to work with you -- and back up their talk with real value-added services. They won't just abstain from cannibalizing your accounts. They want to help you grow.[/caption]
When we started mapping the independent trust industry, it was hard to find a dozen firms willing to commit to sharing the relationships and the fees with investment advisors.
Three years later, so many trust companies have separated their administration services from the portfolio management side that we had the opposite problem: too big a universe, too many potential partners, most of which looked increasingly similar to the rest.
As a result, we’re happy to say the 2015 guide to Advisor-Friendly Trust Companies (download it HERE) is a lot smaller and more selective than the unwieldy 30 profiles we ranked last year.
Odds are good that market consolidation will narrow the field even more over the next 12 months. And in the meantime the giants are far from dead – there’s a lot of ruin in those empires for smart next-generation players to capture.
The least friendly of all
Back in 2012, full-service giants like Northern Trust, U.S. Trust and Bessemer dominated the map, essentially ensuring that any client that created a trust would be aggressively prospected away from the advisor who referred the account.
Needless to say, advisors still hate pushing business toward those institutions because in-house wealth managers would take over the trust assets shortly before marketing teams start “inquiring” about transferring the rest of the family’s assets.
If a full-service integrated trust and wealth management model is the only game a trust company offers, most advisors would simply prefer not to play.
But the three firms named above still control $6.7 trillion in trust assets, so clearly there’s plenty of space for more flexible – and less greedy – providers to carve out a viable business simply by diverting the referral flows and hanging on.
The 23 companies we profile in this year’s guide have under $500 billion between them, making the entire “advisor-friendly” class of 2015 a little smaller than Bank of America and U.S. Trust put together.
Add in big vendors like Schwab where trust service is notoriously slow and niche in-house-only companies like Whittier, and the “unfriendly” group still dominates the landscape.
That’s an enormous opportunity for disruptive providers and the advisors who work with them to share if the forces of cooperation prove stronger than inertia and zero-sum competition.
Remember, barely 1 in 10 advisors in our survey data is willing to add trust services to their platforms under any circumstances because the rest don’t want to introduce one of the full-service vendors to their best accounts.
Opening up alternatives opens up the other 90% of the channel to the possibility that recommending a trust doesn’t necessarily doom the client relationship. The clients get better long-term outcomes. The advisors get a way to differentiate themselves while the rest of the industry catches up.
Consolidation on the horizon?
And just maybe the giants go hungry enough to reevaluate their business practices.
In the meantime, the amount of assets on the table has encouraged dozens of trust companies to join the advisor-friendly revolution.
Back in 2012, that was an exciting prospect. Now that it’s finally coming true, it’s time the emphasis shifts from simple passive “friendliness” to the ways a particular firm can add concrete value to its advisor partners’ businesses.
Otherwise, the number of vendors has gotten so large that adding more choices to the menu isn’t even going to generate diminishing returns – it’s fair to say we’re at or near the point where analysis paralysis sets in and there are simply too many prospective partners to call.
The number of trust companies we had to cut from our rankings demonstrates just how fragmented this side of the market has become.
For a trust company to position itself as advisor-friendly requires extra marketing initiatives. A firm has to be willing to get its name out there and support projects like the Advisor-Friendly Trust Companies guide, which exists to educate everyone in the industry how far these firms have come from the old all-in-one competitive model.
The 23 names who made the cut this year put their best foot forward and opted in. But for Nevada, Alliance, Summit, Heritage Trust and several others, it doesn't seem to be worthwhile to continue to demonstrate how friendly they are.
Nobody would dispute that these firms aren’t happy to win advisors' referrals. But between them they’ve built relationships with maybe 400 advisors and captured well under $5 billion in trust assets, so scale is not in their favor.
To put those numbers in focus, the average trust company that remains in our narrowed universe this year has $15 billion on its books and is working with 625 advisors.
I love a disruptive start-up as much as anyone, but you need a disruptive angle to come out of the deep background and start capturing accounts. You need a differentiating factor, some niche or technological advantage or unique area of expertise that pushes you ahead of the pack.
Once you’ve got that factor on your side, you can strategically build to scale. Until then, you might be the best operator in the best jurisdiction on the planet, and it will still be an uphill struggle just to get the advisors to think of you when it’s time to send business your way.
In the meantime, there are a lot of other vendors fighting for the exact same accounts, all more or less vulnerable to an aggressive consolidator willing to pay a little extra to buy the assets when scale doesn’t come around fast enough.
We’ve already seen a little M&A in this business. I suspect one or two of the names on our 2014 list won’t be around in years to come. Those trusts aren’t going to go away. Someone will buy them.
Fighting over a finite pool of assets
After all, there are only so many high-net-worth families out there who can sink $100,000, $7 million or more into a trust.
Reverse engineering the math on our list and IRS filing data indicates that our remaining advisor-friendly trust companies administer around 150,000 trust accounts, or about one per each of the near-mythic 1% richest U.S. households.
These are the same 150,000 households you fight your fellow advisors to bring aboard your platform. Until wealth creation broadens out and creates a lot more multi-millionaires, the number is relatively static.
Now the IRS says the industry has maybe 3 million trusts to share, so our advisor-friendly firms really only represent 5% of the addressable opportunity – once again, the giants have a stranglehold on most accounts, even if that grip has weakened a lot in recent years.
Split 23 ways, that 5% share turns into extreme fragmentation. A strategic operator is going to roll a lot of these companies up on the way to challenging a Bessemer or even achieving the kind of scale Whittier Trust has on its side.
Odds are good the survivors will be heavily differentiated. Maybe they’ll tempt a lot of advisors with private label trust company programs, true custodian neutrality expanded marketing support or some other competitive edge.
Right now, each of the names left on our list have the potential to grow into that kind of strategic powerhouse. Arguably some are already there, plotting how to take the revolution to the next level.
They’re each “the best” trust company of the year so far. What they do with that potential over the next 12 months is up to them and their partners.
In the meantime, you can get a better sense of the industry landscape – and maybe find a partner of your own – if you download this year’s Advisor-Friendly Trust Companies report HERE.
