More Advisors, Estate Planners Seen Starting Trust Companies

More Advisors, Estate Planners Seen Starting Trust Companies

At a time when financial advisors are looking for every possible business advantage, launching an advisor-owned trust company appears to be an increasingly attractive option.

At least 50 advisory firms around the country have opened up trust companies so far over the past 5 years, and that's just according to the banking authorities in three states: South Dakota, Nevada and New Hampshire.

The benefits to opening up a trust company include “stickier” assets, additional revenue, and a chance to differentiate a firm in a cutthroat marketplace, experts say.

On the downside, advisors who start trust companies on their own must confront a raft of unfamiliar legal responsibilities, an additional layer of regulation, and the prospect of competing for business against the likes of giant banks and brokerage houses such as Charles Schwab.

Although there are no known official statistics as to how many advisors own trust companies or how many have opened such firms recently, industry observers say that interest is definitely increasing

“I’m seeing more advisors and estate planners opening their own captive trust companies recently than in the past,” said Scott Martin, managing editor of The Trust Advisor. Advisors who are considering making the move should have at least $100 million in assets under management, and $300,000 to $400,000 in cash to put into the launch, he said. Moreover, it takes “at least $30 million of assets subject to trust administration in order for a trust company to begin to be a profitable enterprise,” Martin estimates.

Location is everything

Favorable trust laws and the absence of income taxes in Nevada and South Dakota have made those states popular places to incorporate trust companies.

Different states have dramatically different laws governing trust companies, the types of trusts permitted, and how trusts are taxed and the capital requirements for each.

The chart shows the top tier of trust-friendly states weighted by trust income tax treatment and how two popular types of trusts are governed. Note that all eight trust-friendly states permit asset protection trusts, and (in varying degrees) perpetual dynasty trusts, a popular tool for intergenerational transfers of wealth.

Make money sticky

For Christopher Holtby, a partner in Midland Wealth Management Ltd. of Dallas, which has $80 million in assets under advisement, the risk was worthwhile. He and his partners opened a trust company in South Dakota a few years ago and said it has added to the value of the advisory firm.

“Anyone interested in buying the company will realize that if you are the corporate trustee for many of your clients, and that is sticky money,” he explains. “You now have continuity,” he said. “If a client dies, it’s easy for the successors to replace an advisor, but it’s harder to replace the trust company.”

Nonetheless, competing with well-known banks and financial services institutions has been a marketing challenge. “You need to get your name out there, and you’re going up against companies with bigger names who people are familiar with,” Holtby explains.

Advisers opening trust companies also face a new set of compliance regulations, our own Scott Martin cautions. “There is a whole new area of law they have to become familiar with, and the trust business is fairly complicated,” he said.

But as advisory and wealth management firms get bigger, and new ones open up, launching a trust company “makes sense.” “You can diversify revenue, but even more importantly, you get a tremendous stickiness by being a corporate trustee, and it provides value to the overall relationship.”

“It’s not for everybody, but for a sophisticated advisor, it may be a legitimate business strategy,” said David Dunn, the managing director of Kingsbridge Private Wealth Management in Las Vegas, which started a trust company in South Dakota and recently closed it because of the heavy carrying costs. “South Dakota has good estate laws, and they want the business.”

Mr. Dunn, whose firm caters to a small number of very wealthy clients and has about $100 million in assets, said that he initially decided to open a trust company after detecting a demand for the service in the marketplace.

“I have an ultra-high-net-worth client base, and my clients would like us to be their trusted professional and to make their life easier,” he explains. “There are a lot of complex types of trusts and provisions being used now, and we’re working with the first generation of people who have these instruments. I really see a need for someone to step in and do the heavy lifting for them.”

He said that he wants to build his business to between $500 million and $1 billion in assets and views the trust company as a way to differentiate the firm in a competitive marketplace, as well as an ”asset retention tool.”

The prospect of being able to charge clients 30 to 40 basis points is also appealing, Mr. Dunn said, noting that this is “not the best time to raise fees” for wealth management.

Before his launch, Mr. Dunn remembers, “I don’t see the trust company as a huge moneymaker. There will be a lot of administration and a lot of work.” For him, that turned out to be true.

Private label, outsourced labor

A simpler alternative is a private label trust company containing all the attributes of an independent trust company. “Private labeling” outsources all fiduciary responsibility, administration, compliance, trust accounting, recordkeeping and tax reporting to a third-party trust company.

To your clients, a private label trust company will look and feel like your own stand-alone trust company, with the vendor outsourcing of fiduciary functions to a third party trust company not visible.

Private label trust capability allows advisors to outsource all the requirements of creating a trust company, including capital, information technology, specialized expertise and a state or national trust charter, to a third-party provider, while maintaining control of customer accounts and relationships.

"To clients, private label trust capabilities make it look and feel as if their financial advisor has its own trust company. There is no interruption in custody, administration, management or trading," Scott Martin sums up.

“Clients see added service. They don't know you're not the one in the kitchen.”


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