More Advisory Firms Seen Switching to Trust Charters to Ease Regulation

As a hedge against possible FINRA oversight of advisors and re-enactment of the Glass-Steagall Act  in a second Obama term, more RIAs are trading their SEC registration for trust licenses in top trust states.

States like New Hampshire and South Dakota report robust interest from wealth managers, family offices and other advisors looking to offer their clients the benefits of an in-house trust company as a hedge against possible FINRA oversight of advisors and more restrictions on how advisory firms can make money.

State chartered trust companies can do everything an SEC-registered advisor can do, plus serve as trustee and custodian. These privileges were given to both banks and trust companies with the enactment of the National Bank Act.

After a rocky year in the markets, high-net-worth clients are on the move -- and advisors looking for a competitive edge are hunting whatever it takes to give those investors everything they want.

And what those investors want, according to the experts, is an easy way to pass their wealth on to future generations as securely and efficiently as possible. In other words, they want an advisor who can help them set up and fund trust funds.

“Clients are constantly seeking greater certainty over the safety, disposition and management of their assets,” says Bob Ellis, a consultant at Fast Track Advisors.

By creating their own captive trust companies, wealth advisors more strongly retain clients.”

That’s the logic that’s driven dozens of advisors to start trust companies across the country in the last few years, with the lion’s share going to the states that combine investor-friendly statutes with advisor-friendly regulatory environments.

South Dakota alone gained about a half dozen public trust companies last year, with more applications in the pipeline. Nevada, Delaware and other top-tier jurisdictions have also been big winners in what research firm Cerulli Associates calculates is a decade-long boom in trust company creation.

“Interest seems to be on the uptick,” says Mark Purpura, chair of Delaware’s state bar association’s banking committee.

“I currently have several trust company formations in the pipeline.”

Becoming the trust advisor

Advisors have gotten so hungry for information on this topic that the Trust Advisor is running an in-depth webinar in two weeks. (Register here.)

But all this interest is really business as usual, says former Nevada banking commissioner Scott Walshaw, who -- like Purpura and Ellis -- will be a panelist.

“The motives haven’t changed much,” he explains. “What’s changed is that there is more opportunity for people to open trust companies now than ever before.”

Wealth managers still see a trust charter as a way to differentiate themselves in the marketplace, tempt new clients and keep old ones from straying.

After all, everybody in the business claims he or she offers “financial planning,” but only 15% even support plain vanilla trust funds, much less have what it takes to run dynastic trusts, asset protection trusts or other specialized vehicles.

And while many of the 15% are content to refer their clients to a third-party provider, Bob Ellis says your AUM gets a lot stickier when you do it yourself.

“Advisors are seeking to ensure that the strategies they develop for their best clients can't be easily unwound in favor of the next hot product or manager,” he says.

The right trust arrangement can keep the assets on your platform not only for the life of your client, but for generations to come -- or even forever.

Location, location, location

In theory, an advisor who wants to start a trust company can gamble everything on a federal charter or find a state that offers the right combination of flexibility, tax breaks and regulatory oversight.

But because states vary widely in terms of the types of trust they allow -- much less how hard they make it to apply for a charter -- most of the capital has flowed into a few exceptionally trust-friendly jurisdictions.

In these states, the barriers to entry are not as high as many advisors might think.

Nevada and Delaware, for example, generally want to see around $1 million in capital on a trust application. South Dakota will work with applicants who have as little as $200,000 on hand.

As a result, even advisors who used to be content to hand off their trust business to a third-party provider are considering taking that business back in-house.

“If you have a big enough clientele to invest the capital, forming a new trust company makes financial sense,” Scott Walshaw says.

“You’re reducing the lines of communication your clients have to deal with and keeping tighter control over the fee structure and the expense side of things,” he adds. “You can decide what to pass along to your clients, or what not to pass along.”

For example, advisor-run trust companies are well within their rights to charge an administration fee -- often 25 to 75 basis points -- on the trust assets.

That fee would be hard to negotiate in a third-party relationship, but advisors with their own trust company have complete control over how the money flows.

The advisor can absorb the entire cost of running the account, pass it all on to the client or come up with any arrangement in between.

These accounts can be surprisingly profitable in their own right, by the way. Some states charge supervision fees of barely 6 basis points a year, giving operationally nimble firms plenty of room to make money.

Does a trust company make sense for you?

The traditional breakpoint for thinking about adding a trust company to an existing advisory business is at around $100 million in AUM.

At that level, the required starting cash can represent a year or two of the revenue those client accounts throw off -- and it can take another year or two before the operation runs in the black.

For those a little lower down the food chain, there are always trust companies dedicated to directed trusts.

These arrangements keep the advisor in control of the way the assets are invested while taking on the work of administering the trusts themselves.

And while it hasn’t been tried yet, Walshaw is intrigued at the notion that several smaller advisory firms might team up to “share” a captive trust company.

“Get three or four friends together, and you might be able to do it,” he says.

Scott Martin, senior editor, The Trust Advisor


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