Over the last several years, a new crop of trust companies has sprung up to serve the RIA market. These companies shoulder the trust burdens of clients while allowing advisors to focus on investments and "own" the relationships. Advisors have turned to them largely out of fear that the biggest trust companies, often part of large banks or which offer wealth management services, will lure wealthy clients away.
Some experts worry that these young firms aren't as knowledgeable as old-line trust companies. They fret that the complex responsibilities of a corporate trustee will be beyond their ability, and that clients will end up paying.
One trust and estate attorney predicts that use of a young trust company could result in an "absolute nightmare." Matthew Erskine, whose practice in Worcester, Mass., specializes in trusts for collectors and entrepreneurs, says he fears their lack of experience. Worst case, he adds, "They're going to explode."
Nobody tracks nationwide figures for such firms, because they are overseen by an agglomeration of federal and state regulators. There is no central clearinghouse for data. The Conference of State Bank Supervisors, which exists to advance the cause of state banking departments, declined to comment on industry concerns. But just in South Dakota, which has aggressively wooed the newcomers, the number has doubled in the last five years to 67, with 20 born last year alone - although South Dakota officials are quick to note that just five firms work with RIAs.
South Dakota's attraction includes no estate tax and no rules against perpetuity, so wealthy clients can shelter themselves and their families from estate taxes forever. The state also allows an individual to set up a trust to place her assets outside the reach of creditors, but still have access to the money - a no-no just about everywhere else.
Meanwhile, there is strong anecdotal evidence that state-chartered trust companies are gathering steam all around the country. "I have learned more in the past few years about independent trust companies" than in previous years because they are popping up so frequently, says Joe Weaver, president of Raymond James Trust, the firm's captive trust company.
Erskine believes that some of the new trust companies are too loosely regulated, with few restrictions or capital requirements.
Indeed, some trust companies are opting out of the traditional fiduciary oversight of the investments. "If I were an attorney," says Mike Flinn, one of the founding employees of Advisory Trust, "I'd lean toward using a nondirected model" - one that requires the trustee to accept fiduciary liability for the investment management. "I'd want that trustee's butt on the line."
In 1991, Advisory Trust changed the traditional business model of a trust company. To woo RIAs, it unbundled the four main services trust companies offered: relationship management, asset management, asset custody and trust administration, which involves having fiduciary oversight of the assets. The Delaware-based company can do them all, but really pushes only trust administration. "Let the advisors focus on what they do best - managing relationships and assets," Flinn says.
Trust services have landed in the spotlight as more than $30 trillion of assets is set to be passed from baby boomers to heirs in the coming decades. Rather than give it to children or grandchildren directly, many wealthy clients opt to stash the wealth in trusts.
For RIAs choosing a trust company, there are a number of considerations. Those chartered at the federal level are the most closely regulated. Many of these trust companies don't care to partner with RIAs, however, because it is far less profitable than offering a client all of their services, including money management. (A rough rule of thumb is that trustee duties command about 50 basis points - less than can be earned from asset management.)
Next are state-chartered limited purpose trust companies. They face less strict capital requirements than federal trust companies but can work only in the state in which they are chartered. They still act as corporate fiduciaries, and can still manage a client's money.
There also are private trust companies, which can generally serve as a fiduciary only for a family group. Also chartered by individual states, they have lower standards of capitalization and regulation.
How should an advisor choose? Genworth Financial Trust provides one option. Genworth, which is not a trust company, started a program last year called Trust Connections to link independent advisors with trust companies with advisor-friendly business models. These trust companies specialize in serving as corporate trustees - a service RIAs generally cannot perform - handling issues such as distributions, taxes and accounting, but leave the primary relationship to the advisor.
"Big trust companies ... want to serve as trustees and investment managers," says Brad Wheeler, president of Genworth Financial Trust. "Most advisors are not trust experts, so we looked for companies that provide technical expertise while honoring the advisor as a primary relationship contact with the client."
If an RIA decides to find a trust partner on its own, what should it be looking for? Experience counts, certainly. Since many firms are new, there are no brand names to go on. But some of their professionals claim decades of experience.
Most industry observers want to see about 20 years of trust industry experience in the top officers of any trust company. "You can be quite experienced in finance, but to actually administer a trust - maintain distributions, know what duties you owe to multiple beneficiaries, and to have a bedside manner and a way of proceeding - is something you only learn over time," says Michael Puzo, a partner at Hemenway & Barnes, a Boston law firm.
Elizabeth Wine, a writer in New York, has contributed to Barron's, the Financial Times and On Wall Street.