Demographics, industry chaos likely to spur more interest in trust services. The case for making trust services part of the independent RIA's toolkit is usually cast in defensive terms. Be ready to provide them, the argument goes, or risk losing oodles to banks and trust companies as your aging clients move holdings into trust vehicles in preparation for transferring wealth to their successors. But some industry players see bringing trust services in house, whether as outsourced option or through a wholly or partially owned subsidiary, as a vital competitive differentiator against a backdrop of wide-spread industry dislocation that could dramatically increase competition among RIAs.

"We have found that investors are more comfortable and confident with advisors who offer a higher level of fiduciary responsibility for their assets," says Jerry Cooper of Garrison Institutional, a consultancy that helps RIAs, broker-dealers, pension-service providers, law firms and mutual-find companies around the U.S. establish Nevada- and South Dakota-licensed trust companies of their own. "You couldn't find a better way to heighten fiduciary duty and customer peace of mind than through an advisor-owned trust company."

Lynn Brennan is director of client services at Richmond, Va.-based Heritage Wealth Advisors and a former trust officer with Bank of America's ustrust.com. Heritage uses Schwab's personal-trust outsourcing services, so she might not agree with the "advisor-owned" part of Cooper's statement -- but she agrees that trust is an essential part of private-client service.

Stickiness

"If you're not tapping into client relationships to provide trust services, you're leaving out a large part of the financial-planning and wealth-management equation," says Brennan. "And, beyond issues of stewardship and estate planning, the act or process of advising clients who are trustees on their duties and responsibilities is a way to solidify the relationship for the long term -- ideally for many generations."

Schwab, whose bank received regulatory approval to provide trust services about 18 months ago, is seeing strong demand from independent advisors. At any one time it has about 250 trusts in process, says Cathy Clauson, head of trust services for Schwab's Institutional Services division.

Schwab views the sheer weight of demographics as a compelling reason for independent RIAs to consider making trust services an in-house offering. About 76 million U.S. baby boomers will retire with an estimated $41 trillion to $100 trillion in assets through the next two decades, according to Chicago-based Spectrem Group, a market-research and consulting firm. Another industry estimate has the $3.3 trillion that were in U.S. trust accounts in 2005 doubling by next year. As this "rush to trust" gains momentum, some independent RIAs see 80% of the dollar value they managed in 2006 going into trusts over the next decade or so, according to a 2007 study by San Mateo, Calif.-based asset manager and trust-service provider Franklin Templeton.

For many RIAs, trust-bound assets are assets they kiss good-bye -- with banks, the traditional bastions of the space, as the prime beneficiaries of the investment advisor's inability to handle the business.

Options

This is where trust-service outsourcers like San Francisco-based Schwab and New York Private Bank and Trust (NYPBT) -- another fairly new entrant -- as well as stalwarts like Bank of New York Mellon, Fidelity, Wilmington Trust, Trust Company of America, LPL's Private Trust Company and several others come into play.

Schwab brought its trust-service platform into play as a replacement for capabilities it lost when it sold U.S. Trust to Bank of America in 2007. It acts like most other trust-service outsourcers. It can step in as corporate trustee with the RIA as designated manager of the underlying assets or, where the end client wants a non-corporate trust, it can provide personal-trust reporting services -- with the RIA again managing the trust's assets.

But there are a couple of areas where Schwab's trust services stand out, according to Christopher Bray of Naples, Fla.-based multifamily office Willow Street Advisors.

With a good portion of its clients' assets in irrevocable trusts set up at Cleveland, Ohio-based National City (now part of Pittsburgh-based PNC), the former employer of Bray and several of his colleagues, the firm needed administrative support for the thorny task of removing one corporate trustee and replacing it with another.

"We did a lot of due diligence on trust solutions -- a lot," says Bray. "But none were as helpful to us as Schwab."

As it happens, Willow Street went with Schwab as its primary, but not only, custodian -- but that decision had nothing to do with its selection of trust-service provider.

New competitors

"If we'd have gone with TD Ameritrade [as our primary custodian], we would still be using Schwab's trust services -- just as we're seriously looking at going with Fidelity's WealthCentral over Schwab's PortfolioCenter" front-office technology.

In contrast to traditional trust-service offerings, NYPBT enters into trust-company partnerships with its clients. It puts up the capital, secures regulatory approval, handles administration and assumes fiduciary risk -- and can, but doesn't have to, oversee the management of assets in trust. The result is a shared-revenue, corporate and personal trust entity that is branded to suit the institutional client.

Garrison Institutional -- a subsidiary of Reno, Nev.-based Garrison Trust -- helps independent financial firms decide whether owning a Nevada or South Dakota trust company makes sense for them. If the firm decides yes, Garrison Institutional helps with the application and, if it's granted, provides ongoing operational support to the licensee.

Recently Garrison Institutional helped a small consortium of Dallas-area RIAs win approval for a trust license from South Dakota regulators. Wealth Advisors Trust will offer investment-management services, retirement accounts, and full trustee provisions that take advantage of South Dakota's asset protection and dynasty-trust legislation, and its services available to firms outside the consortium.

Christopher Holtby, a partner with Wealth Advisors Trust co-owner Midland Asset Management, says founding the trust company stemmed from a desire to provide the highest level of service possible while keeping costs to the end-client to an absolute minimum.

"Three of us [involved with Wealth Advisors Trust] are ex-Ernst & Young people," says Holtby, who founded Midland in 2003 after a stint creating investment portfolios for clients of Ernst & Young's high-net-worth group. "There we learned that if you put the client first, you'll come to the best solution. We just didn't see anything in the trust marketplace that put the client first. There were too many hands in the cookie jar; they were either charging too much or were in states with income taxes or without asset-protection provisions."

Schwab's Clauson sees growth for trust services coming from several sources. One is an expected influx of ex-wirehouse brokers, especially high-end teams that are used to having access to trust services. In response to industry turmoil that started with the U.S.-government-mandated sale of Bear Stearns to JPMorgan Chase last spring and reached a state almost of frenzy in recent months with the demise of Lehman Brothers, and a subsequent blitzkrieg bailouts, mergers and near collapses that has shaken Wall Street to its foundations, an unusually high number of wirehouse brokers are on the move.

Although wirehouse-to-wirehouse moves get most of the ink -- because they're easier to accomplish and because the receiving team is always eager to boast, it seems likely that there will be an unusual number of new RIAs coming on line in the second half of 2009; the delay owing to the amount of time it takes to set up an investment advisory.

In addition to these new and at least notionally trust-savvy RIAs, Clauson sees the advent of a smaller but perhaps more formidable cadre of independent advisors -- as RIA founders and employees and partners of existing firms -- drawn from private banks and trust companies.

Heritage's Brennan is an example of such a hire; Willow Street is an example of a de novo RIA run by ex-bankers.

"The breakaway-broker phenomenon is well known," says Clauson. "A quieter move is [that of] trust officers to RIAs: they're the ones who really know how to build a business with trust, and you can see RIAs reaching out to them."

Together these two streams are putting pressure on RIAs that want to continue to be contenders for high-net-worth wallet share to acquire or retain trust-service capabilities in a competitive landscape that includes other trust-oriented RIAs as well as banks and brokerages. -FWR

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