world, the old-fashioned trust department seems like a holdover
from bygone days, a dated silo in desperate need of change.
Technology is a key driver to allow trust companies to
compete.
Wealth management services offered by banks, brokers and other
players have moved on, leaving the trust increasingly perceived as
an anachronistic holdover from yesteryear.
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But change is afoot, according to a new report on trust technology
by Robert Ellis, a senior analyst at US wealth researchers Celent.
He contends that a sea change is occurring in the way technology
will impact on the trust industry.
“The trust industry has shown itself to be a poor adapter to the
new realities of the wealth management industry, having declined
from the prevalent form of wealth management just fifty years ago
to a much smaller market share today,” Ellis says. “Fortunately,
new realities and technologies are leading the trust industry to
adopt different business models, such as open architecture for
products, that will allow the trust industry to better compete in
the future.”
Ellis’s research first examines the nature of the firms that
participate in the industry, then looks at the products and
services that define the industry. Finally, he examines the client
sets that utilise trust companies, and outlines technologies that
promise great change for the industry.
As the report documents, trusts have been around as long as finance
itself, and are in no real danger of disappearing. In fact, the
concept was invented to protect knights’ properties while they were
participating in the Crusades. Trusts feature a very strong
fiduciary obligation against which activities must be
measured..
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By GlobalDataOriginal model
Trust companies were one of the original models within the wealth
management industry. It is hard to believe that, until well in the
1970s, trust companies held a significant share of the US’s wealth
and investments. However, 30 years later, while other forms of
wealth management have appeared on the scene and grown, the trust
company business model has remained mostly unchanged. This
inability to change has cost the trust business much of its market
share and a good chunk of its profitability, Ellis asserts.
That’s not to say that the change is uniform, or easy. At many
trust departments, investment officers still want to sell
proprietary products and pick stocks, even though the wealth
management industry is driving toward an open architecture,
advisory model. The resultant fallout has been predictable. Market
share has eroded steadily and while trusts won’t go away, trust
companies may, Ellis contends.
His report paints a dismal picture of the current trust dynamic.
The top 25 institutions hold 92 percent of the trust assets and
earn 75 percent of the industry’s $27.6 billion in revenue.
Currently, there are fewer than 2,000 community banks, regional and
super-regional banks, private trust organisations, and top tier
global providers offering trust services in the US.
Profitability questions
It is generally acknowledged that a stand-alone trust department
cannot be profitable on less than about $250 million in client
assets under management. Custody and retirement plans subtract from
profitability as firms receive much less revenue per dollar of
client assets. Smaller accounts traditionally are charged higher
fee rates. Stand-by and insurance trusts have to be charged at a
per-unit rate due to their inactivity (usually $100 to $1,000 per
account). All the while, the trust organisation is incurring
salaries of often long-tenured employees, operational expenses, and
potential liability.
Assets in personal trust accounts have not kept up with the
increase in overall market indices, indicating that trust assets
continue to move to other types of wealth managers and that the
typical trust clients are older and dying off, with their trusts
gradually being liquidated.
The clients of trust organisations used to be exclusively from the
wealthiest segments. Part of this was due to the fact that options
for wealth management were somewhat limited, and given the high
factor of ‘trust’ that banks enjoyed in those days, their selection
was comfortable to the clients.
That incumbency has crumbled dramatically. The number of personal
trust accounts at the end of 2006 was 762,547, according to the
Federal Deposit Insurance Corporation and the Spectrem Group, down
from a peak of 940,961 in 2002.
As the trust business changed from a vehicle for managing a wealthy
person’s or family’s entire wealth to more of a product used in
estate planning, philanthropy, and tax management, it became much
less likely for clients to have all their assets with a trust
company.
Hopeful signs are appearing, however, as technology offers a new
generation of trust products that allow trust officers to become
the primary trusted financial adviser, and move the industry from
proprietary products to open architecture. All trust technology
providers are rapidly moving to add greater value to their product
offerings. These enhanced products represent a new generation of
trust systems, designed to better integrate the investment portion
of the trust management process combined with enhanced tools in the
areas of web presentation, compliance and imaging.
The report noted that there are four large-scale solutions used by
the majority of US trust companies with trust assets over $1
billion: Metavante (TrustDesk), Northern Trust (Trust/Rite and
Trust/Portal), SEI (Trust 3000), and SunGard (Charlotte, AddVantage
and Global Plus).
These technologies allow an end-to-end solution for trust
departments and a window into the rest of the organisation to serve
their clients more holistically. More importantly, these new
technologies could allow the many smaller trust departments to
level the playing field with larger banks.
The report noted that the biggest breakthrough for trust
departments has been overlay management technology. This technology
allows a bank to customise a client’s portfolio, precisely set
asset allocation and trading, as well as tax harvesting for its
high-net-worth clients across a broad range of non-proprietary
investment options, from mutual funds to exchange-traded funds and
separately managed accounts and more.
Overlay management gives trust departments of any size the ability
to centralise monitoring and control through unified managed
accounts. It transforms the trust from a straight-ahead stock
picker to a do-it-all asset manager, allowing trusts to position
themselves as financial planners.
The robust client proposal tools that are offered by each of the
trust technology platforms also help level the playing field. In
seconds, a trust manager can show what the client is doing from a
risk/return perspective and churn out customised proposal with a
variety of investment scenarios.
The biggest fundamental change is the move toward open
architecture, a move Celent finds long overdue among trust
companies. Open architecture has been slowed by the unwillingness
on the part of trust organisations to select products from a
variety of providers, not just those products developed and
marketed by the adviser’s firm.
Compensation systems traditionally have steered trust officers
toward recommending a limited menu of products to the client. This
limited menu might be dominated by products from both the adviser’s
firm and partner organisations, both of which might offer superior
compensation to the firm when compared to competing products.
Moving from that system to one in which clients can select from a
menu of best-of-breed solutions is no small task. Unfortunately,
trust organisations are among the last wealth management
organisations making the move to open architecture. This fact is
one of the reasons for the declining share of wealth management
business that is going to trust companies.
So, even with all the new technological wrinkles, the report
concludes that the US trust industry will have to work
exceptionally hard to overcome increasing irrelevance in today’s
wealth management industry.
Ellis sees hopeful signs in the fact that technologies are actually
guiding trust organisations to the correct solutions for long-term
viability. Trust systems’ innovations that include open
architecture, financial planning, and customer relationship
management are now meeting the requirements of modern wealth
management.
The face of the future
So what does the future of the trust company industry look like?
Ellis wrote that the future of the trust industry is similar to the
brokerage industry, the financial planning industry, and even the
individual insurance industry. Each has a shot at gaining strength
from the convergence of wealth management providers utilising open
architecture in products and a strong selection of systems to
manage the business, with the financial adviser assuming both an
advisory and fiduciary role.
Each also faces potential irrelevance, however, if it fails to
capitalise on the opportunities presented by the technology
available.
Ellis recommends technology vendors develop platforms that enable
trust accounts to be included like any another asset that is
custodied away and is to be aggregated within the overall
relationship. Product developers should develop products allowing
investment officers in trust companies to be supportive and value
the open architecture model.
This means that investment officers should have the capability to
choose from the entire universe of managed products, from mutual
funds, fund of funds, hedge funds, private equity, separately
managed accounts, and unified managed accounts.
Platforms should orient themselves around the investment officer,
who usually has an existing relationship with the client, and allow
the officer to move to the same side of the table as the client as
they judge outside asset managers’ performance.
The first step for the trust companies, Ellis wrote, is to cease
“being held hostage to the old ways of doing business”. Trusts must
find efficiencies so that the break-even point declines from $250
million in client assets, or smaller firms will have to exit the
business.
Trust firms can do this by moving to “blow up the investment
management model” and redeploying those trusted investment officers
into a part of the sales and service team. By transforming those
trust officers into advisers to help trust customers evaluate the
investment management skills of the selected outside managers, the
industry could insert itself into the financial planning dynamic in
a way that could return them to a central position in the advice
cycle.
Ellis writes: “Trusts will always remain an important product to be
used in estate planning, but as a complete wealth management
philosophy, trust organisations are skating on the edge.”
