More advisory firms expected to start trust companies

They seek to add revenue, differentiate themselves amid stiff competition

Aug 21, 2009 @ 2:42 pm

By Charles Paikert

At a time when financial advisers are looking for every possible business advantage, opening a trust company appears to be an increasingly attractive option.

At least six advisory firms around the country have opened up trust companies so far this year, with at least that many more expected to open by yearend, according to Jerry Cooper, a relationship manager for Reno, Nev.-based Garrison Institutional. The firm, which was launched last year, works with advisers who wish to start a trust company.

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, advisers who start trust companies must confront a raft of unfamiliar legal responsibilities, more work and regulation, and the prospect of competing for business against the likes of giant banks and brokerage houses such as The Charles Schwab Corp. of San Francisco

Although there are no known statistics as to how many advisers own trust companies or how many have opened such firms this year, industry observers say that interest is definitely increasing.

“I'm seeing more advisers opening trusts this year than in the past,” Mr. Cooper said.

“We've had a greater number of advisers ask us about opening private trust companies this year than we've ever seen before,” said Gary Carrai, a senior managing director of Fortigent LLC of Rockville, Md., a software platform provider to financial advisers.

Advisers 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,” Mr. Carrai added.


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

But while Nevada's capital requirement for a new trust company is $1 million, South Dakota's is just $250,000, though that is likely to be raised this year or next, according to Roger Novotny, the director of the state's Division of Banking in Pierre.

“South Dakota has good estate laws, and they want the business,” said David Dunn, the managing director of Kingsbridge Private Wealth Management Inc. in Las Vegas, which is in the process of opening a trust company in South Dakota later this year or early next year.

Mr. Dunn, whose firm caters to a small number of very wealthy clients and has about $100 million in assets, said that he 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 said.

“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,” Mr. Dunn said.

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 “it's not the best time to raise fees” at an advisory firm.

However, he said, “I don't see the trust company as a huge moneymaker. There will be a lot of administration and a lot of work.”

What's more, opening a trust company also means taking on considerable business risk, Mr. Dunn noted.

“It's a litigious area, and you can be sued,” he said.


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 Wealth Advisors Trust Co. Ltd. in Pierre, S.D., in May and he 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, that is sticky money,” Mr. Holtby said.

“You now have continuity,” he said. “If a client dies, it's easy for the successors to replace an adviser, but it's harder to replace the trust company.”

However, competing with well-known banks and financial services institutions has been a marketing challenge, Mr. Holtby conceded.

“You need to get your name out there, and you're going up against companies with bigger names who people are familiar with,” he said.

Advisers opening trust companies also face a new set of compliance regulations, Mr. Carrai said.

“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,” Mr. Carrai said.

“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,” he said.

“It's not for everybody, but for a sophisticated adviser, it may be a legitimate business strategy,” Mr. Dunn said.


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