Adviser trust biz at Schwab reaches $1B milestone

The Charles Schwab Corp. has pushed quietly past a milestone in its dogged attempts to integrate trust services with its custodial business. Since dumping U.S. Trust Corp. in 2007, the company has developed its own homegrown trust company within the Charles Schwab Bank and on Sept. 20 adviser-directed assets held in trust with the bank acting as a corporate trustee reached $1 billion. For Schwab, the event represented something of a final chapter in the story of the failed acquisition of U.S. Trust 10 years ago. Schwab officials point out that the billion-dollar mark was achieved less than three years after its trust business was started in November 2007. That contrasts with the $600 million raised for U.S. Trust over a six-year period. The fit between Schwab and U.S. Trust was so obviously poor that even while U.S. Trust was still in the fold, Schwab began working on plans to start up its own trust business within Charles Schwab Bank. The chief reason why advisers were reluctant to do business with U.S. Trust was that it was too much of a separate company, according to Cathy Clauson, vice president in charge of the trust product at Schwab Institutional. “With U.S. Trust, the No. 1 issue was [that advisers] had to custody at U.S. Trust,” with separate systems for investment management and reporting, she said. That dual arrangement “broke all the efficiencies” of having assets under custody at one firm, she added. Advisers said there was also a branding problem. “In certain markets, a client would choose our adviser over U.S. Trust, and then the adviser would say, "OK, now your trustee is U.S. Trust,'” Ms. Clauson said. “It didn't make a lot of sense to clients.” In addition, Schwab advisers experienced “operational issues” with U.S. Trust, said Richard Gill, a vice president at Focus Financial Partners LLC, an aggregator of advisory firms that use a variety of custodians. That's a complaint Mr. Gill said he hasn't heard about Charles Schwab Bank. Chris Bray, managing director at Willow Street Advisors LLC, said he likes Schwab's trustee services so much that he and his partners are rethinking plans to start their own trust company. Two-year-old Willow Street has $160 million under management, with about $40 million in trust accounts. Schwab also offers what it calls personal-trust reporting, which handles accounting and other administrative tasks for individual trustees, typically family members. Advisers run about $1.7 billion under the reporting unit. Schwab, like the independent trust companies with which it competes, attracts advisers by letting them continue to manage trust assets while it handles administrative duties. Many traditional large banks insist on handling the asset management for trust clients.

PLAYING CATCH-UP?

Despite its recent success in solving its trust issues, Schwab's detour with U.S. Trust has put it in the position of playing catch-up with some of its independent-trust-company competitors. Fidelity Investments is Schwab's biggest competitor for trust assets among custodians. The firm, through its Fidelity Personal Trust Co., offers a reporting service, an “agent-for-trustee” service for individual trustees, a corporate-trustee offering and a referral program to five outside trust companies when needed, said Deborah Gaff, vice president of trust services at Fidelity Institutional. In total, advisers who use Fidelity's custody services have about $6.6 billion in trust accounts. Fidelity doesn't break out trust assets that it administers as corporate trustee. “Advisers really have been using our platform for statement and reporting purposes,” Ms. Gaff said. “That's the most important part.” Another big competitor, National Advisers Trust FSB, has $6 billion in assets. The nine-year-old trust company is chartered as a federal savings bank and is owned by 130 advisers. “Many of our advisers have custody relationships at Schwab,” said Ron Ferguson, chief executive of National Advisors Trust FSB. The bank's Schwab-affiliated advisers “love us,” he said. Through its Trust Network, Pershing Advisor Solutions LLC offers advisers access to five outside independent trust companies rather than limit them to an in-house bank, said Katie Swain, director of product management and development at Pershing. The firm doesn't track assets administered by its trust providers. Schwab doesn't have an official referral program, “but we are happy to work with independent trust companies that custody their assets with us,” said Schwab spokeswoman Alison Wertheim. Unless Schwab holds the assets, trust accounts won't be integrated with Schwab's platform, she said. Advisers with assets under custody at RBC Advisor Services can use RBC Trust Co., which has $1.2 billion in assets, said Craig Gordon, director of RBC Correspondent and Advisor Services. RBC Trust Co., a Delaware trust originally chartered in 1913, was formerly the E.I. du Pont family trust. It was acquired about five years ago by RBC, Mr. Gordon said.

MORE TRUST BUSINESS

Trust companies may be benefiting from a trend toward greater use of trusts, driven by the risk of higher taxes, more-complicated estates and recent changes in custody rules that penalize advisers who act as trustees. In a soon-to-be released InvestmentNews survey of advisers, 69.6% of respondents said that they will be setting up more trusts as their baby boomer clients inherit wealth. Bank failures also caused ultrahigh-net-worth clients to reconsider long-held trust arrangements, Ms. Clauson said. “With those $100 million or $200 million [clients], advisers just weren't getting the nod,” she said. “Now we're seeing more of those in play.” E-mail Dan Jamieson at [email protected].

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