Once again growth in personal trust accounts held at national trust providers has been lackluster, following a trend that has been occurring for almost two decades. While assets at major trust providers grew in the year ending 2015 (the most recently available government data), this is clearly due to market growth, not the influx of new assets. This information is reflected in Spectrem’s soon to be released 2017 Personal Trust report. So what is happening to the trust industry? Is it still relevant? How can it be saved?
The trust industry suffers from three main challenges. First, with the exception of billionaire families who have been using trust services for years, most affluent households really are not familiar with the services and benefits of trust providers. Secondly, trust providers have not been able to change their image to appeal to younger generations. Finally, many wealthy households and potential grantors don’t trust that a corporation could possibly make the right decisions for their family.
I believe that trust services need to be “renovated” but could become increasingly relevant in the future, even if Trump is able to eliminate the “death tax” as promised.
The concept of “fiduciary duty” is a hot topic in the financial services industry. Despite the delay of some portions of the DOL’s fiduciary rule, the discussion regarding the duty of care investment providers and advisors must practice in relationship to a client’s assets will not go away soon. While broker-dealers try to incorporate fiduciary practices into their service standards, trust companies have been providing these services and this high level of care for generations. So is this an opportune time for trust providers to make a push for new clients?
Yes, it is an opportune time but trust providers need to aggressively reach out to high net worth families and re-introduce themselves. At the same time, they need to change their messaging and their approach.
Most investors don’t believe they need or can afford trust. Traditionally, unless a household had enough assets to need a trust to pass assets to avoid the estate tax, they generally didn’t worry about establishing a trust. Today that impacts only a small portion of the population. Spectrem research indicates only 1.26 million U.S. Households have more than $5 million of net worth. Additionally, with the potential for substantial tax reform in the near future, reliance upon tax rules as the primary need for a trust is not as relevant (although still important).
The reality is that numerous households that have a substantial amount of assets should create a trust. There are several important reasons. The first is to pass non-liquid assets to family members. Second, family members need someone to oversee their assets after their first choice of trustee may have also passed away.
Many families have significant assets that may be non-liquid or may are not traded on the markets. For example, farmland could represent a significant amount of a family’s net worth. Few families know how to deal with assets such as this when a family member passes. There are numerous other examples of these types of assets from oil interests to family businesses to alternative investment products. Many families don’t realize that a trust company could help them with these issues. My father, for example, owns farmland that was put into a trust. The trust collects the revenues each year and distributes them to my siblings and myself. My father has few liquid assets, but this helps him to eventually pass his largest asset. Trust companies need to advertise their expertise and make sure that individuals know exactly what they can do. They also need to realize that they may need to redefine their target markets.
Young families with significant assets know they should set up trusts to care for their children should something happen to them. If trust companies could form relationships with these young families could develop larger relationships as the assets of a family grows. Forget about the amount of assets in a trust….even if it is not funded..there is still a potential for a greater relationship.
Most individuals that consider a trust, don’t believe they need a corporate trustee. They believe that a family member, such as the grantor’s brother or sister, or even their spouse, is the appropriate individual to advise their family in the future. But this approach puts a large burden on family members. They need to familiarize themselves with the appropriate tax filings and all of the assets held in a trust. A trust company could assist with these filings, even if they are not the actual trustee. They could act as custodian and lead the family along the sometimes confusing path. As the family member who is trustee ages, it may be that a corporate trustee may seem more appropriate.
The simple trust is that trust companies need to realize that in an age where information is accessible within seconds via a mobile phone, their sometimes lengthy processes and formal stodgy image needs to change. The data clearly shows that trust companies are not being chosen to manage assets. Therefore, focusing on the service aspect is how a trust company can differentiate.
Spectrem did quantitative research a year ago with 50 individuals who had a trust. Half used a family member as a trustee and half used a corporate trustee. The biggest complaint of those individuals who used a corporate trustee was the amount of turnover they experienced in the trust officers that serviced them. They didn’t believe that they were getting access to “the best and the brightest”. At the same time, those who were using a family member as trustee were open to the concept of using a corporate trustee, but they were somewhat unfamiliar with the services that could be offered. They also weren’t sure if the trust company would understand their family and be flexible. Their greatest fear, however, was that they didn’t really know who the successor would be to the family trustee.
The above illustrates great opportunity for trust companies if they are willing to assist families prior to being paid big dollars as a corporate trustee. Other Spectrem research has shown that most families don’t know what to do once a family member with assets has passed. By establishing themselves as the “go to” person well before any actual event occurs, trust companies could once again become relevant to the industry.
So here are some words of advice. Hire competent people and incent them so they stay for the long term. Hire people with personalities that will also cause them to proactively reach out to existing and potential customers. Financial advisors have personalities that are more “sales” oriented. Trust companies need these types of individuals as well as individuals who are detail oriented. Create teams to effectively service customers. Reach out to younger generations. It’s ok to be a custodian for awhile. Speak openly about what will occur when someone passes away. Help families to be ready. Financial advisors are notoriously bad about openly discussing what will happen upon their client’s death. Be the “go to” person when a family has a crisis.
As Baby Boomers continue to age, there will be lots of family crises. There are numerous complicated assets that need to be addressed. Trust companies have the benefit of centuries of experience in providing fiduciary services. Use the experience in trust to create a greater sense of trust in the future.