A personal trust is historically a sign of significant wealth. The trend in today’s market is heavily skewed toward wealthy investors acting as a self-trustee versus utilizing a corporate trustee, and the trust industry continues to feel the pain of these decisions.
According to Spectrem’s 2016 Personal Trust Update, the total number of personal trust accounts held at U.S. financial institutions has dropped, now down to just over 600,000 (602,828). This marks the sixth consecutive year in which there has been a decline in managed personal trust accounts.
For the first time in several years, the total trust assets dropped as of year-end by more than $60 billion. The total personal trust assets is now at $918.1 billion, still well above the total following the recession in 2008 but down from $978.4 billion in 2015.
For management in bank trust departments for whom the trust business is a significant portion of their non-interest revenue stream, these numbers (and others in the report) are problematic. In 2003, the number of personal trust accounts held at U.S. financial institutions was over 940,000; that number has dropped by more than one-third in 12 years.
The assets have dropped by more than $200 billion in just eight years. Certainly, the recession was responsible for much of that decline, but there has not been a significant recovery.
What is it about utilizing a financial institution as a trustee that investors do not like?
Spectrem’s qualitative research report on the industry, Choosing a Trustee, tells the story of dozens of affluent investors who have trusts but do not allow a bank or institution to handle their trust out of a lack of belief that the funds would not be invested aggressively.
“I was concerned mostly that they were too rigid,’’ said one investor. “They have fiduciary responsibility and that doesn’t leave too much leeway in some cases.”
“We’ve been with some other companies and never really felt like we made a personal connection,’’ said another investor who chose to self-trustee. “We are with the financial advisor now because we feel he is our age, with children, and children our children’s age, and we just trust his investment advice. I’d love to work with someone that I could locally meet with and see and feel connected to.”
Understanding why investors avoid a corporate trustee could help an advisor when it comes time to discuss the trust decision with an investor. Demonstrating that an investor can self-trustee with the advisor managing the assets could make the decision to hire that advisor easier to make.
Advisors working with trust assets perform a balancing act based on both the immediate and long-term needs and demands of the trust grantor and the beneficiaries. The grantor will keep a close eye on the trust assets will want to see some growth but with a goal of immediate income and younger investors will want to see a more long-term aggressive attitude toward investments.
Top Takeaways for Advisors
Bank trust advisors should emphasize their fiduciary role with clients and prospects. Given the heightened focus on the role of a fiduciary resulting from the federal regulations, trust providers should communicate to clients and prospects that they have always been and always will be a fiduciary. This is a very competitive advantage at the moment for trust providers and they must capitalize on it.
Despite the low level of corporate trust utilization, opportunities exist. As investors age, they are more willing to rely upon others to manage and protect their assets. Many do not feel their children are ready to manage the trust or they may be unwilling. They worry that their trusted advisors may not be around in the future. In these cases, trust providers have an opportunity to develop relationships with these individuals and their families. These relationship must be developed at a multi-generational level so that the beneficiaries feel comfortable with who they should contact in the future.
Trust organizations need to update their communication methods to meet modern standards but balance those methods with old-fashioned face-to-face meetings. Wealthy investors are often technologically sophisticated and want to be able to gather information quickly and to communicate through multiple methodologies from email to text to Skype or other new offerings. Trust organizations must be able to communicate and provide information immediately via these channels, but they must continue to hold personal meetings to develop trust-based relationships.