Financial advisors typically provide services like tax, retirement, investment, and estate planning to solve important problems clients have with their finances. In most instances, advisors map out the appropriate plan and offer their expert advice to clients but stop short of implementing their recommended strategies or plans. In these situations, advisors often turn to third parties like trust companies, or trust solutions companies, to execute advisors’ plans and perform the duties of a trustee.
In this article, InvestmentNews discusses:
Let’s get into it.
Trust solutions can be essential components of estate planning. Beyond figuring out how to manage client assets and draw up succession plans for them, RIAs must assist in implementing the estate or succession plan. However, most advisors or RIAs choose to not directly handle the execution part of the estate plan, as you’ll see in this article. Most RIAs or advisors still hand over the nitty gritty details of estate planning to a third party, aka the trust company or trust solutions provider.
A good trust solutions provider should be able to help clients navigate the complex nuances of trusts. This refers to all types of trusts, such as:
It’s the trust solutions provider’s duty to provide services that an advisor or RIA cannot fulfill, such as serving as the trustee and performing the fiduciary duties expected by the trust.
A trustee’s responsibilities include:
Given the importance of having a trustee, you’d think RIAs would offer these trust services to their clients. But why don’t they? Here are a few good reasons why:
Advisors are typically focused on getting significant returns and growing their clients’ wealth, while a trustees’ investing capacity may be limited by the constraints of the trust document. For an advisor or RIA to perform these roles well, fulfilling one may compromise the other, creating a clear conflict of interest.
For instance, if the client’s trust document states that only investments that align with the client’s values are acceptable for the trust, this can severely limit and undermine an advisor’s efforts to get high returns.
Also, advisors have more leeway in working with clients to update estate plans and to allocate funds to different investments or novel investment opportunities. Trustees rarely have this sort of flexibility and must adhere to the terms outlined in trust documents, often prescribing how assets can or must be used.
RIAs are typically required to meet certain capital requirements set by the Securities and Exchange Commission (SEC) or state securities regulators. These capital requirements can vary depending on the size and nature of the RIA's business, but they are designed to ensure that the RIA has enough resources to operate effectively and meet its obligations to clients.
Meanwhile, trust companies’ capital requirements can vary based on a set of factors, such as:
In South Dakota, public trust companies working as trustees of foreign trusts or as custodians of digital assets must maintain higher capital requirements. For an RIA or advisory firm to conform to both capital requirements, there is a risk of exceeding or falling short of either of these capital requirements.
Advisors and RIA firms are often limited in scope. Their job is to plan and manage clients’ investments.
The role of a trust company can be more complex and burdensome. Trust companies continuously handle account management responsibilities, disbursements, record-keeping and do all the regulatory reporting on activities done on or within the trust.
RIA firms cannot casually become trustees. If an RIA or advisory firm decides to provide trust solutions, they must have staff that are well-versed in the nuances of all types of trusts.
“Most advisors still don’t leverage estate planning and effective use of trust planning to the level they should be with their top clients. One reason is that it often requires a trustee or fiduciary-level knowledge of trusts that the advisor does not have readily available in their firm,” said Jamie Hopkins, CEO at Bryn Mawr Trust. Knowing which type of trust to recommend to clients, for instance, is vital when delivering quality trust solutions.
Overseeing trust asset management requires a holistic approach. Here is a comprehensive guide to trust asset management from Judson Embree, CTFA. https://t.co/JmWSayDwjD
— Bryn Mawr Trust (@BrynMawrTrust) April 22, 2024
Despite the risks, there are potentially great benefits to RIAs or advisors that plan to build trust solutions departments within their organization. Here are some benefits worth considering:
Within a crowded market filled with prestigious advisory firms and RIAs, offering trust solutions can help your firm or RIA practice stand out from the rest. “Advisors who include trust services in their practice can differentiate themselves in a competitive market,” Hopkins said.
However, this benefit may not be exploitable for very long, since “you will see more and more advisor firms partner with trust companies to be able to offer this service in the next few years,” said Hopkins.
Trust solutions are not commonly offered by financial advisors or RIA firms. By offering these services to the next generation of your clients, you can ensure repeat business from your clients’ families.
“Incorporating trust services into your advisory practice not only helps manage assets more effectively, but also ensures a seamless transition of wealth to the next generation. This fosters long-term relationships with clients and their families,” Hopkins said.
Legacy is important to many clients, so having these conversations is vital. "By offering trust services, you can discuss legacy and bring the children to the planning table.” This arrangement can lead to better sustained outcomes for both parties.
RIA or advisory firms that choose to offer trust solutions can be a win-win situation for both the firms and their clients. “By offering trust services, advisors can get closer to providing a comprehensive financial solution that addresses clients' immediate needs and future aspirations,” Hopkins said. “This holistic approach builds trust and loyalty, making it more likely for advisors to manage assets over a longer period.”
Hopkins goes a step further to suggest that not offering trust solutions can be a missed opportunity. Not including estate planning or trust services leaves a gap in your clients’ financial plan.
If having your RIA or advisory firm offer trust solutions is unfeasible due to foreseeable conflicts of interest, high costs, or other factors, there are strategic, risk-managed workarounds. So, for firms that still want to offer trust solutions without the hassles, here are the options:
1. put up a subsidiary – in this setup, your firm can build its own trust solutions and consulting solutions company as a subsidiary or sister company. This means your RIA can have an independent trust company that can offer separate trustee functions and services to clients.
2. outsource the solutions to a private label trust company – by outsourcing these services to a third-party solutions provider, your firm can offer trust services without the hassle. You can avoid burdensome capital, infrastructure, or IT requirements.
The beauty of both these options is that your firm not only expands its services, but also retains control over client relationships and builds its brand. More notably, there’s a clear distinction between the two services and how they are delivered.
"Most advisors do not know that you can partner with trust companies, like Bryn Mawr Trust, to outsource the fiduciary trustee duties while maintaining control of the investment management as the advisor,” said Hopkins.
Here’s a video that talks about one type of trustee: the corporate trustee. Corporate trustees specialize in all the trustee services and requirements, so it’s a logical choice for some RIAs to employ. So, why is this type of trustee not employed often? Watch the video to know why and see why you may want to partner with one.
So, this begs the question of whether RIA firms should establish their own trust company or hire one. Most advisors should not try to start trust companies or even act as a trustee, according to Hopkins.
“Instead, you should look to find a professional trust company that can be the fiduciary trustee of a delegated or directed trust. This setup can allow you to continue to manage the wealth, stay as quarterback of the relationship with the client, but offer the trust services to the client,” Hopkins said. “This added value not only attracts new clients but also helps in retaining existing ones, ensuring long-term asset management and growth. As such, I see partnering with a great trust company as both an offensive strategy and a defensive strategy."
RIA firms and advisors should think well on offering trust services versus hiring another trust services company. Either strategy can be worth considering, but only after all the possible benefits and drawbacks have been weighed.
Find out what our experts have to say on trust solutions and other topics – read and bookmark our Opinion page.
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