How to Select an “Advisor Friendly” TrusteeJanuary, 2012
By Richard P. Trumpler, TEP.
Chief Operating Officer, New York Private Trust Company
Investment advisors for high net worth individuals and families often recognize that their clients should create trusts to meet their financial goals. They also often become aware that their clients have established trusts holding liquid assets which are beyond the manager’s reach because those assets are being managed by an institutional trustee. To help investment advisors retain assets when their clients form new trusts and expand their business to manage existing trusts managed by a competitor, a number of trust companies promote themselves as “advisor friendly” trustees. This promotion advertises a “win-win” proposition for the advisor by suggesting that the trustee and the advisor can cooperate to win new business rather than competing for that business. However the term “advisor friendly” is not very useful as a screening device for an advisor who is trying to simultaneously help their client satisfy a need for professional trust services, and also protect or expand their ability to manage trust assets. Here are some tips for an advisor analyzing the wisdom of accepting a trust company’s invitation to become a friend.
The first question for an advisor to ask a prospective trust company partner is whether it has the ability to administer trusts in jurisdictions which allow trust administration responsibilities and investment responsibilities to be split between two unaffiliated parties in a manner which allows each party to be sheltered from liability for the misjudgments of the other party.
Using the language of the trust industry, this question is whether the trust company believes that its charter and location allow for the administration of directed or delegated trusts. A directed trust provides that trust administration will be provided by one party and investment management will be provided by another party and that each of these parties is not responsible to monitor the activity of the other. A delegated trust provides that the trustee may hire an investment manager and if the trustee follows a reasonable process in hiring and monitoring the manager, it will not be liable for the investment manager’s bad decisions. A shorthand method for describing the distinction between these two types of trusts is to remember that the grantor chooses the investment manager of a directed trust in the trust document while the trustee is empowered by the trust document or state law to choose the manager of a delegated trust. Only a few states ( e.g. Delaware, Wyoming, New Hampshire, Nevada and South Dakota) allow for the creation of a directed trust. Approximately half of the states protect trustees who delegate their investment responsibilities to a third party investment advisor from liability for the acts of the advisor.
Assuming that the prospective trust company partner can properly administer directed or delegated trusts under relevant state law, the next question is whether they are comfortable administering such trusts. Many trust companies have decided not to offer directed or delegated trust administration either because these accounts
do not fit within the company’s traditional business model which focuses on investment management rather than trust administration or because they are unfamiliar or uncomfortable with the risks associated with such accounts.
If a trustee is willing to accept appointment as trustee of a delegated trust, it is important for an advisor to understand their process for conducting initial and annual due diligence of investment advisors to whom they delegate investment management. During the course of the relationship, will the trustee provide the investment manager with any notice that the trustee has become concerned with the investment performance of the manager? If the trustee has become concerned about a manager’s investment performance, will the trustee afford the investment manager a reasonable opportunity to correct any investment management shortcomings?
As is often the case in establishing any new business relationships, the devil can be in the details of a relationship between an investment advisor and a trust company. Before recommending that their best clients seek the services of a trust company for a life-long relationship, the investment advisor should determine:
- Where the investment assets must be custodied?
- If the assets may remain custodied on the platform of the investment advisor, how will the trustee generate trust account statements, and what will those statements look like, i.e., will they simply reflect one account held by the investment advisor or will they reflect transactions and individual assets of the account?
If the trustee’s account statement will reflect transactions and individual holdings, will there be any conflict
- between the method for pricing assets on the custody system of the investment manager and the account statement generating system of the trustee?
- Does the trustee have any policies which restrict the types of alternative investments which may be held in their trust accounts?
- Does the trustee prohibit the retention of any types of assets in their trusts?
- Does the trustee have the willingness and capability to serve as trustee for trusts holding managed assets and unmanaged assets, such as real estate?
- Does the trustee have the capability to produce any necessary principal and income trust accounting?
- How will the trustee arrange for the payment of bills by the trust or any required distributions from the trust to beneficiaries?
- Will the trustee charge flat or asset based fees?
- How will the trustee charge for trust assets owned by an LLC or LP?
An investment advisor interviewing a trust company about the creation of a relationship should clearly understand the trustee’s expectations for creating an investment mandate or investment policy statement for a delegated trust. There should be a clear understanding of the rules regarding the establishment of investment performance benchmarks, the monitoring of manager compliance with those benchmarks and the ability to shift benchmarks if conditions or assumptions change.
Last, but certainly not least, an investment manager must very directly ask whether the trust company’s investment management department will be given the opportunity to present their capabilities to the trust client. Of course, if the trust company does not have an investment management department, this question can be easily answered. However, if the trust company’s answer to this question makes it clear that a new trust account is considered to be a relationship for the trust company that will be subjected to cross-selling pressure from the trust company’s investment management department, that should be an important fact for an investment manager seeking a trust company partner to consider.
It is very possible for an investment advisor and a trust company to forge a “win-win” relationship for their mutual benefit and the benefit of their customers. However, to create such a relationship, it is vitally important for each partner to understand the other partner’s business model and the source of potential conflicts during the term of a long relationship. Without such an understanding, it is quite possible that the client will be badly served and the relationship will become a “lose-lose” exercise.
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