Archive for March, 2010
HSA Providers Expect to Win Big With ObamaCare
Posted by Scott Martin in News on March 26, 2010
Corporate trustees like Millennium, Wells Fargo and others to gain a big boost in trustee business hosting these once obscure accounts. Experts predict many new players to emerge soon.
Employers facing increased responsibility for providing health coverage are turning to a previously overlooked type of trust—the HSA or health savings account—and according to those who work with these accounts, the ball’s just gotten rolling.
“The phone’s been ringing off the hook this week,” says Roy Ramthun, who invented these accounts at the Treasury Department back in 2003 and now runs HSA Consulting Services.
An HSA is basically a self-directed account that anyone with relatively high-deductible health coverage can open at an IRS-approved custodian or trust company. Once the account is open, it’s funded with tax-free money that the owner can invest in anything from money markets to stock funds and withdraw to pay qualified out-of-pocket medical bills.
The trust angle has always made HSAs a viable add-on business for companies that were already set up to hold the assets of self-directed IRAs and similar accounts. However, the triumph of Obamacare has gotten a lot of employers thinking about switching to cheaper health plans with high deductibles and then offering to contribute the difference to employee HSAs.
“We’re definitely starting to see more traction,” says Rhett Smith, whose company, Beneco, sponsors HSAs as part of a $420 million workplace benefit platform.
“It definitely is a trend,” he added.
Opportunities…and Questions
These accounts are so appealing to businesses in the current environment because they provide a way to defray incidental healthcare costs while providing relatively frill-free coverage that kicks in for a serious illness or hospitalization, Smith told me.
However, he added, high-deductible policies are not only cheaper now but tend to be shielded from big price hikes down the road. Those soaring premiums have already priced higher-end insurance out of many companies’ budgets, and now relatively few hope the new healthcare rules will do much to stop the upward spiral.
Trustees who hold HSA assets are entitled to charge regular fees, although many—local banks in particular—waive the charge in order to get the assets to manage. Companies like Beneco, Millennium Trust and HSA Bank allow outside advisors to manage the assets and collect a wrap fee.
Unlike traditionally cash-oriented bank HSAs, accounts hosted at independent custodians or approved trustee companies can invest in mutual funds, ETFs or most other asset classes.
Because individuals own their HSAs, they can move their accounts at will from sponsor to sponsor.
“It’s definitely another arrow in the quiver,” Smith says. “As long as you’re approved to sponsor these accounts or team up with someone who is, you can utilize them to gather assets and add value.”
There’s plenty of room to grow the market. Until recently, only 10% of all American companies offered HSA-eliglble health coverage, so penetration of these accounts was pretty limited.
In fact, as of 2008, the top 21 HSA vendors could only scrape up 2 million accounts and $2.9 billion in AUM between them, according to benefit consulting firm Buck Associates.
Buried in the Bill
Now that there’s a mandate for every boss to help out with health coverage, employers who previously didn’t offer any benefits at all are more likely to provide HSA-eligible coverage, Roy Ramthun told me. He compares it to the evolution of the $3 trillion retirement market from defined benefit to defined contribution accounts
Before the final reform bill came out, nobody even know whether HSAs would survive, keeping some benefit providers cautious.
But now they’re on the move, Ramthun says. “Nothing in the bill destroys HSAs and employers are certainly all over the high-deductible plans now. This is huge for payroll administrators and they’ll be looking to farm out the administration.”
How huge? The New York Times is already promoting HSA participation as a good fit for anyone who qualifies.
Scott Martin, contributing editor, The Trust Advisor Blog.
Permalink: http://thetrustadvisor.com/news/hsa
New SEC Custody Rule Boon for Directed Trust Providers
Posted by Jerry Cooper in News on March 19, 2010
Audit and compliance fees are sending RIA trustees to independent trust companies. Providers welcome the new business.
A new SEC rule that took effect last Friday leaves thousands of RIAs facing annual surprise audits and has triggered a surge of new business for trust companies that specialize in lightening the load.
The audits are part of a package of new rules adopted by the SEC last year in response to the Ponzi scheme perpetrated by Bernard L. Madoff. Under the new system, an advisory firm the SEC considers to have custody over client assets has to pay for an annual audit to properly account for all funds and trades.
According to SEC records, the new rule affects 10 percent of the 25,000 RIAs, including those who handle trust accounts for families, charities and retirement plans such as 401(k)s and ESOPS.
With few exceptions, trustees are now deemed to have custody, but advisors who let a corporate trustee handle the trustee work are off the hook.
Christopher Holtby, president of Wealth Advisors Trust Company, tells me that the new rule is a boon for companies like his, which specialize in doing just this.
“It lets us do your heavy lifting.” he said. Dan Ehrmentraut, JD is Wealth Advisors’ Director of Business Development, comes to Wealth Advisors Trust Company with over 20 years experience in the directed trust advisory business.
By partnering with a separate trust administrator, advisors can go on managing their clients’ assets without being considered the custody provider. The arrangement is known as a directed trust.
The decade-old trust feature that splits trustee and advisor into separate operations has become accepted practice for banks and trust companies nationwide. Trust Advisor Blog wrote a story several weeks ago that explained how they work.
I spoke to several accounting firms recently to determine how expensive the compliance audits will be. Estimates range from a low of $16,000 all the way to $100,000, largely depending on the stature of the firm.
The expensive part of the engagement involves an internal control report similar to a SAS‑70 audit, which must be received by the SEC within six months of becoming subject to the requirement. In addition, advisors must respond to new questions on a revised Form ADV.
Given these headaches, Christopher Holtby at Wealth Advisors Trust tells me that directed trust is a “win-win situation” because there aren’t any conflicts of interest and “if you work the math out, our fee is substantially lower than the compliance cost.”
Holtby’s firm is based in South Dakota, where trust rules are most favorable to advisors. His firm can also support dynasty and asset protection trusts, which are most desirable with high-net-worth investors to complement their estate plans.
MULTIFAMILY OFFICE PROVIDERS AFFECTED
Many advisors are still trying to work through compliance problems, says Valerie Baruch, assistant general counsel of the Investment Adviser Association, a Washington, D.C.-based trade group that has been on top of this issue since the beginning.
Over the last few months, advisors have wrestled with serious confusion as to who needed to comply. The SEC eventually posted clarifications on its website that dealt squarely with the central question:“If an employee of an advisory firm serves as a trustee to a firm, does the advisory firm have custody?”
The answer to the question, according to the SEC, is “yes.” However, the clarification, released only a week before the new rule went into effect, did not give advisors much time to shop for accountants or deal with the issue properly. While the Trust Advisor Blog received many questions from advisors over the last several weeks concerning this, the matter seems to have been laid to rest—for the time being.
In addition to advisors who serve as trustees, those who provide multifamily office services also come under scrutiny of the new SEC custody rules.
I spoke to Mari-Anne Pirsarri, a Washington, D.C.-based lawyer, who told me that any time an advisory firm has the ability to direct the custodian to pay a third party, the SEC says the advisor has custody.
David Newkirk, a managing director with Schwab Institutional, told me that when advisory firms serves as trustees or have the ability to tell us to send money to third parties, they effectively have trust custody. He added “We beat this question up pretty well,” he told me.
I also spoke to Steve Austin at Fidelity and that firm’s position is identical to Schwab’s. “It’s cut and dry,” he said. “The advisor has custody when they tell us what to do with the money.”
Mari-Anne Pirsarri told me the SEC has made additional clarifications (and a few exceptions) for multifamily office providers. For example, she says when a client calls up an advisor who is also a multifamily office provider and says, “Pay my taxes for $50,000,” that involves custody. However, if the client calls up the advisor and says, “Move my money from Schwab to Fidelity,” custody isn’t an issue.
She notes that there is so much confusion because, after awhile, the arguments start circling back on themselves. But the SEC means business, she says. “The SEC is not backing off on this one.”
Despite this, the SEC has made a few concessions. When the audits were first proposed last year, the SEC took the position that even deducting fees from client accounts represented custody. The SEC received over 1,000 letters and wound up agreeing that advisors who are simply authorized to collect their fees did not have true custody over their accounts.
Jerry Cooper, senior editor, The Trust Advisor Blog. Scott Martin contributed to the editing.
Permalink: http://thetrustadvisor.com/news/custody
When a Bank Fails, Are Trust Assets at Risk?
Posted by Scott Martin in News on March 12, 2010
With bank failures running at their highest level in nearly two decades, those holding fiduciary accounts may cause problems for advisors who recommend them should the bank fail.
Experts recommend wealth managers conduct due diligence before sending a client to a bank’s trust dept.
With 700 banks still on the FDIC’s secret “problem list” and banks getting shut down on almost a weekly basis, the financial sector is still in its worst shape since the early 1990s.
But until recently, relatively few people worried what would happen if fiduciaries started failing along with banks.
FDIC spokeswoman LaJuan Williams-Young told me, advisors recommending a bank to hold client assets should be on guard.
The good news is that no federally insured financial institution with the legal power to operate as a trust company failed in either 2008 or 2009. However, this year five banks with trust assets have been taken over by the FDIC.
“There are definitely banks that have considerable problems and some of them have trust departments,” she said.
She wouldn’t single out any trust banks in particular, but said the ones the regulators have their eyes on generally have a lot of problem loans and a track record of enforcement actions against them.
Cracking the Code
L. Scott Walshaw, Nevada’s former banking commissioner and regulatory advisor with Advisors Institutional, says sending a client to a bank that wind ups failing can affect the relationship. It’s better to do some homework. Figuring out which banks are in bad shape can be a matter of “reading the tea leaves,” but he gave me more specific pointers for spotting serious trouble ahead of time.
While most of the steps leading up to the FDIC taking a bank over are hidden from the public, a bank usually gets an official cease and desist order—usually a last warning to clean up its lending habits and beef up its balance sheet. If it fails to comply or improve on its own, it’s a strong candidate for getting sold off.
These orders are part of the public record, so anyone can check the FDIC website to see whether a bank’s condition has deteriorated to that point. So far this year, 40 banks have gotten the orders, but only 7 have had trust departments: Cowlitz Bank in Longview, WA; First Security Bank & Trust in Norton, KS; State Bank of Burnettsville in Burnettsville, IN; Clarke County State Bank in Osceola, IA; Security State Bank in Scott City, KS; Bank of Smithtown in Smithtown, NY; and Citizens Union Bank of Shelbyville in Shelbyville, KY.
All have relatively small trust departments. The biggest, Cowlitz Bank, has a total of $70 million in fiduciary assets.
Knowing the Risks
When a federally insured fiduciary fails, its trust accounts are currently protected up to $250,000 per qualified beneficiary, LaJuan Williams-Young at the FDIC says.
While that may scare some advisors whose clients have put millions of dollars in stock or real estate into trust at a weak bank, it may not necessarily be a big deal, Scott Walshaw told me.
That’s because the FDIC insurance limit only applies to products issued by the bank that failed. Certificates of deposit held within the trust account are subject to the $250,000 limit. Stocks and real estate aren’t.
As long as the assets are managed properly and your clients’ trust bank is FDIC-insured, Walshaw says, it won’t matter whether it fails or not. The fiduciary assets simply roll over to the financial institution that takes it over and, as Walshaw puts it, “Nobody’s even going to get a haircut.”
In the worst case scenario, he says, the FDIC will simply liquidate the bank and turn insured cash and other assets back to the outside trustee, who now needs to find a new trust company.
“Other than perhaps the inconvenience of having to move from one institution to another—which is normally done for you by the FDIC—that’s it,” he told me. “There’s really little if any risk to the beneficiaries as long as the limits are satisfied.”
However, some experts warn that failure to satisfy the limits does expose advisors to some degree of reputation risk if the bank fails.
According to a report the Virginia State Bar Association did a few years ago, lawyers may not be immediately liable if trust assets are lost in a bank failure; after all, there are hundreds of non-FDIC-insured trust companies out there, and some legal precedent for holding the advisor blameless when those companies go under.
Still, James Barr, the association’s ethics counsel, warned Virginia lawyers that leaving even a small part of their clients’ assets in weak banks outside the FDIC’s protection can damage their reputation and isn’t really good practice.
“Regardless of possible malpractice or disciplinary exposure, good lawyers take reasonable measures to prevent or mitigate financial loss to clients,” he said.
Trusts not the Problem
In any event, banks with trust departments tend to be more stable than those that focus exclusively on lending. Nobody I talked to had ever heard of a trust department dragging down a bank.
Usually, it’s the other way around, says Mike Heller, president of a company called Veribanc, which provides independent bank safety ratings.
“Most of the FDIC-insured trust companies have a much broader portfolio,” he told me. “I don’t know of a single bank that’s failed because of the trust department.”
For Northern Trust and other huge trust banks that analyst Dick Bove at Rochdale Securities covers, the trust business itself is not part of the problem. The big risk to worry about is litigation, he says.
“Unless the bank gets sued for things that have to do with trust activity, the trust department isn’t really in a position to create risk,” he told me. “If anything, trust accounts can help a bank weather the credit cycle by giving them earnings when the lending market does poorly.”
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and editing.
Permalink: http://thetrustadvisor.com/news/fdic
Sleepy New Mexico Emerges as Important Trust Center
Posted by Scott Martin in News on March 5, 2010
Low start-up and operating costs attract trust companies, but state legislature is dragging its feet to support infrastructure.
UPDATE: Randy Hahn reminded us of First American Bank, which has been operating with trust powers under a federal charter since 1963. We’ve added it to the list.
If you’re a banker, RIA or trust officer ready to get out of the rat race, New Mexico may be the place to go to set up a pet project: starting your own trust company.
Capital requirements for new trust companies are low, only $150,000, and the operating environment couldn’t be better, as long as you’re not married to asset protection or perpetual trusts, don’t mind some taxes and don’t require the prestige of a Delaware or South Dakota.
One local player that’s grown well beyond the hobby level is Santa Fe Trust. With a half billion dollars in assets and an active directed trust model, the company has grown into a significant force since it got up and running in 1997.
Santa Fe CEO Kathy Roberts told me that the state presents companies like hers with a combination of a solid trust-friendly regulatory climate and fringe benefits.
“The operating environment in New Mexico is wonderful,” she explained. “And of course there are the normal positives: wonderful place, wonderful weather. Simply being where we are makes us appealing to both potential clients and their advisors who might be looking for an excuse to get some sun or hit the ski slopes.”
Compared to other Sun Belt states, New Mexico missed most of the real estate boom and so weathered the bust in relatively good shape. The unemployment rate in Santa Fe was 6.6% in December, well below the 8% to 13% that cities in Arizona and Nevada are suffering. Foreclosures are well below the national average, and only one of the state’s banks has failed during the credit crisis.
Labor costs are competitive. According to FDIC data, moving the average financial staffer from Nevada to New Mexico delivers a 2% savings on wages; the same move from Delaware would cut payroll costs 39%. (South Dakota’s still even cheaper.)
Prospective clients are a healthy blend of moneyed refugees from the big city, three- and four-home types who usually end up retiring in the area, and pockets of old money families, many of which have most of their wealth tied up in real estate and so can readily see the value proposition of moving that ranchland into trust and managing it effectively once it’s there.
Too Good to Be True?
A search of New Mexico’s Regulation & Licensing Department’s records reveals ten active trust companies in the state. Three are captive departments of local banks; the rest range from relative giants like Santa Fe Trust and Avalon Trust to niche IRA and escrow servicers.
That’s not bad for a state that didn’t make our list of most trust-friendly jurisdictions. In fact, only four of the states that scored higher (Delaware, Nevada, South Dakota and New Hampshire) have attracted a larger trust company presence, and some like Wyoming and top-tier Alaska have given out far fewer charters despite their reputation as trust havens.
On one hand, New Mexico has a few things going for it on the statute side: Directed trusts are authorized in statute and any company incorporated in the state can get a trust business going as long as it can meet the $150,000 capital requirement and post $100,000 for the bond and $500 for the application.
Support for directed trusts was enough for Santa Fe Trust and Taos-based Heritage Trust. By design, neither has an in-house investment specialist on the payroll. Both were set up with the goal of wooing wealth managers eager to hand off the administration of a client’s trust as long as they could go on managing the money in it.
However, tax treatment could be better. There’s no state inheritance tax, but residents do pay local income tax. “It’s a relatively minor thing, but beneficiaries who live in non-income-tax states still have to file a New Mexico tax return,” Roberts explains. “Whether they actually owe any money depends on the situation, but there are those out there who may get offended simply because the state makes them file in the first place.”
|
New Mexico Trust Companies |
Specialty |
City-Phone |
|
Trust & Investment Mgmt., Family Office |
Santa Fe |
|
|
Trust Management |
Clovis |
|
|
Wealth Management, Estate Planning |
Farmington |
|
|
Desert State Life Management Services |
Trust Management |
Albuquerque |
|
Trust Management |
Artesia |
|
|
Trust & Investment Mgmt., Family Office |
Taos |
|
|
Trust & Investment Mgmt., Family Office |
Santa Fe |
|
|
Self-Directed IRAs |
Albuquerque |
|
|
Trust Management |
Clovis |
|
|
Trust & Investment Mgmt., Family Office |
Carlsbad |
|
|
Trust Management |
Albuquerque |
|
|
Source: New Mexico Registration & Licensing Department and federal regulator websites. © 2010 TheTrustAdvisor.com |
||
On the column to your right, our research department compiled a list of 11 active trust companies in New Mexico; each name clicks through to the institution’s website. Please note that Desert State Life Management Services does not have a web site that we could locate.
Answering the Perpetual Question
Both Roberts and Heritage Trust founder Fred Winter acknowledge that because New Mexico still prohibits perpetual trusts, a company with a local charter can be a bit less flexible than a competitor from South Dakota or elsewhere in the same time zone (two hours behind New York).
Perpetual or “dynastic” trusts have become increasingly popular among families looking to shield their wealth not just for a single generation, but for centuries or even forever. In fact, Winter told me he has at least one client who’s thinking in dynastic terms. “It has actually come up in recent discussions,” he says. “They wouldn’t mind seeing our charter move.”
It probably won’t come to that. Kathy Roberts at Santa Fe Trust says that even if her clients were clamoring for perpetual trusts, it would take a lot to get her to move the charter. “We could always find a partnership with someone who can offer that kind of capability,” she told me.
Trust companies in the state can also wait for the rules to change. New Mexico lawmakers have argued several times to roll back the restriction on perpetual trusts, but so far nothing’s come of it.
Daniel Montoya, who works closely with Winter as secretary of Heritage Trust, says that the fact that so much of the state’s wealth is tied up in land is the sticky point here. The state’s lawyers just don’t want to see that real estate locked up for generations, he says.
“However, this year gives us a good opportunity to get things settled,” he told me. “I suspect something will happen.”
In the meantime, as long as a trust is located in a state that does allow perpetual trust or any other structure, New Mexico administrators will be happy to follow the rules.
Regulators Offer “Red Carpet” Treatment
Local land lobbies notwithstanding, every New Mexico trust officer I talked to loves the state’s regulators, especially Bill Verant, who runs the Financial Institutions Division, and Adrian Martinez, who has direct responsibility for trust companies in particular. “They’re both incredibly welcoming,” says Winter.
Kathy Roberts says that compared to life back in Wilmington, Santa Fe is “a very positive place to be” when it comes to getting things done. “It’s easy to talk to people,” she told me. “You can get in touch with the regulators or just call them up without any impediments—go to lunch. And the bankers’ association is what I would call proactive.”
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and editing.
Permalink: http://thetrustadvisor.com/news/nm
Pennsylvania Family Office Provider To Start South Dakota Trust Company
Posted by Scott Martin in News on March 4, 2010
Charter would likely help DM Trust defectors build out a “formidable” platform.
PIERRE, SD, Mar 3 – Sterling Trustees LLC, a Philadelphia-area family office service provider, has filed to receive a trust charter in South Dakota, according to a report released this week by the South Dakota Division of Banking.
A Sterling spokesman confirmed to the Trust Advisor that it has submitted the paperwork to launch a public trust company in the state, but declined to comment further while the application is still pending.
According to the company’s website, Sterling currently provides private trust and family office services to high-end clients; it also offers trust administration services to investment advisors, lawyers and other professionals to add value to their own client relationships.
CEO Stanley Joffe is known in Philadelphia legal circles as a high-powered attorney focused on international estate planning issues. He founded and ran then-Pennsylvania-chartered trust company DM Trust (now operating as Everest Trust with a Delaware charter) as a subsidiary of local law firm Duane Morris in 2007 but went independent a year later to launch Sterling. His son Antony followed him to his new company and serves as president.
“My guess is that they broke up with Duane Morris and formed this new deal themselves,” Jeffrey Lauterbach, founder of Capital Trust, told us. “They look like they’ve got a pretty formidable family office set-up, so this charter might give them added support for that.”
The trust charter would likely help Sterling build out a “formidable” trust platform, he said. In particular, he noted that the company is using Rockit, the elite high-end family office software package developed to handle the Rockefeller family’s needs.
As to why they picked South Dakota, the state has actively courted the business through a combination of an inviting tax regime and trust-friendly statutes. Sterling is the second public trust company this year to start up in the state.
Lauterbach says, “They probably just decided they liked it better than Delaware. Delaware’s gotten kind of tough.”
South Dakota’s getting even easier. The state legislature passed a bill this week that aims to “strengthen the legal and regulatory framework for public trust companies.”
Scott Martin, contributing editor, The Trust Advisor Blog.
Permalink: http://thetrustadvisor.com/news/sterling
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