New Tiburon report shows independent trust firms ahead and winning the race for profitability and amassing personal trust assets. Warns banks to wake up and change or lose big.

A generation ago, banks had an iron grip on the trust business, but according to recently released research from San Francisco research firm Tiburon Strategic Advisors, that once-commanding position is a lot weaker today.

“Banks have lost huge market share in terms of consumers’ assets,” says Tiburon managing principal Chip Roame, who says banks are spending too much time optimizing a “dead” business model.

The latest Tiburon estate planning report indicates that banks still control 40% of personal trust accounts. However, that share is concentrated in relatively high-end irrevocable trusts, which are both expensive to administer and hard to capture from competitors.

Revocable trusts now account for about two thirds of the $6.8 trillion in personal trust assets out there, and this is Tiburon where finds that brokerage trust operations and true independent trust companies dominate the market.

Parallels from the advisory business

Most of the early push in this direction came from the brokerage channel, the Tiburon report explains.

Historically, rather than refer client assets to banks and lose the business, the national wirehouses and some regional firms built or bought in-house trust units, while others found banks to partner with.

But this has been a bad decade for the wirehouse model. Full-service brokerage firms saw their controlling share of U.S. wealth contract from 43% to 27% from 2000 to 2007 alone, and the losses intensified after Bear Stearns and Lehman Brothers imploded two years ago.

At this point, the independents and online trading platforms now have a bigger share of the market than the wirehouses—and they want to work with independent trust companies.

“Both independent reps and fee-only financial advisors have taken significant share of assets under management from the banks and full-service brokers,” Roame explains.

“These independent advisors found that as their clients aged, they needed a trust solution. The independent trust companies emerged to fill that need.”

As a result, Roame says the ability to offer directed trusts is a key competitive factor.

“Independent advisors want to manage the money and just hire a trustee for 20 to 30 basis points,” he says.

Boutique operations can shine

Thanks to directed trust, technology and new business models, the number of non-bank competitors that Tiburon tracks has quintupled in recent years.

Because most are start-up operations, these next-generation trust companies tend to be small compared to their counterparts in the banking world.

Trust Performance Report editor Bernard Garbo, who just released a new benchmarking survey on industry assets, says few truly independent trust companies will ever accumulate over $1 billion in assets.

“I see the independents as boutique operations,” he explains. “They tend to stay at mid-size to small because the successful ones generally focus on one or two specific areas of the market.”

Garbo’s most recent numbers support the Tiburon report’s longer-term findings. So far this year, the fiduciary industry gained 10 institutions at the true start-up level, where firms have under $500 million under administration apiece.

Meanwhile, the number of players in the bulge bracket and up—over $1 billion, representing most of the big banks—shrank by about 10%.

Profitability favors the independents

While industry leaders like BNY Mellon and State Street aren’t going away any time soon, the giants are also having a hard time gaining ground in terms of signing accounts and squeezing revenue out of the assets they already have.

Not counting State Street, which reported a spectacular 29% increase in fiduciary assets, on average the top 20 fiduciary institutions (over $100 billion under administration) actually lost 2.7% of their assets last quarter.

The smallest fiduciaries, on the other hand, managed to grow a little.

And when it comes to monetizing those new accounts, the independents definitely have the edge, Garbo says.

“They know their market and are going for it instead of trying to do all things poorly,” he explains. “As a result, they tend to show a higher return on their assets than most bank trust departments.”

Although directed trust may be the secret to growing an independent trust operation, wealth management remains the sweetest slice of the business.

The smaller a trust company is, the more of its fiduciary assets it tends to manage in-house—charging a management fee in the bargain.

As a result, while the Citibanks of the world may oversee several trillion dollars in assets, they only generate 1 or 2 basis points a year on that massive cash hoard.

Meanwhile, smaller players like Bessemer Trust can comfortably generate 30 to 40 times as much fee revenue per dollar in trust.

Without the deep pockets of a depository institution to fall back on, independent trust companies are simply “a bit more price conscious,” in Garbo’s experience.

“When you’re independent, you have got to make money if you are going to survive,” he explains. “There are definitely some bank trust departments that have picked up on that model, but they’re still a little behind.”

Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and reporting.

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