Expert Says Value-Added Advisors Can — And Should — Boost Fees

Pricing guru Rafi Mohammed recommends providers in trust-friendly states charge higher fees for services not available elsewhere.

Trust companies in a position to provide a broader range of products don’t need to cut prices to compete and are even justified in charging higher fees, says Rafi Mohammed Ph.D, a leading pricing expert and author of books like The 1% Windfall and The Art of Pricing.

“If I come to you and say my trust product can avoid taxes for generations to come while others don’t, your eyes would be popping,” he told me. “If consumers are really hooked on the dynasty trust, then vendors should not be afraid to ask for a top-dollar premium on that added value.”

To earn that premium, out-of-state trust companies have to give prospective customers a good reason to move their business out of the local market. In some jurisdictions, the selling point might be the perpetual or “dynasty” trust, which potentially lets beneficiaries avoid generation-skipping taxes for centuries. Or it may be the self-settled asset protection trust, which is designed to shield wealth from litigators.

“This is not a mass-market product,” Mohammed told me. “Articulate how you are different and how it benefits the consumer,” he added. “Especially in high-net-worth markets like this, it’s not always about the best price.”

Some value propositions are easy to demonstrate to a prospective client. Just moving a plain vanilla trust from New York to Nevada, for example, improves its real investment performance by about 113 basis points a year simply by eliminating drag from state taxes.

That’s a huge added value, and trust companies in tax-free states can get a few of those basis points for themselves if they can communicate what those basis points add up to over the decades.

Competing on value, not price

As long as a trust company avoids charging a lot more than rivals that offer comparable value, it should definitely forget about charging less in order to win business, Mohammed says. After all, these are multi-million-dollar trusts, not Volkswagens.

“Your marketing should never be about a race to the bottom,” he told me. “Once you establish that your offering is competitive with what direct competitors are charging, there’s no reason to lower your prices. People are always too quick to lower prices.”

If your offering isn’t competitive in a particular market, don’t compete there. Directed trust companies often operate in states that don’t support some forms of trusts, so they have to refer these accounts to other vendors — and don’t spend much time chasing them.

After Delaware changed its statutes to allow perpetual trusts, trust companies operating in the state doubled their assets in five years as money flowed in from all over the country. Clearly, the trust-friendly environment was good for business.

Harvard law professor Robert Sitkoff has been looking at this issue for years alongside Max Schanzenbach at Northwestern. Not all of the 20 perpetual trust states were created equal, he tells me.

In fact, according to their research, between 1995 and 2003, one out of every ten trust dollars—$100 billion—moved to jurisdictions that, like Delaware, South Dakota and Nevada, support trusts in perpetuity but do not tax out-of-state accounts.

States like Wisconsin, which allow perpetual trusts but tax the assets, didn’t get many of those accounts.

“Once there’s a reason to go out of state to take advantage of more favorable statutes, picking the one with the best tax treatment is an obvious decision for an estate planner to make,” Sitkoff explains. “The added cost is minimal and the benefits are huge,” he added.

Other competitive propositions seem harder to sell. Sitkoff and Schanzenbach have yet to find any proof that asset protection, spendthrift trusts, added confidentiality or other added services have translated into concrete asset flows.

“We’re just not picking any of that up,” Sitkoff says.

Pricing and profitability

Some of the most trust-friendly states provide trust companies with a two-pronged benefit: premium service and better margins.

While Philadelphia-based Sterling Trustees set up its trust operation in South Dakota because it liked the regulatory climate, Antony Joffe, the company’s president, told me cost efficiencies are a nice bonus.

“We can operate more cheaply than the Glenmedes and Wilmingtons of the world,” he says.

Rafi Mohammed says that trust companies that operate in low-cost states like New Mexico or South Dakota offer the same level of service as rivals in high-cost states like Pennsylvania or Delaware, so they should charge the same fees.

“There’s no need to lower your price to pass on your efficiencies to the client,” he advises. “When consumers evaluate your product, they never say ‘The most I’m going to pay is double costs,’” he added. “Your profits should never be part of the conversation,” he added.

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

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  • Don Moore

    I continue to be amazed by those organizations that do not fully understand their pricing scenarios or by those institutions that do not have a disciplined approach to pricing. For many they continue to rely on the dated AUM metric, where the belief is that bringing in assets will generate profitable business. This no longer is the case, organizations need to begin to focus on ROFA (Return on Fiduciary Assets) as the new metric and establish goals and objectives around the ROFA for each type of account and the overall portfolio. Failure to do so will create inconsistent pricing situations and increased risks.

    The goal should be to optimize risk-adjusted revenue while at the same time providing quality and reliable service to the client.

    The process we have implemented produces annual revenue lifts in the 12% – 25% range (excluding market value appreciation). Perhaps it is worth a look.

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