Posts Tagged Advisors Institutional

South Dakota Sets Record for New Trust Companies

Posted by Scott Martin in News on May 15, 2010

South Dakota is becoming the top choice for trust providers. With ten new launches this year and a roster of 50 institutions shortly, it’s easy to see why banks and advisors alike are flocking to the wealth-friendly state. But despite the welcome mat, screening for new players “isn’t easy.”

This week, the South Dakota Division of Banking announced that Pittsburgh-based Mid Atlantic Capital Group, a $19 billion wealth manager and trust technology provider, applied to receive a charter. Approval is expected before July 1.

Mid Atlantic’s not the only Pennsylvania trust operation to set up shop in South Dakota. Earlier this year, Consohocken, PA-based multi-family office Sterling Trustees decided too that South Dakota’s compelling trust benefits made it better than the other no-tax dynasty trust states.

Sterling’s president Antony Joffe told me, “We picked South Dakota because we wanted the best trust law environment and thought they had what we needed.”

They just received official approval this week and are now ramping up ambitious plans to offer trust services to registered investment advisors, as well as more effectively run the roughly $500 million in high-net-worth trust accounts they already have.

Sterling is one of seven public trust company going through South Dakota’s approval process this year. Denver-based United Western Bancorp’s UW Trust Company, with $2.6 billion in assets, received its approval at the end of March.

Counting Mid Atlantic, three other applications in the pipeline, and private trust companies, and a record 10 companies have entered the South Dakota system so far this year.

One of them, Kingsbridge Trust Company, was launched by Kingsbridge Private Wealth Management of Las Vegas to complete its suite of family office services. CEO David Dunn told the Trust Advisor Blog that the process “isn’t easy,” with hours of meeting with regulators and answering tough questions. “It required a great deal of background work just to file the application,” he says.

“We’re okay with startups”

What’s driving the flood? Five months ago, Les Revzon, president of trust consulting firm Advisors Institutional, who assisted Mid Atlantic with its trust charter application, attended a meeting in Pittsburgh with Mid Atlantic VIP’s to lay out the case for why South Dakota might be the best place to host its new trust company operations.

It didn’t take more than 10 minutes for the honchos at the table to overwhelmingly agree that South Dakota would be their new home. With the benefits adding up—no taxes, dynasty trusts, asset protection trusts, directed trusts, low capital requirements and affordable on-the-ground services—they were sold. All of that sounded a lot better than posting $1 million in regulatory capital in Nevada or Delaware, big staffing costs and waiting over a year for a trust charter.

The interest in the state’s trust environment isn’t too surprising, says Bret Afdahl, counsel for the South Dakota Division of Banking.

“We’re business-friendly, which means that we want our trust companies to succeed,” he told me. “Profit is not a swear word in our state.”

Afdahl likes to discuss the advantages of his state’s trust jurisdiction, and with good reason: According to state statistics, the Division of Banking booked a record $262,651 in trust-oriented revenue last year in the form of examination and supervision fees.

To attract new institutions that measure up, capital requirements are low. A trust company needs to post $200,000 to set up shop in the state. Other centers of the trust industry like Delaware and Nevada require $1 million or more to obtain a trust charter.

New legislation kicks in July 1 to tighten the capital requirements at regulators’ discretion, but this is aimed at established institutions that might run into trouble, Afdahl told me. “We’ll keep it low on the front end to allow for startups,” he says.

Although the new rules also mandate additional background checks for principals and key employees, the South Dakota approval process is streamlined compared to other jurisdictions.

Antony Joffe got the green light in about five weeks, compared to an estimated year to move an application through the Delaware system or up to two years of dealing with the FDIC for a federal trust charter.

Nevada’s quest for modernization

By sheer number of operating trust companies, South Dakota has leapt ahead of Nevada and even Delaware.

Nevada’s lack of appeal for new trust institutions seems odd when you consider that the state went through a great show of modernizing its trust statutes late last year in order to attract new business.

State regulators wouldn’t comment on success or failure. However, a source familiar with local politics says “updating” the rules was less about making the state friendlier to public trust companies and more about setting up barriers to entry.

“You can probably read behind the lines and see that the number of public trust companies in the state hasn’t budged this year,” my source told me. “The new capital requirements make it more difficult for public companies to be formed.”

We were unable to interview officials from Delaware, but according to Bret Afdahl, the issue for that state’s regulators is “quality,” or at least exclusivity. Delaware is legendary for enforcing extremely stringent audit and residence standards that can be too expensive for smaller players to consider.

“Delaware’s rules only really allow for big companies,” he told me. “You need X square feet and Y full-time employees, of whom Z must be trust officers. It doesn’t disallow startups, but you need to be pretty big to cover the initial expenses.”

When it comes to operating on the ground in South Dakota, Sterling Trustees’ Antony Joffe is excited. He plans to set up an office and move all his existing fiduciary activities there.

“We’ll still manage some trusts here in Philadelphia on an individual basis, but we’re going to try to run as much as we can out of South Dakota,” he told me.

Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes and senior editor Jerry Cooper contributed.

Permalink: http://thetrustadvisor.com/news/sd-record

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Feds Order Trust Firms to “Unbundle” Fees

Posted by Scott Martin in News on May 8, 2010

Trust clients expecting to deduct bundled fees to the limit of the law may need to find providers who can break down fees as the IRS requires.

Two years ago, the US Supreme Court in Knight v. Commissioner held to be eligible to deduct investment management fees in a trust, they cannot be grouped together or bundled with trustee fees in one bill. As a result of this famous case, trust firms in the US are now getting ready to comply with an IRS directive requiring trustee and IM fees to be billed separately for a taxpayer to gain a deduction. 

Michael KnightA decade ago, Michael Knight was under the impression that investment management fees for trusts were fully deductible. After all, hiring the best possible advice was part of his fiduciary duty as trustee for a $2.8 million Pepperidge Farm family trust.

He was surprised when the IRS bounced most of the deduction back, leaving the trust with a $4,000 tax bill and gnawing questions about how to account for pure trust expenses (which are fully deductible) versus investment expenses going forward. He took the case all the way to the Supreme Court, only to lose in 2008.

The Supreme Court ordered trustees to split or “unbundle” pure trust expenses from everything else if they want to make sure their accounts get all the deductions they deserve. Two years later, Knight and everyone else in the trust business is still trying to figure out how to obey that order as the IRS delays issuing firm guidance on more than a year-to-year basis.

“You know they just extended the review process again a few weeks ago,” Knight told me. “That means they’ve deferred yet again on making a decision on unbundling. At this point, I wonder if I lost the battle only to win the war,” he added.

“A real pain”

If and when the IRS makes up its mind, trust companies that currently don’t break out their expenses are looking at headaches ahead.

“The Supreme Court ruled in their favor, but I agree that if that’s what’s going to happen, it’s going to be a real pain,” Douglas Blattmachr of Alaska Trust told me.

Tommy Tucker, Dunham Trust

Other trust companies are steeled for what they see as inevitable. Reno-based Dunham Trust has the accounting systems in place to unbundle its fees as soon as the government tells it to push the button, Tommy Tucker, the company’s president, told me.

“When I checked into it, my operational people said we’re ready to go,” he says.

In fact, there are software fixes out there, says Les Revzon, president of Advisors Institutional, a firm that helps trust companies form in South Dakota and provides back office support for about a dozen trust company clients.

“Most trust accounting systems like SEI, Sungard, Infovisa and HWA can easily break fees down any way the trust company wants,” he says.

While the technology may not be a hurdle, figuring out where to assign every basis point of a previously unified fee may cause some consternation. Firms like Alaska Trust simply charge one all-in fee based on assets and service level, and so, Blattmachr tells me, they’re still working on what an itemized fee breakdown would look like.

Even asking trust companies to do this is pointless, as far as Texas lawyer Carol Cantrell, who argued Knight’s case against the IRS, is concerned.

“I am not sure it can even be done,” she told me. “It would be like asking a real estate broker to unbundle his real estate commission among the various duties he performed,” she added, noting the complexity of all the unique variables involved.

“No two trusts are alike”

Cantrell points to another serious issue: What happens when trust companies disagree in how they split up the basis points, even as far as trusts administered by the same company are concerned?

On the one hand, every trust and every trust company is different, but ultimately the line-item approach will force fee allocations to converge throughout the industry, Cantrell says. That could lead to a competitive race to the bottom, but it’s not likely to happen any time soon.

As things currently stand, there’s no need to unbundle unless the IRS mandates it. The Supreme Court’s issue was not so much with fee transparency but with whether bundled fees are fully deductible. Theoretically, any trust officer could simply charge a wrap fee and accept potentially less favorable tax treatment.

In the meantime, Dunham Trust, for example, is still treating all of its fees—trust and investment management alike—as deductible. However, Tommy Tucker has talked to colleagues who are being told to unbundle and not write off a cent of their investment fees.

Michael Knight originally argued that making sure his accounts were invested in the best possible way was part of his fiduciary duty, and so investment management necessarily qualifies as a fiducuary expense. It’s a great point, and there are efforts in Congress to change the law to accommodate it.

Whether that happens this year is anybody’s guess, given Washington’s distracted and fractious mood. Nobody I talked to expects anything to shake out before the November elections, and even when it does, there could probably be a long wait before new rules go into effect.

As for Knight, he told me he’s really just scratching his head when it comes to the Supreme Court decision.

“The lack of focus on the fiduciary relationship was disconcerting to me,” he says. “Some of these judges have been in private practice. I guess they didn’t do a lot of trustee work.”

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

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