Our new expanded trust industry survey for the second quarter of 2010 reveals who’s charging what for directed trusts and for investment management. We found some providers offer a better deal for bundled services. Either way, both plans have their advantages.

When wealthy families pick a trust company, pricing is a factor. But there’s still a lot of debate about just how much value vendors should pack into each of those basis points in order to win accounts.

The Trust Advisor’s latest quarterly survey of independent trust company fees shows that the industry is all over the map when it comes to picking a sweet spot between service and profitability.

Some vendors take a full-service approach and charge a bundled fee for giving clients everything they need or want. Others just provide administrative or custodial service at a rock-bottom price and rely on scale or other operating advantages to boost their margins.

Either way, trust officers agree that unless you’re already one of the biggest banks in the business, it’s important to resist the urge to deliver a one-size-fits-all experience.

“From our point of view, this is not a commodity business,” Anthony Guthrie, president of Atlanta-based Reliance Trust, which offers both bundled and unbundled options, told me. “How we differentiate ourselves from the banks is on service, and that’s not something you can reduce to an in-the-box product or price.”

Finding your niche

In fact, full-service trust companies find that once they focus on a market segment, clients will pay a premium on top of the roughly $3,000 a bare-bones provider would charge just to open the account. If not, they probably weren’t going to be profitable business anyway.

“Our customers are usually need-specific,” says Teresa DeMenge, senior trust officer at Zia Trust, which works with a lot of employee benefits programs and IRAs.

Prospects who need more than what Zia provides “really do need the bigger banks to ‘jumbo’ their services,” she told me.

While these clients may be looking for a trustee or custodian, they often end up requiring private banking services or other add-on expertise that a pure trust provider can’t really provide as a standalone operation.

Because those really big fish tend to demand big discounts, even the biggest banks may not really want their business, Bernard Garbo, publisher of A.M. Publishing’s Trust Performance Report, told me.

“You see people in the banking industry getting out of the trust business because being a full-service vendor is too expensive,” he says.

“Doing too many things is difficult,” he added. “Institutions that do nothing but personal trusts do not have the support of being inside a bank, but they still make a lot of money.”

The sweet spot

Of course, the big trust banks say they make their money by leveraging the sheer scale of their holdings. But while deciphering the basis points is not an exact science, it seems that you need pretty vast scale to overcome minuscule margins.

Crunching Garbo’s data reveals that some of the biggest players in the industry generated revenue of 0.20% or less on their managed assets and net margins under 0.02%. Based on that math, there are banks out there that squeeze less than $250,000 in profit out of every $1 billion they gather.

The more commoditized a trust company’s business it is, the faster its fees have to race to that 0.20% level in order to remain competitive, and the more efficiently it needs to run in order to break even.

Those 20 basis points are also roughly what it costs large and small trust companies to provide custody service, says Reliance Trust’s Anthony Guthrie, so we are unlikely to see pure custodians drop their prices any time soon.

Added service demands richer fees. However, the exact formula for what to charge for administration or investment management varies widely from vendor to vendor, and is often obscure when they simply quote clients an all-in-one bundled rate.

“I’m actually not sure I’ve ever had a discussion about how you bifurcate a wrap fee,” says Guthrie, who estimates that a discretionary trustee could easily charge 50 basis points for administration and support and another 50 basis points for any in-house wealth management service.

Of course, that isn’t pure profit. Companies like Reliance, for example, assign all clients—large and small—their own relationship managers, rather than make the little accounts go through a call center. Throw in expensive frills like local administration or investment expertise, and those basis points get eaten up pretty fast.

Where we go from here

If anything, what’s surprising about independent trust companies’ fee structures is not so much that they are resisting the temptation to race to the bottom, but that prices aren’t on the rise.

According to Guthrie, pricing at Reliance and the rest of the industry hasn’t budged much over the last decade. “There simply hasn’t been much price compression,” he says.

Teresa DeMenge at Zia Trust agrees that pricing at independent trust companies is stable “so far,” but warns that there may be change on the horizon for bank trust departments.

“Large bank fees appear to be rising,” she told me. “Medium-sized banks seem to have a slight increase due to an increase in operation costs.”

If so, this may make the banks even less competitive at a moment when many are already dumping their trust businesses entirely to leave the field to the specialists, Bernard Garbo says.

“It’s an old thing, but it’s as true in the banking business as anywhere else,” he told me. “Doing too many things is difficult.”