Posts Tagged Bank of Hawaii

Don’t Count on Hawaii’s New Trust Law to Attract the Super-Rich

Posted by Jerry Cooper in News on August 21, 2010

Experts say Hawaii’s new asset protection law is “dead on arrival.” With a 1% user fee and onerous investment restrictions, few billionaires will find Hawaii a proper bastion for their family fortunes.

The economic pinch has even affected paradise. Hawaii is suffering from a decline in tourists and as a result is scrambling for new ways to bring more money to the state. Ambitious plans are underway that include the revival of the 1970s hit CBS TV show “Hawaii Five-O.”

As part of the revival initiatives, Hawaii’s trust firms and the estate planners have embarked on a bold campaign to attract the world’s super rich by making it the premier trust haven of the Pacific.

On June 28, 2010, Hawaii Governor Linda Lingle signed into law a new trust law designed to compete with Nevada, Delaware, Alaska, South Dakota and other domestic asset protection trust states by allowing local trusts to shield assets from creditors or, theoretically, the courts.

With the new law, Act 182, as ammunition, local legislators hope their state will become a powerful “sun, swim and protect” combo that entices mega-rich families who may be vacationing in paradise to leave more of their cash behind.

“We believe that trust business is very compatible with our visitor industry,” explains state senator Rosalyn “Roz” Baker, who sponsored the bill back in January.

“Yes, the rationale was to woo offshore assets to a repository in Hawaii,” she adds.

DEAD ON ARRIVAL

Even though Honolulu is optimistic that asset protection trusts will bring in revenue, estate planners do not see a credible threat to established trust centers on the mainland.

Although Act 182 puts Hawaii ahead of the 37 states that do not support asset protection trusts at all, unique twists ensure that the Aloha State will remain a poor second choice compared to other asset protection states

Under the new law, wealthy families must pay an unprecedented 1% excise tax on all money and assets they move into an asset protection trust.

Given the potential size of these accounts, this can add up to real cash for the state government—but why would anyone pay it if a few phone calls to Nevada, Delaware or South Dakota will provide the same benefits without the added charge?

“The law won’t work as intended,” says Dan Rubin, a prominent estate planning attorney with the New York firm of Moses and Singer.

“Without very bad legal advice, no smart billionaire is going to set up a trust in Hawaii even if they have a $10 million house on the beach if it requires participants to pay a 1% user fee to gain trust benefits.”

If the extra expense weren’t enough, Hawaii also restricts asset protection trusts to 25% of the grantor’s net worth—and prohibits transfers of real property into trust.

And unlike states like South Dakota or Nevada, trusts administered in Hawaii pay state income tax whether their trustees are locals or tourists.

Someone in Hawaii must have done some quick math to work out a formula for political success. According the state’s 2010 budget, Hawaii only had a $22.3 million shortfall. Therefore, if say only a few billionaires set up a handful of trusts, with a 1% excise tax, $3 billion would do the trick and generate $30 million in tax collections.

Finally, while Honolulu may hope Tiger Woods or other celebrities with contentious marriages will start flying in for sun, golf and protection, Act 182 does not shield assets from divorce—or even secured creditors.

Steve Oshins, a Nevada asset protection trust lawyer who rates asset protection trust states based on their benefits, agrees with Rubin that the new law is “dead on arrival.”

“I don’t even know if it’s got a lot of sizzle, let alone the steak,” he says. “Nobody’s going to use it.”

In fact, he gives Hawaii a failing grade where asset protection is concerned, and would be surprised if the new law will help the Aloha State carve out even 1% of the business currently dominated by Nevada, Alaska, South Dakota and Delaware.

“Laws need to be competitive with those of the Tier 1 states,” he explains. “Given the ability to forum-shop, nearly everybody from out of state uses one of these four states.”

NOT FOR TIGER WOODS…BUT WHAT ABOUT THE LOCALS?

With reviews like these, the state’s three institutions with trust powers—Bank of Hawaii, Central Pacific Bank and First Hawaiian Bank—may not win many accounts from the mainland after all.

Bank of Hawaii, far and away the biggest of the trio, does substantial trust business with locals, but so far this year its trust and asset management income has been flat or even slightly lower on a year-over-year basis.

Resident estate planners doubt that the new law will even give Hawaiian professionals and other wealthy residents an incentive to keep their assets at home.

“Now that I’ve chewed through this a bit more, I’m moderately certain we won’t use many of these,” says Hawaii-born financial planner Lesley Brey.

“I suspect that it will not be very appealing to most professionals,” agrees Honolulu estate planning attorney Ethan Okura. “I see no reason to keep marketable securities with a trustee in-state.”

In fact, Okura believes that only relatively “unsophisticated” locals will take advantage of the new ability to create an in-state asset protection trust.

“Many local Hawaii residents prefer to work with other local professionals, so perhaps there will be quite a few who utilize the new law—especially if the local banks promote it with their clients,” he says.

Dan Rubin predicts the Hawaiian legislature to wake up to Act 182’s problems and start fixing them fairly soon.

But for Hawaii to become a real national competitor, just putting asset protection on the menu is not going to be enough, Steve Oshins says.

“Because they have a state income tax, they wouldn’t have a chance,” he says. “If you had the best state law, then you can say that you’re going to charge a little more because you’re the best. But this is a mediocre law anyway.”

Perhaps the revival of the TV show Hawaii-50 may have the same good luck it did 40 years ago and attract tons of tourists to the islands. But for now, as Dan Rubin says “if this were 1997 and Hawaii introduced the first domestic asset protection statute, this law might be taken seriously.” He adds, “but this is 13 years later, and wealthy families expect a lot better.”

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

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Why Aren’t Overlay Providers Closing the Sale?

Posted by Scott Martin in News on August 7, 2010

Cerulli survey says wealth managers don’t understand and aren’t buying UMA overlay capabilities. One firm, Smartleaf, bucks the trend and continues to close deal after deal. Here’s why.

When industry research firm Cerulli Associates released its latest benchmarking report on unified managed accounts (UMAs), the headlines screamed that advisors just weren’t buying into these theoretically advisor-friendly investment vehicles.

According to Cerulli analyst Jeff Strange, less than half of the financial advisors he surveyed have ever used unified management accounts and roughly 80% have no plans to rely on UMAs more in the future.

“They still don’t understand why UMA is beneficial to their process,” Strange tells the Trust Advisor. “A big part of that is still just that the providers haven’t taken off the training wheels yet.”

While about $80 billion is now managed on UMA platforms, new flows have been stubborn to capture. Only $1.7 billion in new money came to UMAs in 2008 and while aggregate AUM in these vehicles jumped 70% in 2009, most of that growth was simple appreciation in a bull market year.

Overlay providers fire back

Statistics like that are frustrating for companies that sell UMA software and investment models on the premise that UMAs are better for trust companies, banks and advisors than either traditional mutual funds or separately managed accounts (SMAs).

Both UMAs and SMAs tap the expertise of third-party managers to build a customized investment portfolio. However, while an SMA exports the assets to the outside managers to run, UMA assets never leave the sight of the bank or advisor that landed the client in the first place. Instead, the UMA imports the manager’s expertise and applies it to the assets in what’s called an “overlay.”

Trust officers and other advisors can then tinker with the overlay to improve tax efficiency, balance out clients’ outside holdings or obey restrictions against investing in various types of companies—tobacco, for example.

While the combination of flexibility, best-of-breed investment models and custody of the underlying assets should be a win with advisors, most overlay providers still have well under 100 clients on their platforms.

But those narrow client lists—and the Cerulli data—disguise the fact that while the typical RIA may not be eager to sign up, the institutions that are adopting overlay approaches tend to be banks and other relatively big wealth managers.

While a vendor like Smartleaf may only have about 50 clients running its overlays, those elite four dozen institutions still manage about $31 billion in AUM between them. This effectively makes Smartleaf the leader in the bank UMA marketplace.

Most of our clients are banks now, says Smartleaf president Jerry Michael. And many of those banks are pretty big names like BB&T, BBVA Compass and, most recently, Bank of Hawaii’s $6 billion investment services group.

Scale is a big part of the UMA value proposition. Specialized vendors like Smartleaf (which provides the back office software that supports these accounts) and Placemark (which gathers the proprietary investment models) cater to firms that already have accounting systems, trading systems and the dedicated IT staff to keep them talking to each other.

Resellers like Concord Wealth Management and others, package and resell Smartleaf with enhancements into an integrated solution for smaller players like the archetypal independent broker fresh out of the wirehouse.

If you’ve got 100 clients, you can probably build them customized portfolios yourself. But as Placemark CEO Lee Chertavian tells me, going the overlay route looks a lot more cost-effective if you’re running $5 billion in 13,000 client accounts.

“Overlay management can be as simple as an accounting solution to combine separately managed assets or as complicated as a system that helps an institution make better investment decisions,” he explains. “We’re on the far end.”

The real buyers don’t need to be sold

Banks that have the scale and the sophistication to benefit from true UMA programs rarely need much of a sales pitch, Smartleaf’s Jerry Michael says.

“Often as not, they approach us,” he notes. “Firms with strategic objectives requiring change tend to see it as a must-have product. Firms looking for incremental improvement are more reluctant.”

The ability to bring in outside expertise while retaining ultimate discretion is especially attractive for trust companies and other fiduciaries, Michael says. Farming out the assets in an SMA approach rubbed too many banks—not to mention RIAs reluctant to “share” their hard-won clients—the wrong way.

“SMAs just didn’t work for banks,” he explains. “They like being fiduciaries. They wanted to remain fiduciaries, but they needed to open up their wealth management to outside research. This lets them have their cake and eat it.”

Of course, concentrating on the bank channel contains its own challenges. The only client Smartleaf has lost in its 10-year history was when Regions Financial bought Union Planters and threw out its UMA systems.

That’s true of the advisor channel as well. Jeff Strange at Cerulli acknowledges that much of advisors’ distrust for UMAs comes from the notion that overlays are not portable from one broker-dealer to another, and too complex for the typical independent operator to run on his own.

“You can take the mutual funds and the underlying securities with you, but the tax management and other features are not transferable,” he says. “Same with the specific mix of asset managers you have running the portfolio.”

For Jerry Michael, the important thing is clearing up the vagueness surrounding these accounts and what they do.

“I personally twinge when I hear the word UMA,” he says. “It’s too confusing.”

“There’s one type of UMA that’s really just a souped-up SMA that helps the institution monitor what the outside managers are doing in all the separate accounts. Then there’s what we do, where the outside managers’ brainpower is brought in to sit on that truly unified internal account.”

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

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