Shopping for a trust accounting system? Our experts reveal what you need to know before you buy. HWA, Fi-Tek and others boost their standing, while new players like Citi make a splash with innovation, offering institutions a better way to do business. SunGard AddVantage leads as top choice across the board. Here’s why.

Keeping accurate records — and staying on top of them — remains the foundation of everything that trust companies do. And as family offices and other wealth managers hunt operational efficiency, systems originally developed to track trust accounts are becoming hot strategic commodities.

To find the best platforms out there, we polled trust operations personnel, consultants and the users themselves on the pros and cons of 11 systems from 9 separate vendors:

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“Trust accounting systems do a better job of reflecting the totality of the relationship between fiduciary and client,” says Bob Ellis, a wealth management consultant who’s written extensively on trust technology for Celent and other firms.

“The trust is not just the portfolio and not just a bank account and needs a more flexible system,” he explains.

“It needs to reflect a combination of investments, analysis, reporting and even cash distributions. And as non-trust companies take a more holistic approach to the client relationship, they need these capabilities too.”

AddVantage wins through scale

Our sources give the prize to Sungard’s massive AddVantage for giving the biggest bang out there, bar none.

“No other system has all the features that AddVantage provides,”  says Les Revzon, who runs a trust company operations outsource group.

“It was ahead of the game years ago and remains so far ahead of any system that I know of that it still earns an ‘A’ rating from me.”

Quite simply, AddVantage does it all, so a look under its hood reveals a lot of what modern trust companies are looking for.

The platform provides a full range of securities and mutual fund transaction support and processing, systemwide balancing, custody and asset safekeeping, client reporting and portfolio management.

AddVantage automates cash sweeps and — especially desirable for trust officers juggling the need to maximize total returns for all beneficiaries — segments account assets into income and principal.

Investment architecture is completely open, even where private equity, hedge funds and other alternative asset classes are concerned.

Processing takes place in real time, all via the Web. And AddVantage even supports email delivery of statements as part of its integrated customer relationship management (CRM) capability.

In just the last few years, CRM has gone from a novelty in the financial services industry to a must-have labor- and cost-saving technology. And trust officers increasingly demand the power to check client history and generate automated client communications without leaving the core accounting screen.

Plenty of choices for the rest of us

While AddVantage is definitely the thoroughbred in the marketplace, its architecture and pricing make it a tough fit for trust companies with under $2 billion under administration.

To run AddVantage, a trust department generally has to budget around $10,000 a month to the system, which instantly prices out start-up firms and non-traditional users alike.

Luckily, other trust companies still have plenty of more reasonably scaled vendors to pick from.

Since 2009, the number of vendors on our list has grown from 7 to 10 — broadening out to include specialized trust-only firms like Delta Data and a few emerging giants in the world of trade processing and back office software.

All do a fine job of tracking accounts and assets. But beyond that, the sheer diversity of add-on features — and the dictates of pricing — makes it hard to pick a definitive “best of breed” winner in this category.

“Turn the key in a 1960 Chevy, and it’ll still run. It just won’t have airbags, automatic seat belts, satellite radio or any of the other things we now take for granted,” Revzon explains.

Instead, we ranked the platforms on a one- to five-star scale, with one star going to that perfectly serviceable 1960 Chevy and four stars to the best platforms out there that a start-up trust company could reasonably afford.

Innovation is rewarded

Scoring very high in the four-star group this year, HWA International’s TrustNet would probably also win the prize for the most improved platform.

Back in 2009, our research revealed that TrustNet supported basic portfolio performance tracking and Web-supported ASP networking — both of which have become must-have items for any competitive accounting system — but offered little in the way of more advanced technology.

But over the last two years, HWA invested heavily in its platform and now provides straight-through processing (STP) and integrated investment proposal generation software, along with full CRM support.

“It’s pretty beefed up now,” says Harry Sullivan, who heads up HWA sales. “There’s not too much more we could add from the trust processor side, although if a client wants something changed we have an excellent procedure in place for handling that.”

As far as Sullivan’s concerned, the only real competitor for TrustNet now is HWA’s other trust accounting system Trust Processor, which has all the same functionality and as a bonus happens to be the only general-ledger-based option out there.

That makes Trust Processor ideal for smaller offices in particular, Bob Ellis tells us.

TrustPortal leading the convergence

And where non-trust institutions like adapting traditionally trust-specific accounting systems to their business models, Fi-Tek’s TrustPortal is winning big gains, Ellis says.

“This is creating a huge opening for people like Fi-Tek, which is probably the low-cost provider in the space,” he tells us.

Until recently, family office providers who wanted an integrated solution had to either cobble one together from in-house spreadsheets or else pay through the nose for an expensive and specialized product like Rockit.

But since Fi-Tek started transforming TrustPortal from a specialized accounting system into a full-fledged wealth management platform six years ago, family offices and trusts alike have flocked to its versatility and pricing.

Clients get all the functionality of other top-line systems — combining wealth planning, portfolio management, modeling, realtime trade execution, proposal generation, compliance and other capabilities in the same platform.

And Ellis says compatibility with Fi-Tek’s popular HedgeTek portfolio tracking platform, which already runs $400 billion in institutional funds, is a real ace in the hole here where integration is concerned.

“Fi-Tek is probably the leader in this segment because they have HedgeTek already on their side,” he explains.

Citi making big waves

Integrated proposal generation and household rebalancing are also key competitive factors for the newest vendor on our list, Citi Investor Services, which rolled out a trust accounting enhancement for its popular OpenWealth asset management platform back in March.

OpenWealth now allows trust officers to handle everything from account creation and proposal generation, rebalancing to reporting and long-term tax planning, right in the trust office desktop.

And its award-winning “unified managed household” approach lets trust officers monitor all of an investor’s assets across trusts and other family accounts, ensuring that each investor’s wealth is managed as effectively as possible.

“What we’ve done is deliver to the trust space the first truly holistic wealth management platform from the family perspective,” says Jonathan Flitt, director at Citi Investor Services.

Although Citi is new to the trust market, this kind of innovation has already earned it high marks – not to mention forcing more established trust accounting vendors to play catch up.

After all, to paraphrase Les Revzon, the 1960 Chevy may get you there, but that doesn’t mean you want to drive it.

Scott Martin, senior editor, The Trust Advisor Blog. Steve Maimes and Les Revzon contributed to the reporting and research.

Practically speaking, the country’s 11 million undocumented immigrants have always been in a precarious legal position. But with federal and state authorities cracking down, the threat of sudden detainment or deportation is more real than ever.

In the face of that threat, wealthy foreign nationals are reaching out to estate planners to insulate their families and shield their property.

A simple power of attorney will do the trick in some situations, but others may require a full-fledged trust. That’s where things can get complicated, says Chuck Sharpe, a Dallas estate planner and co-founder of Wealth Advisors Trust.

To open a trust or bank account, a resident alien needs to register with the IRS to get an international taxpayer identification number (ITIN).

While many undocumented immigrants studiously avoid any contact with the federal government, plenty — 3.8 million of them — have ITINs and are paying taxes.

If members of this group can scrape up enough proof of identity to satisfy the trust company and if nothing in their background raises a red flag, the process of creating a trust can be relatively simple, Sharpe says.

“I don’t know of any requirements requiring you to be a U.S. citizen — or a citizen of a particular state, for that matter — to set up a trust,” he explains.

“The only special issue on that front is that you use the ITIN number in place of a Social Security number,” he adds.

Meet the deportation trust

The arrangements that estate planners are coming up with — call them “deportation trusts” if you like — need to work like a conventional asset protection trust, while building in a lot of the features of a will or estate plan.

Once the trust is in place, it works like a conventional asset protection trust. The settlor can use the assets as long as he or she is in the United States, and if a deportation order is ever served, the asset protection kicks in to make it harder for the authorities to freeze or confiscate wealth granted to the trust.

Meanwhile, the “estate plan” side provides instructions for winding down life in the United States in an orderly fashion: appointing guardians for children left behind, liquidating non-trust assets and paying debts.

“The one thing you probably want is to make sure you’re creating the trust in a jurisdiction that allows for self-settled trusts,” Sharpe says.

In the Southwest, that means your options boil down to the domestic asset protection states: Nevada or South Dakota as a first choice, followed by Utah or Colorado, whose statutes either make a lot of exceptions or are too vaguely worded for many lawyers’ comfort.

Since neither Arizona nor California — hotbeds of anti-immigration rhetoric — support self-settled trusts, wealthy aliens in these states would probably be better served by situating their assets elsewhere.

Pinning down the details

Naturally, the normal asset protection statute of limitations is in force. A Nevada deportation trust, for example, would need to hold the assets for at least two years before providing any benefit.

Because the deportation process rarely gives people longer than one year to wind down their U.S. affairs, it’s going to be too late to get the trust process moving if someone is already on Immigration’s radar.

This makes advance planning critical. And since the people with the assets to take advantage of these arrangements tend to also have top-notch advice, many started laying the groundwork back in 2006 when Arizona first got tough on undocumented nationals within its borders.

“Anybody thinking of doing it probably has some wealth,” Sharpe says. “And with that kind of wealth, they were probably already thinking of broader estate planning needs.”

In those cases, amending the existing paperwork to cover the possibility of forcible ejection from the country — and add asset protection, where needed — may be enough, estate planners say.

At that point, the real questions revolve around beneficiary and trustee choice and the tax ramifications of any grant or gift of property. Gift tax considerations, for example, may apply whether the beneficiaries are foreign nationals or U.S. citizens.

As for fees, Sharpe says that a deportation trust should be roughly as expensive to administer as a more traditional asset protection trust. Added costs may arise if there are a lot of foreign beneficiaries or other research-intensive details complicate the situation.

No ITIN, no trust?

But if no taxpayer ID or tax record exists, even routine trust company due diligence could raise a red flag and make an already precarious situation worse.

“If you are in this position and use a third-party trustee, you are definitely opening yourself up to additional government scrutiny,” Sharpe says.

ITIN or no ITIN, some trust companies may want to see more documentation than these people can provide.

“It’s a mixed bag” for those who can’t come up with the paperwork, says Les Revzon, who handles due diligence for Nevada’s Summit Trust. At a minimum, he says, trust companies want to see a valid driver’s license or government ID, plus a credit card and a utility bill as proof of address.

For truly undocumented immigrants, granting power of attorney to a U.S. citizen and designating a temporary guardian for any children should go a long way toward ensuring that a sudden shift in the enforcement environment doesn’t wreck their lives completely.

Stipulations in the power of attorney can act like a “living will,” spelling out exactly what should be done with assets left behind in the event that the signer is detained or deported.

Without granting clear authority, it can be tough to sell cars, real estate or businesses in order to send the cash back or free it up for family members who remain here.

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

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Helping Wealth Firms Start Trust Companies

As the WSJ story points out, South Dakota is becoming the top choice for trust providers. With ten new launches this year and a roster of 50 institutions currently conducting trust business in the wealth-friendly state, it’s easy to see why banks and advisors alike are flocking to South Dakota.

Advisors Institutional Services helps financial professionals, law firms, pension plan administrators and banks determine whether a South Dakota-based trust company would complement their current service offerings and, if so, assists them in applying for a trust company license in the state and lining up operational support.

Most recently, Advisors International helped Pittsburgh-based fund processor Mid Atlantic Capital Group apply for a South Dakota trust charter, said President Les Revzon.

“The aging of the baby boomers has created an enormous need for trust services,” Mr. Revzon said. “Our outstanding launch team has helped both boutique wealth managers and large institutions like Mid Atlantic Capital Group  – which has $19 billion on its platform — compete in this increasingly important market.”

In fact, the WSJ story highlights a 2007 study by asset manager Franklin Templeton that concluded that some independent investment advisors could see 80% of the assets they manage move into trust accounts over the next decade as aging clients retire.

“A full 40% of today’s wealthiest Americans have no will or trust in place,” Mr. Revzon said. “The opportunities for those who provide such services are enormous.”

South Dakota offers would-be trust providers numerous operational advantages, including low capital requirements, no state taxes on corporations or individuals, the ability to support all major types of trust structures (including asset protection trusts and multi-generational or “dynastic” trusts), and a favorable view on out-of-state entities setting up trust representative offices elsewhere.

For more on the opportunity that operating a trust business in South Dakota represents for financial professionals around the country, Advisors Institutional Services has published a special report, “Launching a South Dakota Trust Company: Guide to Operating Nationwide.”

Source Link: http://www.prnewswire.com/news-releases/wsj-reports-on-firm-that-helps-wealth-advisors-start-trust-companies-95106044.html

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

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. 

A 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.

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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