Posts Tagged Nevada Trust Companies
More Advisory Firms Seen Switching to Trust Charters to Ease Regulation
Posted by Scott Martin in News on January 29, 2012
As a hedge against possible FINRA oversight of advisors and re-enactment of the Glass-Steagall Act in a second Obama term, more RIAs are trading their SEC registration for trust licenses in top trust states.
States like New Hampshire and South Dakota report robust interest from wealth managers, family offices and other advisors looking to offer their clients the benefits of an in-house trust company as a hedge against possible FINRA oversight of advisors and more restrictions on how advisory firms can make money.
State chartered trust companies can do everything an SEC-registered advisor can do, plus serve as trustee and custodian. These privileges were given to both banks and trust companies with the enactment of the National Bank Act.
After a rocky year in the markets, high-net-worth clients are on the move — and advisors looking for a competitive edge are hunting whatever it takes to give those investors everything they want.
And what those investors want, according to the experts, is an easy way to pass their wealth on to future generations as securely and efficiently as possible. In other words, they want an advisor who can help them set up and fund trust funds.
“Clients are constantly seeking greater certainty over the safety, disposition and management of their assets,” says Bob Ellis, a consultant at Fast Track Advisors.
By creating their own captive trust companies, wealth advisors more strongly retain clients.”
That’s the logic that’s driven dozens of advisors to start trust companies across the country in the last few years, with the lion’s share going to the states that combine investor-friendly statutes with advisor-friendly regulatory environments.
South Dakota alone gained about a half dozen public trust companies last year, with more applications in the pipeline. Nevada, Delaware and other top-tier jurisdictions have also been big winners in what research firm Cerulli Associates calculates is a decade-long boom in trust company creation.
“Interest seems to be on the uptick,” says Mark Purpura, chair of Delaware’s state bar association’s banking committee.
“I currently have several trust company formations in the pipeline.”
Becoming the trust advisor
Advisors have gotten so hungry for information on this topic that the Trust Advisor is running an in-depth webinar in two weeks. (Register here.)
But all this interest is really business as usual, says former Nevada banking commissioner Scott Walshaw, who — like Purpura and Ellis — will be a panelist.
“The motives haven’t changed much,” he explains. “What’s changed is that there is more opportunity for people to open trust companies now than ever before.”
Wealth managers still see a trust charter as a way to differentiate themselves in the marketplace, tempt new clients and keep old ones from straying. Read the rest of this entry »
Provident Trust Boosts Trust Assets to $3 Billion
Posted by Scott Martin in Headlines on December 20, 2011
Everyone in the industry is chasing all the AUM they can find, but the “secret recipe” for converting those paper assets into actual fee-bearing accounts has been elusive for giants and independents alike. On the other hand, Las Vegas-based Provident Trust has prospects calling them out of the blue to sign up.
When we checked in with Provident CEO Theresa Fette back in February, she’d taken her start-up from zero to $1 billion in assets and was aggressively courting advisors to partner up with and grow alongside.
It evidently worked, because 10 months later, Provident is signing the paperwork to triple its clientele and assets under administration, leaving it with 30,000 accounts and a hefty $3 billion on its platform.
“They’ve been coming to us,” Fette says. “We haven’t had to chase them.”
Another account — this one to serve as administrator for a new pooled investment product — adds $100 million in icing to the cake, and Fette tells me the pipeline is full of looming deals that she can’t talk about yet.
She attributes the extremely positive word of mouth to the firm’s independent reputation. Unlike captive trust departments eager to refer business to affiliated wealth managers, Provident exists solely to provide administration and custody.
The fact that the firm is so accommodating to alternative assets doesn’t hurt either.
Provident earned its stripes in the alternative asset world as a custodian for self-directed IRAs, which often hold wealth that’s a little more exotic than the conventional stocks, bonds and cash that every vendor can support.
Real estate, gold and even life insurance settlements: as a recent report from industry research firm Cogent indicates, even in the button-down wirehouses, 40% of advisors now build portfolios that incorporate at least one “alternative” asset class.
“Many major players are looking for a place to custody their alternatives,” Fette notes. “That’s what Provident specializes in, and that’s another reason people are coming to us.”
With all that growth on the table, Fette has had to staff up fast with trust officers and other support personnel just to keep up. She says she’s doubled her Nevada operation and is keeping her Boston office full as well.
Scott Martin, senior editor, The Trust Advisor Blog.
Permalink: http://thetrustadvisor.com/headlines/provident_boost
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Nevada’s Banking Regulator Tells Lawmakers Tough Laws More Important than More Business
Posted by Scott Martin in News on March 26, 2011
At a time when Nevada is suffering from the worst financial crisis since the great depression, Nevada’s top banking cop George E. Burns says he’s done a good job keeping the state’s financial institutions safe.
Since George Burns took over the job safeguarding Nevada’s banks and trust companies in late 2007, his tenure has been marked by the closure of more institutions than any time in recent memory.
You would think all this tough regulation would be good for the state. But nothing Burns has accomplished has helped bring in new investors from other states and abroad, create jobs, boost home prices or restore Nevada’s soiled banking reputation.
As a matter of fact, experts say, he’s made matters worse because his red-tape regulation has sent new banking and trust business to other states.
After years of watching the Nevada trust industry shrink despite some of the best fiduciary statutes around, state lawmakers are now considering a bill that would stop Burns from his binge of “regulations gone wild.”
In an effort to slow Burns down from promoting new rules, Nevada Senate Bill 198 was introduced last week before the Nevada legislature. It is a straightforward attempt to restore the competitive advantages that once enticed out-of-state trust companies to come to the Silver State.
Sponsored by Senator Michael Roberson, the proposal fine-tunes the application process, clarifies the interstate branching rules and aims to eliminate the requirement that forces trust companies to set aside at least $500,000 of their reserves in cash.
However, while Burns is officially lukewarm on most of the bill’s provisions, he draws a line at loosening the cash requirement — apparently because if a trust company fails, selling off its stocks and bonds would be be too much trouble.
“Readily available cash to fund the costs of receivership is essential because the ability of the state or receiver to liquidate securities portfolios is cumbersome and protracted,” he testified in a recent Nevada state hearing.
How much cash does the “king” need?
By his estimates, it takes at least $500,000 to $1 million to wind down a failed trust company’s affairs, so it makes sense that every Nevada-chartered vendor keep that much capital on hand in the event of disaster.
But in a world where elite family offices and other entities looking to set up trust companies can pick and choose where they want to do business, this actually seems a little too “prudent.”
Nominally “conservative” states like New Hampshire — which actually disparage the Nevada rules as too loose to protect consumers — are fine with trust companies investing their entire reserve in marketable securities and earning a decent return on their capital.
Back when Nevada only insisted on $300,000 from trust companies — exactly what the regs want from start-up depositary banks, incidentally — the net opportunity cost of sinking $150,000 into near-zero-yielding Treasury bills was relatively small.
After the state tightened the rules in 2009, potential entrants are finding it easier to go to South Dakota, which only mandates $200,000 in cash.
“Now that the minimum capital has increased to $1 million, it is impractical for companies to maintain half their equity in cash,” Las Vegas trust attorney Matthew Saltzman tells me.
When pressed in the hearing, Burns conceded that he’s not really married to the $500,000 cash minimum. He just wants Nevada-chartered trust companies to keep as much cash as possible to ease the “cumbersome” task of liquidating the portfolio in a worst-case 2008-level scenario.
And while cash may be king, he’s also been quoted as defending troubled Nevada banks on the grounds that numbers are “not the entire picture.”
At the time, he said regulators need to consider “qualitative factors” like management, business plan and active oversight — which would arguably mean the character of a would-be trust company operator is the kingmaker.
Return to the Delaware of the West
As it is, Nevada under Burns’ watch has seen the number of trust companies licensed to do business drop significantly while the roster in South Dakota has practically doubled.
Insiders tell me they suspect there hasn’t even been an application for a Nevada charter in years, which has cost the state a bit of revenue in lost fees.
Although trust companies don’t employ hordes of people, every white-collar job that Nevada can lure to the state — where unemployment only recently dipped below 14%, compared to South Dakota’s 4% — counts a lot to lawmakers and the people who vote for them.
State Senator Michael Schneider, who chairs the committee reviewing the bill, noted in the hearing that it’s desirable that Nevada strive to regain its mantle as the “Delaware of the West,” Saltzman says.
Of course, there are issues of public safety to uphold. Burns’ testimony brought up the unfortunate case of Enterprise Trust Company, which had a Nevada charter but only a token physical presence in the state.
Shortly after the SEC filed a formal complaint on behalf of the company’s Illinois clients, the Nevada FID’s own investigations forced it to shut Enterprise down in a hurry.
With only $300,000 in regulatory capital, Burns estimates that Enterprise clients lost $48 million. Under the new rules, of course, they would have still lost over $47 million, so the real burden is always going to be on the backs of the regulators, not the regulatory capital.
In that light, it’s admirable that, as Burns says, “gone now are the past days of anyone with a little capital coming to Nevada, easily securing a trust license, hanging it in a resident agent’s office, and heading off somewhere else.”
But as David Dunn — longtime Las Vegas resident and CEO of South Dakota-chartered Kingsbridge Trust — can attest, it’s a fine balancing act between making it tough for the shady operators and making it too tough for the legitimate vendors.
Dunn was probably one of the last people to consider a Nevada trust charter, but as the new rules were set in motion, he choose South Dakota instead.
Dunn asked Burns at the hearing, “Where were your examiners before Enterprise failed?” Burns never replied.
Burns is facing background noise about whether he has enough of the new governor’s confidence to stay on as commissioner.
Since taking office in January, Governor Brian Sandoval has fired two agency chiefs, the heads of Nevada’s Tax and Mortgage divisions: one for incompetence, the other for being a political liability. Questions remain whether Burns will be the third to go.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the editing and research.
Permalink: http://thetrustadvisor.com/news/sb198
Trust Baron Jeff Dunham Wows Advisors with Dynastic Trusts
Posted by Scott Martin in News on January 30, 2011
Dunham Trust’s multi-generational trusts help advisors lock down accounts nearly forever. As advisors start looking to their own succession plans, nailing down management fees across generations has become a natural sell for the Nevada-based trust company.
Where some independent trust companies have had trouble competing for new accounts, Dunham Trust has found a way to woo increasingly finicky advisors and add $300 million to its platform in the process.
The secret boils down to a 40-second proposition, says CEO Jeffrey Dunham, who runs the $1.2 billion trust company as part of a financial supermarket that includes its own mutual fund company and FINRA-registered broker-dealer.
“If investment advisors paused for 40 seconds and asked their best clients this question, I predict the results will be very successful 80% or 90% of the time,” he explains.
“After that, the only thing left to do is to find the right trust company,” he adds.
Based on its growth rate, Reno-based Dunham has evidently been the right partner for a lot of advisors out there.
Back in 2009, when the industry was still picking its way out of the credit crash, Dunham had $900 million in client assets. Now, the company boasts north of $1.2 billion.
Not counting M&A, Dunham has posted compound organic growth of 16% a year — twice the average in its size bracket and easily triple the performance of slightly smaller trust companies, according to the latest issue of Bernard Garbo’s Trust Performance Report.
The next best thing since…directed trust
Jeffrey Dunham tells us he expects his AUM to double in the next several years.
What’s feeding the excitement, he says, is that the company’s next-generation directed trust arrangements lock down long-term relationships for advisors and clients alike.
“Everyone is talking about directed trust like it’s the best thing since sliced bread,” he explains.
“Directed trusts are nice and we do work with directed trusts, but for advisors, the bigger story in my opinion is capturing customer relationships beyond the current generation.”
Traditional directed trusts have become a hot property with advisors who want to help clients transfer property into a trust without sending their biggest accounts to a potential competitor.
With a directed trust, the advisor retains control of how the assets are invested, as well as the associated management fees, while the directed trust company sticks to the work of running the trust itself.
Thanks to that simple premise, directed trust has roughly doubled its share of the $1 trillion trust business over the last decade and is now a $360 billion piece of the pie, according to data from the Spectrem Group.
However, Dunham notes, although directed trust keeps the assets under an advisor’s control as long as the original grantor is alive, the beneficiaries get the power to reassign management duties after that — and there’s nothing stopping them from picking someone new.
“What happens is that the matriarch passes and the advisor gets a letter from the beneficiary’s advisor thanking him or her for doing such a good job for Mrs. Jones, but here are the wire instructions for delivering the assets,” he says.
When and if advisors get that letter, there’s not a thing they can do about it.
The “direction” in a directed trust only means that the grantor or beneficiary can “direct” the trust to obey a given advisor, not that a given advisor has any power in his or her own right.
Making directed trust multi-generational
The solution is to insert the advisor into the trust documents as a successor trustee, Dunham says.
That’s where that 40-second conversation with an 80% to 90% success rate comes in.
“It’s a simple question to ask the clients with whom you have already spent years building a strong rapport,” Dunham says.
“That question is, ‘Do you want to set us up as the advisor a successor trustee needs to work with? We’d be happy to continue to be involved when you’re gone, if that’s what you want.”
From there, as long as you’ve got the right trust company, the assets can theoretically travel with the advisor for generations — up to 365 years, given Nevada’s dynastic trust rules — and keep generating fees.
And because Dunham already counts incentive trusts — which incorporate restrictions on beneficiary behavior — among its specialties, building that twist into directed trusts was a natural play for the company.
His team is happy to go into greater detail on how the twist on dynastic directed trust works. Click here to contact them.
Succession planning for planners
Granted, not many advisors plan on living that long, but that’s the genius of this twist on the directed trust.
If the trust assigns management rights in perpetuity to the advisor or his or her professional heirs, then those fees become annuitized income to count on for decades if not centuries.
And in a world where the average RIA principal is turning 55 this year and thinking about retirement, that kind of annuity income can double or triple the value of your business when you sell.
Even though M&A activity in the advisory world has gone through the roof, deal valuations have favored sellers who can demonstrate that their business can keep making money without them.
Remember, a purely commission-based RIA maybe goes for 1.3 times annual production, while a book that generates recurring fees can go for 3 times revenue or more. Show a potential buyer that the fees can theoretically keep accruing for centuries, and your business looks even more attractive than ever.
And in the final analysis, why not ensure that whoever you hand-pick to take over your practice can count on these accounts down the road?
“Advisors have done a good job creating a strong relationship with the matriarch or patriarch over the years, but a poor job suggesting that that role should continue after the first generation dies,” Dunham says.
Scott Martin, contributing editor, The Trust Advisor Blog. Steve Maimes contributed to the research.
Permalink: http://thetrustadvisor.com/news/dunham
Nevada’s New Trust Company Rules Set to Begin October 1st
Posted by Jerry Cooper in News on September 25, 2009
After two failed attempts, determined regulator succeeds in closing Nevada’s low capital loophole.
LAS VEGAS, NV. Sept 25 – This Thursday, October 1st, Nevada’s Financial Institutions Division, the state agency that supervises trust companies, and its Commissioner George E. Burns can celebrate a long fought victory for promoting major trust company regulatory reforms and carrying them through the legislature to the Governors’ desk.
The new law, Nevada Senate Bill SB-310, provides for $1 million in capital to be posted, a 330% increase in the requirement needed to license and maintain a retail trust company in the state. In addition to the need for additional capital, other major requirements include:
- Verifiable physical office to administer trust business in Nevada.
- Nevada employee with trust experience “satisfactory” to the Commissioner.
- Original or “true” copies of business records and accounts readily available for examination.
- Maintenance of the required cash portion of the capital requirement in a Nevada financial institution.
- Services provided to Nevada residents consistent with the business plan.
- Other conditions that the Commissioner may require to protect the “public interest.”
To give time to the state’s currently licensed 17 public trust companies to comply, the new law calls these grandfathered trust companies and provides for a reasonable time to meet the new $1 million requirement:
- $500,000 by October 1, 2010
- $750,000 by October 1, 2011
- $1,000,000 by October 1, 2012
SB-365 Establishes Provisions Relating to Family Trust Companies
A second law, Nevada Senate Bill SB-365, establishes provisions relating to family trust companies. Private family trust companies do not do business with the public and are a lessor concern to Commissioner Burns.
This bill, promoted both by the Nevada Bar Association and noted private trust company expert John P. C. Duncan retains the existing $300,000 capital requirement for licensed private family trust companies. In addition to the lock on lower capital, the bill provides for better definitions of what a family trust company is and a reduced annual fee of $1500.
Most significant about SB-365 is the option to be regulated or unregulated. Section 13 of SB-365 states:
A family trust company:
- Is not required to be licensed pursuant to this chapter or chapter 669 of NRS.
- May apply for a license as: a) A trust company pursuant to chapter 669 of NRS; or b) A licensed family trust company pursuant to this chapter.
This means that an organizer of a private family trust company can choose to be unlicensed and carry on its business with the full blessing of the state without obtaining a trust license from Nevada’s Financial Institutions Division.
Reaction to the New Laws
The reaction to Nevada’s trust company overhaul has been mixed. Les Revzon, an officer with Summit Trust Company, which has been in business since 2004, said reforms were needed. Revzon said: “By promoting the increase in capital and entry requirement standards, Nevada is raising the bar and will attract higher quality institutions.” Revzon added: “Summit already maintains $1 million in regulatory capital and we are pleased to see that now everyone else needs to measure up.”
Christopher Holtby, a Dallas-based wealth manager, said for a wealth manager that has less than $1 billion under management, Nevada makes no economic sense. The cost to maintain $1 million of capital and to support a stand-alone office with full-time staff makes Nevada cost prohibitive for any start-up.
Holtby and several other Dallas area wealth managers chose South Dakota over Nevada to launch Wealth Advisors Trust Company when they learned of the proposed changes in Nevada earlier this year. “The $1 million requirement did not bother us, but we felt that made no sense for a non-custodial institution. Also, that together with our group’s overriding concerns with Nevada’s surge of bank failures and reputation with gambling made South Dakota a better choice.”
Holtby continued: “Perhaps if you are a Morgan Stanley or LPL, Nevada may be the right fit for a trust company. But, I see those firms selecting Delaware over Nevada now with similar requirements. Delaware is a mature well-known trust center with close proximity to the east coast, with plenty of trust talent.”
All of the trust companies interviewed had no problems with the new law. They were pleased with the new rules because they are specific and clear. Most were pleased with the way Commissioner Burns was running the agency, including the handling of examinations. Revzon said: “The two examinations he oversaw on behalf of Summit Trust, the auditor was well trained, very professional, fair and reasonable.”
The Road to Reform
Reforming Nevada’s trust statues which go back to the 1940′s was no easy task. The quest to increase the capital requirements and modernize the licensing and supervision rules governing trust companies began over two years ago in early 2007.
The first proposal was introduced by Commissioner Burns’ predecessor Steve Kondrup for the 2007 Nevada legislative session. The bill, SB-537, asked for similar reforms found in SB-310 but with a $2 million capital requirement. The bill died before it could be heard since the Senate Committee Commerce Chairman Randolph J. Townsend thought the proposal was out of touch with the needs of the industry.
FID’s second attempt to close the loophole came in the form of proposed regulations by the Commissioner of Financial Institutions. On August 20, 2008, proposed regulations to the existing trust company law, NRS 669, were introduced. The regulations titled LCB File No. R134-08 were posted on the agency’s web site.
Most of the content from the 2007 Nevada legislative attempt was inserted into these regulations almost verbatim, making it seem the Commissioner was trying to bypass the approval required by the Nevada Legislature and Governor Jim Gibbons.
This proposal included a requirement that a trust company maintain $2 million in regulatory capital. In addition, there was an unusual provision added in Section 9 of the proposed regulations. It states: “Evidenced that a majority of the operations of the trust company serve residents of the state.” This meant a Nevada trust company would have to do more than half its business only with Nevada residents. This unusual requirement had no precedent anywhere in the country.
The procedure for promulgating regulations in Nevada requires a public hearing, called workshops so that those affected might have a chance to comment and hopefully prevent unnecessary and over-burdensome rules to be created. Among those in attendance was John P.C. Duncan who testified in opposition.
Duncan was concerned that the family trust companies he formed on behalf of his clients might be affected by these requirements. It was Duncan’s arguments which reportedly led to the Nevada FID withdrawing the regulations without further contention. By the time those regulations were withdrawn the window of time that the Nevada Financial Institution Division could introduce a bill in the next legislative session was coming near.
At that point, the Nevada FID abandoned its further attempt to control the trust companies through regulations. It set its sights on a higher and better target of actually getting the law changed. At that point the Division introduced a first draft of SB-310 on March 16, 2009 which contained much of what was requested in the proposed regulations.
Duncan said, according to my interview, that he followed the bill through the legislative process. He realized that if he didn’t reach out to Commissioner Burns, that his private trust company clients could become trampled and caught up in this new far-reaching proposal.
Duncan persuaded Burns that his chances of success were much greater with his help and his trust company credentials in front of the legislature. Duncan was the architect of New Hampshire’s trust company law overhaul and wrote the model trust company law for the Conference of State Bank Supervisors.
Commissioner Burns, according to Duncan, readily agreed to allow Duncan and the Nevada Bar Association retain its existing dominion over private trust companies if Duncan signed on and supported the Commissioner’s proposal for major retail trust company reform.
On April 6, 2009, Duncan delivered and provided testimony before the Senate Commerce and Labor Committee hearings on SB-310. Duncan said: “Can Nevada not only remain but become an even more attractive state for trust companies and family trusts and the good jobs associated with them, while at the same time providing superior protection to the assets and financial health of their clients and trusts?” He added: “In my opinion the clear answer to this question is yes.”
When the Senators heard him say that jobs might be created they easily went along and approved the bill. It was his testimony urging passage of SB-310 that closed the deal for the Commissioner. With only modest compromises, the bill wound up on the governor’s desk for signing on May 30, 2009.
The question still remains: will the reform of the trust company rules really create employment for Nevada as Duncan suggested? Of course, only the future can tell.
However, can a state deep in debt, suffering from a flood of bank failures and the worst housing and mortgage crisis in modern history find prosperity from tightening trust company rules? The likelihood that J.P. Morgan, Merrill Lynch and Citigroup will be lined up at the Nevada FID’s doorstep next Thursday remains to be seen.
As for John P.C. Duncan, the future is clear. His incredible reputation as a trust company law reformer and the nation’s leading expert on private trust companies has assured him a lucrative franchise by continuing to create both regulated and unregulated Nevada private family trust companies.
Duncan said that family trust companies in Nevada under this new set of rules are groundbreaking. He said: “It provides the best possible environment for hosting family trust companies.” He added that beginning October 1st he has five family trust companies that he will set up under the new rules.
Industry insiders have different opinions what motivated Commissioner Burns to promote reform. Las Vegas based financial institutions attorney Matthew Saltzmanwith the law firm of Kolesar and Leatham said he thought allegations of wrongdoing by several Nevada trust companies last year motivated the Commissioner to push for changes. Saltzman said that Burns did not want to see Nevada become a “Tijuana of Trust Companies” where trust companies establish themselves under Nevada’s relatively low capital requirements and then operate in other states. Saltzman’s firm represents many Nevada trust companies, including several that have been the subject of the regulators compliance actions. He is currently appealing the Nevada FID’s denial of a trust company license application that was filed shortly after Burns was appointed Commissioner.
Scott Walshaw, Nevada’s former FID Commissioner said there was no loophole that needed to be closed. “The Commissioner always had the power under the existing rules to require a trust company to put up any amount of capital he deems fit, including $1 million.”
Walshaw would not comment of what he thought of the new rules, but both Saltzman and Walshaw agree that the proposal will not likely attract the big banks and large financial organizations as promised. Walshaw added: “If they hadn’t come to Nevada already they certainly aren’t going to come now.”
Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the reporting.
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