Our new trust industry survey for the third quarter of 2010 reveals who’s charging what for directed trusts and for investment management. We found providers charge about the same price for similar services. Our report offers guidance on what to look for to gain the best value for your client.

To offer us clues which trust company provides the best value proposition, we went to Rafi Mohammed, author of The Art of Pricing and The 1% Windfall, for insight as to what differentiates these similarly priced vendors.

When reviewing our research, one would think that advisors pick pricing as the only factor in deciding which trust firm offers the best deal for their clients.

But, based on our conversations with pricing expert Mohammed, we can find plenty of factors that should go into the decision of which trust company to hire:

• Critical mass. The amount of assets already under administration may be an important way to determine whether a provider is a right fit for a client. But recently, we have found that independent trust companies have taken a big share of the market from the trust banks that traditionally rule this space. Therefore the marketplace is telling us that the amount of assets under administration is not a key factor.
• Technology. Although most providers rely on their clearing firms or custody vendors to determine what fancy technology may be available, trust firms that have enhanced trust accounting systems and slick reporting — especially when it comes to servicing advisors — may have a big edge.
• Overlay systems. Although overlay systems have been sleepers in the advisory community, when mixed into the trust environment they become powerful high-tech incentives to consider when choosing a provider. Our research told us that both Reliance Trust, which relies heavily on GlobalBridge overlay systems, and Alaska Trust, which relies heavily on Concord, may be emerging as winners in this space because of their arrangement with overlay management systems.
• High touch services. Trust firms that offer a great deal of mothering to an advisor obviously have an advantage. If the firm offers a lawyer with trust experience, there is obviously an edge and a unique benefit to the relationship. Advisors have told us that service is an important part of the selection process. Trust firms that do not offer any support at all and rely on call centers to support advisors and clients will likely not compete well on this front.
• Price. Finally, the raw cost proposition has traditionally been a key determiner — especially after the financial meltdown — to steer advisor and client to one provider or the next.

More than a commodity play

“Trust administration in itself is really a commodity and is often priced that way,” says Mike Flinn, a Phoenix-based trust consultant with Delaware-chartered Advisory Trust, a long-time directed trust company and a unit of Wilmington Trust since 2008.

Back then, Flinn told an audience at a Pershing Insight Conference that “70% of all brokerage account business involves trusts” and that “after a death, someone has to decide where the assets go. Therefore, the wealthy who leave property behind need trusts.”

“You don’t see a U Haul hitched to the back of a hearse,” he observed.

Directed trust, in which trust companies and investment advisors split the responsibility of administering the trust from the management of the underlying assets — and split the fees — has become a huge way for advisors and trust companies like Advisory Trust to work together.

According to Advisory Trust’s web site, directed trust has become a $1.3 billion business for the company. With about 1,200 accounts, that translates into an average account of a little over $1 million.

“Our direct trust services consistently have the broadest appeal,” says Bryn Mawr Trust president Matt Waschull. Bryn Mawr is a leading directed trust provider, based in Delaware and offering a competitive directed trust service for 60 basis points.

This quarter, we add Edward Jones Trust Company to our list to represent the wirehouse category. Since Edward Jones has about 11,000 reps on the ground, it is clear that the purpose of this trust company is to service its own network.

Advisors should note that relationships with brokerage-affiliated trust firms such as Edward Jones or Raymond James Trust tend to be difficult to move. Naturally, these firms’ allegiances are to their brokerage-tied reps and to making sure accounts stay where they are.

Value is more than basis points

Our survey tells us that advisors are historically reluctant to rely exclusively on price as a factor when recommending a trust company.

According to data collected by Tiburon Strategic Advisors back in 2001, the overwhelming majority of advisors (92%) said they could find a provider willing to charge under 35 basis points for serving as a corporate trustee. But the trust companies they actually went with tended to charge 40 to 50 basis points.

Almost a decade later, that 35 basis-point level would now be viewed as corporate suicide. While it’s possible to find a lower-cost relationship, the level of service would be so poor that a client may be sold down the river if and when the discount vendor finds it impossible to make a profit.

As to where those extra basis points come from, pricing guru Rafi Mohammed says trust firms — or advisors, for that matter — that differentiate themselves can charge a little extra.

“You do not need to charge what your rivals charge because your products are not exactly the same as theirs,” he says.

“You know your product is best in some way,” he adds. “But when I ask you why I should buy it, most people stumble. You have got to effectively communicate with your clients to understand what value a provider offers.”

For the fourth quarter survey, The Trust Advisor will be collaborating with Cerulli Associates. To make sure your firm’s fees are anonymously reflected in the final data, please fill out the brief “Trust Fee Survey” questionnaire HERE.

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

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