It was another bumpy season for the big banks, but when you drill down into the numbers, the trust business is ramping up in terms of both activity and profits.

Most of the publicly held names in the trust industry booked a solid first-quarter profit as trust fee income expanded by about 20% to 25%. Northern Trust, Washington Trust and Westwood Trust all improved their bottom line.

The best performers attribute the improvement to a mix of tactical business development and old-fashioned organic growth. For example, Westwood Holdings, the parent of Dallas-based Westwood Trust, boosted its trust income 24% to $3 million in the quarter.

“We’ve hired a new trust officer and are hoping he will help us grow,” William Hardcastle, the company’s chief financial officer, told me.

“But about 3/4 of our new cash flows are from referrals or new assets from existing clients,” he added. “Clients are not quite as afraid as they were. That’s very welcome.”

Northern Trust reported a 25% increase in trust and other fees. Washington Trust bumped up its wealth management revenue by 16%.

Drilling down

That’s nice for the big institutions, but most trust companies aren’t publicly traded and don’t announce their results. To get the score on smaller trust operations, we got in touch with the expert number-trackers at Trust Updates in Chicago.

First-quarter numbers are just trickling in now, but Bernard Garbo, publisher of the company’s Trust Performance Report, told me that if early indications are any guide, the rising tide is still lifting all the boats.

“Larger institutions seem to be doing fairly well, but the rest are reporting that assets are up as well,” he says.

Garbo sees the best growth potential in institutional markets like employee benefits programs and other corporate trust services. However, the biggest trend he’s noticed is that the trust companies that can squeeze the most profits out of their assets tend to be specialists.

“Institutions that tend to specialize in fewer account categories are often the most profitable,” he told me.

“That’s not to say that some full-service operations aren’t making money, but especially among the independent trust companies, it seems difficult to be all things to all clients,” he added.

Trust works when lending fails

If specialists are reaping big rewards, the reverse also seems to be true. Full-service banks where trust is only a slice of a larger service platform don’t seem to be doing so well.

Among the big integrated trust banks, Wilmington Trust lost $29 million and Marshall & Ilsley lost $140 million. Both confessed that problems in their loan portfolios dragged their results down, but it wasn’t the trust departments’ fault. In fact, both banks singled out their wealth management operations as a bright spot.

Bank analyst Richard Bove at Rochdale Securities told me this is a natural part of the business cycle.

“The trust business is all about regular fee income and incremental growth,” he says.

“Because of this, it rarely suffers when the market does poorly, and in fact can provide a buffer when the environment turns against an institution’s riskier activities.”

Wilmington has tweaked its business to take advantage of the trend. The bank saw its core trust revenue climb 11% in the first quarter and its assets under administration surge 22%, thanks in part to an aggressive new sales campaign.

“Our reputation as a superior fiduciary and service provider continues to serve us well,” Mark Graham, executive vice president of Wilmington’s wealth advisory services unit, told me, adding that new account activity is up 34% over last year.

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

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Exclusive

In a year when registered investment advisors have faced impossible challenges to stay ahead, one wealth management firm in Texas found opportunity and success. 

Westwood Holdings Group, Inc. (NYSE:  WHG) through its trust company unit Westwood Trust, helped forge gains by landing large new accounts while other firms waited, worried, and sat on the sidelines.  

Last summer my research team noticed a blip on our radar screen when looking for firms that stood out during the meltdown.  These are firms that increased managed assets for the year September 30, 2008 to September 30, 2009. 

The firm that stood out was Westwood Holdings Group, company with little press attention, listed on the New York Stock Exchange, and a top performing wealth manager.  

Last month I had an opportunity to chat with Brian Casey, President  and CEO of Westwood, to discuss how his firm managed to bring in $2 billion in new assets during the toughest year in recent financial memory.  Reviewing SEC reports, I looked at money managers that weathered the meltdown and it was not hard to understand how Westwood was able to mark this achievement. 

The Secret 

Although Westwood has been in business since 1983,  its  strategies were illuminated when  it became public in 2002. But, the true story of Westwood Trust began  in 1998. 

Westwood Trust’s mission is to provide high quality products and services to its high net worth clients.  Casey calls it “offering a competent investment professional to assist them with structuring a portfolio, and meeting the objectives whatever they may be trying to accomplish.”  

Westwood is not a financial planning trust company that provides directed trusts, dynasty trusts or self-settled trusts.  It is basically an eloquent investment store for a catered high end investment business segment. 

In the past five years Westwood’s managed assets have grown from $4.5 billion to $9.5 billion.

The reason for this growth was due largely to the way the firm had been structured. Many channels of diversification contributed and provided a continuous and steady growth.  

Casey, a native Texan for 40 years, describes Westwood as a diversified wealth management organization with three different business lines.  The first, Westwood Management Corp., began its investment business in 1983 as an institutional money manager.  Next, its trust company, Westwood Trust, a fully licensed and chartered trust company based in Texas that has been up and running for 12 years.  Third, its mutual fund business called WHG Funds, which has been in business for four years. 

The story of success is credited, in part,  to Westwood Trust.  Casey noted while other firms sat on the sidelines Westwood got its sales team out and prospected for new accounts.  

The result of course is recorded history.  Offsetting Westwood’s market losses experienced by most firms in the industry, Westwood was able to show net asset gains of $2 billion going from $7.5 billion at 9/30/08 to $9.5 billion at 9/30/09. 

Casey attributes this influx of new accounts to one concept: “high quality.”  Westwood knew it would have to rely on its high net worth business in order to sustain its asset levels, so it used its trust company as a main vehicle to reach new investors. 

The notion of providing an institutional quality product to its institutional clients, and having access to that through its trust company, created a unique combination of delivering quality to the marketplace to high net-worth clientele. 

I asked Casey whether he described the business at Westwood Trust as “retail.”  He did not feel comfortable with that word and said that his customers would not like to consider themselves retail customers.  He prefers to call them  private wealth investors—meaning the average account size for Westwood Trust is $2 million. 

How Did They Do It? 

Casey says that they’re constantly on the lookout for new customers in a way that’s different for most RIAs.  They primarily work through referrals and referral sources but have no wholesalers.  Casey adds “If you’re looking for the client that has $2 million or more you’re not going to find him answering an ad.  He’s going to have to come through a referral or direct call.” 

He adds that clients are doctors, professionals and entrepreneurs that have accumulated wealth over a lifetime but who see Westwood Trust as a shop that puts value and income first. 

Of particular importance is the fact that Westwood Trust offers common trust funds or commingled trust funds.  These are funds that act and behave like mutual funds and what Casey calls the precursor to mutual funds. “They are a tremendously efficient way of delivering institutional-quality investment products to clients.” 

He adds, “Commingled or common trust funds is a tool that allows us to deliver a well-diversified  institutional-quality product at a more reasonable fee than by trying to cobble together some outside mutual funds along with a separate account.” 

About Westwood 

When looking at Westwood it’s best to view Westwood in comparison to its peers.  The quick take snap shot provided by Morningstar gives Westwood stellar financial grades.  There are only three firms in the group which include Franklin Resources and T. Rowe Price that have “A” financial health ratings.  

Westwood’s market cap is only $268 million while the market cap of T. Rowe Price is $14 billion and Franklin’s is $25 billion.  So for a small company being managed efficiently they have done quite well in comparison to their peers.  Westwood is also accorded a “B” rating in profitability from the Morningstar analysis. 

All this being said, Westwood is an interesting story to follow both from the point of being a stellar asset manager, and owner of a trust company, and using that trust company in a way that allowed it to bring in important new accounts and new assets at a volatile time. 

 Next week more about Westwood, its operations, and an acquisition.

Jerry Cooper, senior editor, The Trust Advisor Blog. 

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