‘Friendly’ trust services encourage retention over generations

By Mark Dreschler
Financial advisers and financial planners are reluctant to offer trust services to their clients. They are afraid traditional trust service providers — for example, national trust companies, bank trust departments and local trust institutions — will poach their clients and their assets under management by offering proprietary financial and investment advisory services. This is often the reality, so most advisers steer clear of referring trust service business.
But many clients name as successor trustee one of their children or another relative, with whom the adviser often has little or no personal or working relationship. And unfortunately, according to several independent surveys, the vast majority of financial advisers lose a client’s account within six months of the individual’s death 80% of the time. The reason is simple: They did not have an adviser-friendly trustee in place to administer their client’s trust or estate. As a result, advisers are faced with continually prospecting for new clients just to replace the ones lost in this battle of attrition to the competition.
An adviser-friendly trust company, one that provides only trust administration, can protect an adviser’s future by not involving itself or interfering with the existing investment management program or plan. This can provide great peace of mind for clients who now will know that their trusted investment or financial adviser will continue to manage their financial affairs for the benefit of their heirs after they are gone.
For the adviser, the adviser-friendly trust company provides a twofold benefit. First, the adviser’s income is virtually unaffected by the death of a client because the client relationship is maintained and the investment advisory business continues.
Second, the value of the adviser’s practice is likely to increase dramatically. A client’s account with an adviser-friendly trust administrator is a more valuable account for succession planning purposes than an individual or joint account. The concept is pretty simple: Trust accounts help provide the most important factor considered when valuing a practice — a predictable stream of high-quality, long-term recurring revenue.
Revenue from trusts can be multigenerational with the relationship lasting 10, 20, or even 30 years or more. Non-trust revenue is considered by experts to have a shorter productive period based on the advisory practice’s demographics, which include the average life expectancy of the typical client and the 80%-plus likelihood that individual accounts will transfer out to another adviser after the client’s demise.
Therefore, when valuation experts apply discounted cash flow metrics to select advisory business models, predictable and long-term trust account revenue commands significantly higher value in the formula than revenue from non-trust individual accounts. As a result, advisory practices that have an adviser-friendly trustee or successor trustee named for their clients might expect their practice to be valued up to 40% higher than a non-trust practice. This is a critical fact for advisers who are planning to retire by monetizing their business, or formulating and implementing business succession plans.
It is neither complicated nor costly to convert an advisory practice to the trust model. The simplest insurance an adviser can have is to name an advisor-friendly trust company as the successor trustee of a revocable trust, or trustee of a testamentary trust — a trust that is set up by a will. Clients will incur a minimal legal fee to make the change to an existing revocable trust or will. And, generally, no fees are paid while the client is alive to a successor trustee who is only in standby mode. Trustee fees are charged only after the successor takes over the active trust administration.
The main cost to the adviser is the time and effort it takes to learn and understand the process and to communicate the benefits to clients.
Mark Dreschler is president and chief executive of Premier Trust, which he co-founded in 2001.