Directed Versus Delegated Trusts: What Advisors Should Know
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During the late 1980s and early 1990s, the financial service industry experienced two very significant changes: the birth and proliferation of independent financial advisors coupled with sweeping changes to trust laws and regulations governing directed and delegated trusts.
In its simplest form, a directed trust bifurcates asset-management and distribution decisions between the trustee and another person(s), typically defined as a “trust protector, distribution advisor, or investment advisor.” The trustee must follow the instructions of the non-trustee with respect to the specific powers stated in the trust.
While the directed trust model seeks to absolve the trustee from certain responsibilities, the majority of trusts include the trustee’s power to delegate investment authority. This authorizes the trustee to delegate fiduciary authority to agents who are properly vetted and supervised by the trustee while not requiring the trustee to perform all aspects of the trust’s investment activities.
In contrast to the directed model, a trustee who elects to delegate remains legally responsible to oversee and approve all aspects of the trust’s investments. Both models make it possible for advisors to manage trust assets for their clients while maintaining a primary relationship management role with their client who is typically a current or future beneficiary of the trust.
The dynamics of these changes spawned a cottage industry of independent trust companies who forfeit the revenue and responsibility of managing the trust assets in order to access the burgeoning distribution channel of independent advisors. This unbundling of administrative and investment management responsibilities has successfully captured billions of dollars in trust assets across dozens of advisor-friendly trust companies.
With an eye on the bottom line, many of these trust providers have opted to exclusively support the directed instead of the delegated model, as it exposes them to significantly less liability and overhead while only marginally reducing their trustee fee. For this reason, those that accommodate both models often steer advisors toward the directed model. The directed model is often positioned to advisors as the cheaper option that will allow the advisor to fully dictate security selection and investment policy, while preventing the trustee from firing them or stealing their relationship with the client/beneficiary.