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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.
How should advisors work with clients who have a directed trust? There are two primary scenarios were advisor-friendly trust companies add value to advisors:
- The client or prospect has questions regarding creating, amending or modifying a living/revocable trust or will. Often, the client will ask questions like: Who should I name as a successor trustee? Would you be my successor trustee? or Should I name a corporate trustee or a family member as a successor? The advisor may rely on recommended language provided by the advisor-friendly trust company.
- The advisor has a client or prospect who is already the beneficiary of an irrevocable trust and is unhappy with the current “bundled” bank/trust company’s fees, service and/or investment performance. The beneficiary would prefer that the advisor manage the trust assets. If the irrevocable trust does not already contain directed language, it is cumbersome to modify or amend the trust to become directed.
After thousands of conversations with advisors during my 27-plus-year career in the advisor-friendly trustee field, I have found that many are misinformed regarding the risks, liability and compliance issues associated with the advisor’s role in the directed-trust model. When considering this option, the advisor should ask several very important questions:
- Am I familiar with the significant differences in managing trust assets versus non-trust assets?
- Does the trust specifically name me as the directed investment advisor?
- Will my firm’s compliance policy allow me to take on the fiduciary liability of managing trust assets without the help and oversight of corporate trustee?
- Do I have the expertise to manage assets such as real estate, oil and gas, partnerships and other illiquid non-traditional assets that are in the trust currently or may become part of the trust in the future?
- Does my form ADV 2B cover these contingencies?
- Beyond my “preferred” relationship with the current beneficiary, what kind of relationship do I have with future beneficiaries who my challenge my investment performance and allocations?
- Does the marginal reduction in trustee fees outweigh the investment oversight and deep pockets of a corporate trustee as well as the additional time and legal fees to modify the trust?
- Does the corporate trustee offer a delegated option and what is the cost difference?
Of course, the advisor should also take into consideration the potential risks and rewards of the delegated option. Some questions to consider include the following:
- Has the corporate trustee demonstrated a successful history supporting the delegated model?
- Is the corporate trustee willing and able to accommodate non-traditional assets?
- Does the corporate trustee allow me to “quarterback” communications with the beneficiary?
- Will the corporate trustee approve my investment philosophy and asset allocation?
- What expectations does the corporate trustee have regarding investment policy statements?
- Will the corporate trustee willingly resign if asked by myself and/or the beneficiary?
- What constraints exist on the fees I can charge?
- What oversight and support will be provided to insure I am prudently managing the trust assets?
- Is the corporate trustee a preferred provider of my broker dealer and/or custodian?
As one of the founders and pioneers of the advisor-friendly, unbundled corporate trustee revolution, I have seen this paradigm evolve from a niche player to a mainstream solution. As trust beneficiaries tire of the “1-800” treatment they often experience with the traditional bundled/trust model, they will continue to look to their preferred and trusted advisor to apply their investment and relationship management skillset to the team.
As you evaluate advisor-friendly trust providers, begin with a comprehensive understanding of the associated risks of the directed and delegated options.
As a founding member of one of the original advisor-friendly independent trust companies in 1991, Mike consults with advisors in identifying the steps required to move a trust and the relationship between the trustee, client, and their preferred advisor.
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