An Untapped Gold Mine of Assets You Can Manage

Traditional trustees

The distinction between directed and traditional trustees is critical, yet estate planning attorneys and financial advisors often underappreciate it.

A traditional trustee is responsible for a trust's administrative and investment functions. The trustee ensures compliance with the trust's terms, manages distributions, handles tax filings, and manages the trust's assets.

The downside for financial advisors is that once assets are placed in a trust with a traditional trustee, they lose control when the trustee appoints their in-house investment management team or a friendly third-party advisory firm.

From a client’s perspective, traditional trustees might seem like a convenient all-in-one solution, but there are drawbacks. For one thing, the investment management team the trustee selects may not align with the client's preferences, and bundled services can result in higher fees.

Traditional trustees also often adopt a one-size-fits-all approach, which may not be suitable for clients with complex investment strategies or personalized financial goals. That approach may be inconsistent with how you manage the client’s assets.

There’s a better option, but few estate planning attorneys will suggest it. Perhaps they don’t appreciate the distinction or (more likely) may receive referrals from traditional trustees and want to maintain that relationship.

Directed trustees

A directed trustee separates the administrative and investment functions. The trustee handles the administrative aspects of the trust, like tax compliance and distributions, but an outside financial advisor makes the investment decisions.

By recommending a directed trustee to your clients, your client can name your firm as the investment advisor for the trust’s assets, ensuring that you retain control of AUM after the assets are placed in a trust.

A directed trustee offers significant benefits for your clients.

More control: With a directed trustee, clients retain their trusted financial advisor to manage investments within the trust. This continuity provides peace of mind, especially if the client has developed a longstanding relationship with you and has adopted your investment philosophy.

Flexibility: Directed trustees allow for more tailored financial solutions. Clients with unique financial goals or sophisticated portfolios will appreciate the ability to customize their investment approach while benefiting from a trust's legal protections and tax advantages. This arrangement can appeal to high-net-worth clients who want to ensure their wealth is managed according to their preferences rather than a standardized investment plan.

Lower costs and transparency: Directed trustees often result in lower overall costs. Clients avoid the bundled services and higher fees of traditional trustees by keeping the investment management separate. In this transparent arrangement, clients (and their heirs) know precisely what they are paying for – administrative services and investment management are billed separately.

Finding a directed trustee requires some research, but there are several ways to identify trustees who specialize in this model.

Professional trustee associations: Trust associations can provide directories of trustees who work within the directed model.

Online search: A simple search for "directed trustees" can yield valuable results. Vet any trustee thoroughly. Look for trustees with a solid reputation, strong reviews, and experience working with high-net-worth clients.

Donor Advised Funds (DAFs)

Another often overlooked opportunity for financial advisors is donor-advised funds (DAFs). DAFs are powerful philanthropic tools that allow clients to donate to charity tax-efficiently while maintaining control over the distribution of the assets. Many advisors are missing out on the chance to manage these funds because they aren’t aware of the DAF equivalent to a directed trustee.

A DAF is a charitable giving vehicle that allows donors to contribute assets, take an immediate tax deduction, and recommend grants to charitable organizations over time.

When clients contribute to a DAF, they don’t have to decide which charities will receive the funds immediately. Instead, they can make grant recommendations at their own pace, providing greater flexibility in their charitable giving.

However, there’s a big difference between traditional and advisor-friendly DAFs:

Traditional DAFs: In a traditional DAF, the charitable organization that sponsors the DAF also manages the assets. Once clients contribute to these DAFs, their financial advisor loses control over asset management. If you are considering a DAF, ask whether they manage the assets or permit the donor to designate an advisory firm of their choice.

Advisor-friendly DAFs: These DAFs operate differently. They permit (and may even require) the donor to designate an independent financial advisor as the manager of the assets contributed to the DAF. This means that even after the client donates to the DAF, your firm can continue to manage the assets, ensuring that you retain control of AUM, assuming the client names your firm.

An advisor-friendly DAF can offer benefits for your clients:

Flexibility: Clients using advisor-friendly DAFs retain the same investment flexibility they have with their portfolios. They can work with you to develop a strategy that aligns with their financial objectives, charitable goals, and risk tolerance. Traditional DAFs often impose a more rigid investment structure, which might not align with the client’s broader financial plan.

Extended payouts: Advisor-friendly DAFs may be more flexible in how long funds can remain invested before being distributed to designated charities. Clients may want their charitable assets to remain invested and grow over time to make a more significant impact by allowing them to grow tax-free before being disbursed. This flexibility can appeal to clients who want to maximize the effectiveness of their charitable giving. One way to frame this issue for the DAF you are considering is to ask “What’s the maximum payout period for assets contributed to the fund?”

Lower costs and transparency: Like directed trustees, advisor-friendly DAFs often offer clients more transparent and cost-effective solutions. Traditional DAFs may charge higher management fees and provide less flexibility in how assets are invested and how rapidly they must be disbursed. Advisor-friendly DAFs offer clients greater transparency by unbundling administrative and advisory fees.

There are a number of ways to find advisor-friendly DAFs:

Research top DAF providers: Institutions like the American Endowment Foundation and iGiftFund are advisor-friendly. They allow donors to designate an outside advisor to manage the assets. Some of the larger DAFs, like Fidelity Charitable and Schwab Charitable, permit the designation of an outside advisor but may have other restrictions (like insisting on a shorter payout period) that must be evaluated.

Leverage industry networks: Talk to estate planning attorneys, philanthropic consultants, and wealth management professionals familiar with DAFs. These experts can recommend advisor-friendly DAFs that fit your client’s needs.

Look for flexibility: When researching DAF providers, focus on those that offer flexibility in investment management, time horizons for payouts, and low administrative fees. This combination makes advisor-friendly DAFs more appealing to your clients.

Final thoughts

By incorporating directed trustees and advisor-friendly DAFs into your financial planning services, you enhance your value proposition and secure lasting relationships with clients who appreciate your comprehensive, forward-thinking approach to estate planning and charitable giving.

A critical component of implementing this strategy is your involvement in estate planning, starting with attending the first meeting with your client and their estate planning lawyer. Don’t assume the legal community is familiar with directed trustees or advisor-friendly DAFs.

Without your active participation, it’s unlikely your client will be offered these options.

Dan coaches evidence-based financial advisors on how to convert more prospects into clients. His digital marketing firm is a leading provider of SEO, website design, branding, content marketing, and video production services to financial advisors worldwide.

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