In many ways, independent trust companies are close cousins to the wealth management space – the revenue model looks like a wealth manager, the payroll looks like a wealth manager, and some of them are, in fact, wealth managers operating under a trust company regulatory structure.  From a service perspective, there’s also overlap: advising clients on estate planning is a core offering of wealth management firms, and the best tool for meeting estate planning objectives is often a trust.  These dynamics place trust companies closely adjacent to wealth management firms: sometimes as competitors, sometimes as referral sources, and sometimes as acquisition targets.

But, the trust industry is much smaller than the RIA industry—while there are over 15,000 RIAs in the U.S., there are only a few hundred independent trust companies, and fewer still that are pure-play trust administration without wealth management services.  Given this smaller scale, M&A transactions in the trust space have been few and far between, particularly relative to the large transaction volume in the wealth management space.  Of the handful of transactions that have occurred, many have been driven by RIAs seeking to internalize trust operations in a bid to expand their capabilities and to move upmarket to larger clients with more complex needs.

Does this supply/demand imbalance create a “scarcity value”? We think it might.

Several large wealth platforms have added trust capabilities through M&A: Mercer Advisors through its 2016 acquisition of Kanaly Trust, Kestra Financial through its 2018 acquisition of Reliance Trust Company, Pathstone through its 2022 acquisition of Willow Street, Lido through its 2022 acquisition of Enterprise Trust & Investment Company, and so on.

These deals are illustrative of the strong demand for trust company acquisitions.  From an RIA’s perspective, there’s a meaningful value proposition in adding trust administration capabilities to wealth management services.  Doing so addresses two of the levers that are top of mind for RIAs: retention and growth.  Integrating trust services can open the door to more complex (larger) clients for which expertise and capability around trusts are table stakes.  And it potentially supports asset retention as RIAs are able to hold onto relationships that might otherwise be lost if an outside trust provider were to enter the picture.  Additionally, placing assets in certain trust structures makes it more likely that the wealth management relationship is maintained for the next generation.

However, there’s not a lot of supply.  Attractive acquisition candidates in the trust space are few and far between.  Apart from the limited number of trust companies, there are strategic considerations that can make acquisitions in the trust space more difficult than a plain vanilla wealth management deal.  For example, if the trust company is “advisor-friendly”—meaning they don’t offer wealth management services that compete with RIAs—then there’s potential that selling to an RIA could threaten the existing referral sources and relationships of the business.

Is There a Scarcity Value for Trust Companies?

Does this supply/demand imbalance create a “scarcity value” for trust companies in today’s market?  We think it might.  There’s growing demand among RIAs for expanding the suite of services to include trust administration, either by bringing those services in-house or through M&A.  And in-house development of trust capabilities is challenging: the upfront investment can be significant, the right infrastructure needs to be built, the right talent needs to be recruited, capital requirements need to be met, and so on.

The scarcity of independent trust companies in today’s market underscores a compelling opportunity for RIAs seeking to enhance their service offerings and secure long-term growth and for trust companies that are considering an external sale.  Anecdotally, we get far more calls from inquisitive buyers than inquisitive sellers in the trust space.  And this supply / demand imbalance seems to be reflected in healthy pricing for deals that have closed.

About Mercer Capital

We are a valuation firm organized by industry specialization.  Our Investment Management Team provides valuation, transaction, litigation, and consulting services to a client base consisting of asset managers, wealth managers, independent trust companies, broker-dealers, PE firms and alternative managers, and related investment consultancies.