5 Takeaways from the Association of Trust Organizations’ (ATO) 2023 Annual Meeting

Margins and Compensation Practice Management Transactions Trust Companies

Earlier this week, ATO held its annual meeting at the Ritz Carlton in New Orleans to discuss a variety of topics relevant to independent trust companies, including the impact of AI, M&A and financial performance trends, and best practices for evaluating prospects. As a sponsor of this year’s conference, here are our main takeaways from the meeting:

  1. The FTC’s recent proposed ban on non-compete agreements is unlikely to have a huge impact on the trust industry anytime soon.

    Tom Blank of Shumaker, Loop & Kendrick, LLP kicked off the conference with an overview of various regulatory developments over the last year that could impact the trust administration industry. One of the more significant developments is the FTC’s proposed ban on non-compete agreements in employment contracts earlier this year. Since non-solicitation agreements are more common in this industry and are still allowed under the proposed rule, the proposal will likely have a limited impact on independent trust industries. There’s also a good chance this proposal won’t be enacted during an election year, so it probably won’t take effect anytime soon.
  1. The benefits of AI will likely outweigh its risks to the trust industry for TrustCos that learn about the technology and manage it properly.

    Steve Randolph, Ariel Junquira-DeGarcia, Steve Plummer, and Mike Tropeano hosted a panel discussion on how artificial intelligence will impact trust institutions in the years to come. The consensus was that it’s still too early to fully assess the impact AI will have, but it could significantly enhance the efficiency of analyzing and organizing the high volume, data-dependent work associated with administering client assets. It will likely require a fair amount of time and money upfront to educate staff on the benefits of AI and how to manage it properly. Still, the investment could lead to real efficiencies down the road and a competitive advantage for early adopters. The panel recommended a trial-and-error approach with significant initial human oversight before wider adoption to address any issues and understand its limitations and best uses.
  1. Relative to RIA peers, independent TrustCos generally transact at higher EBITDA multiples and lower revenue multiples.

    Bruce Cameron, Tony Guthrie, and Kyle McDonald hosted a session on M&A activity in the TrustCo space. Relative to RIAs, trust companies generally transact at higher EBITDA or earnings multiples because of their client base’s higher stability and longevity, making their cash flow potential more reliable and attractive to prospective buyers. On the other hand, RIAs tend to transact at more robust revenue multiples since they tend to have higher profit margins than TrustCos, so buyers will pay more for a dollar of revenue when it yields a higher return on their investment.
  1. Trust companies run expensive businesses.

    David Lincoln of Wise Insights discussed various financial performance trends in the TrustCo industry. Compensation costs have outpaced revenue gains over the last five years, so many TrustCos aren’t benefiting from sizable gains in client assets during this time. Lincoln recommended developing a compelling value proposition for recruiting best-fit talent and limiting compensation increases associated with market appreciation and overpaying for team sales. Talent is a trust company’s most valuable resource, so determining the right compensation structure for key employees is critical to growing the business and shareholder returns.
  1. If you’re in the trust business, you’re in the risk business.

    Debbie Gauthier, Jack Davidson, Stuart Allen, and Adam Gaslowitz hosted a panel on evaluating the risk of a prospective client during the engagement process. The panel discussed the benefits of formalizing the proposal and acceptance process for prospective clients to address potential problems before they happen. They recommended a collaborative approach involving the client contact, management, and legal/compliance teams for larger clients with complicated trust needs. They noted that compensation structures tied solely to revenue production can incentivize client-facing staff to take on riskier prospects, so a balanced salary/bonus/equity comp structure is generally preferable.

The conference was well attended, and plenty of other great topics and presentations were not referenced here. We would certainly recommend it for trust company officers seeking intel on the state of the industry. Hope to see you at next year’s meeting in Dallas.

About Mercer Capital

We are a valuation firm that is organized according to industry specialization.  Our Investment Management Team provides valuation, transaction, litigation, and consulting services to a client base consisting of RIAs, asset managers, and trust companies.