Advising clients on estate planning is a core service offered by wealth management firms, and the best tool for meeting estate planning objectives is often some sort of trust.  This dynamic places trust companies closely adjacent to wealth management firms: in some instances, as competitors, in other instances as referral sources.  And, increasingly, RIAs have sought to internalize trust operations through various means in a bid to expand their capabilities and move upmarket to larger clients with more complex needs.

Several large, often PE-backed wealth management platforms have opted to build trust capabilities internally rather than buy.  Creative Planning has its own internal trust company.  St. Louis-based Moneta formed its own trust company in 2021.  In 2022, Hightower launched Hightower National Trust Company with a national charter.  Last year, CI Financial’s US wealth management business, now known as Corient, established its own South Dakota trust company.  And last month, $25.9 billion Wealthspire opened the doors of Wealthspire Trust, a Tennessee-chartered trust company.

Others have entered 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.

There’s a meaningful value proposition for RIAs in seamlessly integrating trust administration processes into wealth management services

Why all the interest in trust?  There’s a meaningful value proposition for RIAs in seamlessly integrating trust administration processes into 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 retain assets 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 retained for the next generation.

But, for all the seeming benefits, entering the trust business is not without potential pitfalls for RIAs.  For one, owning a trust company adds another level of compliance and potential legal risk associated with being a fiduciary.  And while the wealth management business bears many superficial similarities to the trust business—both have similar recurring revenue models tied to the market, and people-heavy cost structures, for example—there are fundamental differences between the two.  At its core, wealth management is a business of translating numbers into numbers: a client’s financial situation (net worth, asset allocation, liquidity needs, etc.) is the input, and investment decisions are the output.  In contrast, the trust industry is a words-to-numbers business, where the words on the page of the trust document guide investment decisions with respect to trust assets.  Interpretation of those words is often where wealth management minds get stuck.

The RIAs entering the trust space tend to be large and well-capitalized—in other words, they can fund the upfront investment and absorb the risk if things don’t work out.  Even for those establishing their own trust company (rather than buying), 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.

There are a number of “advisor-friendly” trust companies with which smaller RIAs can partner to offer trust capabilities

For smaller RIAs, the risk associated with building or buying a trust company is unlikely to be worth it.  But that doesn’t mean they’re out of the game: there are a number of “advisor-friendly” trust companies (i.e., those that don’t offer competing investment management services) with which smaller RIAs can partner to offer trust capabilities.  Those who do it best make the administrative job of trust administration invisible to how the RIA operates.  It’s not quite the same thing as having trust capabilities in-house, but it can be close if done well.

There’s a growing demand for expanding the suite of services to include trust administration, either by bringing those services in-house and making it a one-stop shop for clients or by seamlessly outsourcing.  For RIAs that can figure it out, there are opportunities for higher growth and retention at the margin relative to a field of competitors that lack robust trust capabilities.

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 asset managers, wealth managers, independent trust companies, broker-dealers, PE firms and alternative managers, and related investment consultancies.