Choice and complexity
Mirror, mirror on the wall, who’s the fairest trustee of all? If it was as simple as this advisers would almost certainly breathe a collective sigh of relief. The reality, however, is that choosing a trustee can be a complicated and arduous exercise. Gone are the days of advisers recommending a trustee on the back of a couple of long lunches – there are now a myriad of factors that need to be carefully considered.
One of the principal criteria to consider when choosing a trustee is its ownership structure, and this should go beyond the simplistic and generic categorisation of bank-owned or independent.
Bank-owned trust companies broadly fall into two categories, the most common being the traditional bank-owned model where a trust’s financial assets are frequently invested in products issued or managed by the trustee’s parent. The alternative bank-owned model encourages its trust company to run as a standalone business with greater flexibility and a trust administration philosophy more akin to that of an independent.
Families understandably take comfort in the resources available to bank-owned trust companies, which often cannot be matched by independent firms. However, the obvious flaws with both these models are the conflicts that arise when a parent’s financial services are used and the inflexibility resulting from the association with a large global brand concerned with its image.
Over the years there has been an evolution in the trust industry that has probably affected independent trust companies more than bankowned ones. Independents are no longer simply owned by principals who act as the directors of the corporate trustee. They now include trust companies ultimately owned by legal firms, accounting firms, private equity firms, insurance groups, wealth management firms, angel investors and other professional service organisations.
Historically, one of the main benefits of using an independent was the perception that it was free of conflicts with its shareholder and could always act in an impartial and independent manner for its beneficiaries. As the ownership model has evolved, independents now have their own conflicts centred on providing investment services, legal and tax advice, accounting services and so on.
A number of independents also need to contend with the challenges of having much greater levels of debt than historically. These conflicts need to be carefully managed by independents and, as with bank-owned trustees, services must be properly segregated (although their smaller size will make this more difficult). The non-fiduciary services should only be used when they are relevant and the entire market has been considered as an alternative.
A common challenge
Despite their differences, both models share a common challenge as the global legislative landscape evolves. This pressure is contributing heavily to industry dynamics. Independents are changing ownership as they attempt to consolidate their positions and boost their bottom lines, while bank-owned trustees are narrowing their fiduciary offerings to hold more conservative financial assets for families in fewer jurisdictions.
The ownership structure of the trust company and its corporate culture and business philosophy are key variables in the selection of a trustee. Ultimately, the form of ownership will influence other important criteria such as: the trustee’s professional indemnity insurance; the quality of staff; the trustee’s track record and reputation; the value of the assets under administration; the diversification of the assets held; the medium to long-term plans of shareholders; internal succession planning to ensure longevity of relationships; a proper process for selecting the best investment adviser, accountant and lawyer; fee transparency (trustee’s fees, investment fees, legal fees, accounting fees, tax fees, retrocessions received) and so on.
Each form of ownership has advantages and disadvantages. A trustee will ideally be owned by a shareholder that is able to provide the financial resources required to run an independently minded, multi-jurisdictional, modern trust business that has sufficient scale to avoid internal conflicts. The trust company should be built on a robust risk and compliance infrastructure and be allowed to operate as a standalone business. It should have a low staff turnover and its employees should be suitably experienced and qualified to implement bespoke structures without obligations or financial incentives to invest assets with or borrow funds from a specific company. Given recent changes in the fiduciary industry it is important for the trustee to have an ownership model that is supportive and conducive to the long-term nature of a fiduciary relationship. Each family is unique, with specific estate and succession planning needs, and therefore each trust company should be considered on its merits and advisers should look beyond the generic assumption of bank-owned or independent.
The Lawyer - Briefing, Offshore, 24 February 2014