Trustee billing: revolution or evolution?
FOR A LONG TIME, trustees have had tried-and-tested methods of billing the structures they are responsible for, and to which they provide administrative services. Much has been written about professional fees and how they
are levied. Ultimately, if a business considers itself client-centric, its fees should be driven by client preference.
A mere ten years ago, almost every trust company was billing on either a time-spent or ad valorem basis. Time-based billing occurred due to the fact that most trust companies, or the founders of independent firms, started out as subsidiaries of either accounting or legal practices. It was very convenient for trustees, who, subject to recovery rates on the work in progress raised, were able to recover almost fully everyone’s most valuable commodity – time.
There were also benefits to billing on an ad valorem basis. However, it was only really viable if asset valuations were readily available. It was also popular because, as long as the assets increased in value, the trustee fee increased in tandem.
As technology improves, client expectations evolve and trustees move into new markets, we are finding that a one-size-fits-all way of charging no longer quite fits. There is no denying that the complexity of trust administration has increased. A modern trustee’s core IT system should now accurately quantify the cost of completing most standard administrative tasks.
Many of the jurisdictions trustees are working with are not wholly familiar with the trust concept. They are, however, very attuned to having fixed fees and surety in relation to their outgoings when dealing with professional service providers. As a consequence of this, and the competitive nature of the modern trust industry, it is important that a trustee’s method of billing does not put it at a disadvantage to its competitors.
Over the years, methods of charging have evolved, and each has its own merits and failings. In our experience, there has been a move, often driven by clients, towards one model of charging: the fixed-fee model.
The fixed fee
This model requires caution, as some trustees may fall into the trap of proposing a very rudimentary fixed-fee arrangement, whereby any work completed is incorporated into the fixed fee charged.
Establishing a profitable fixed-fee arrangement is very difficult, unless the costs of administering different elements of a structure are properly understood and quantified, and the services required are comprehensively communicated. There are always changes to a beneficiary’s circumstances that cannot be foreseen at the outset, and work accommodating these changes can significantly exceed that fixed fee.
If all these points are not properly understood, a trustee will largely be ‘guestimating’ costs when proposing a fee.
This is a big gamble when considering the importance of running a financially healthy trust business, not to mention the likelihood that clients will hold the trustee to the quote.
A low, all-encompassing fixed-fee arrangement is probably ideal for a client, but it will end up being a trustee’s nightmare.
Fixed-fee arrangements have evolved, and hybrid charging scenarios are becoming the norm. Fixed fees for the standard administration of a structure and its agreed asset classes are being complemented by transaction fees for any deviation from the agreed administration parameters. These transaction fees will cover varying the terms of a trust, or the sale or purchase of a material asset, for example.
This provides a client with certainty regarding annual outgoings from the structure, but also allows the trustee flexibility to charge additional fees for administration outside the scope of the fixed-fee arrangement.
It is important that clients are properly informed when making their choice, and that the positives and negatives of each methodology are discussed. A trust company must also be able to implement a fee arrangement in a fair manner that does not result in a loss to the company or compromise on the required service level.
It appears that an evolution has occurred in the way trustee fees are charged. The process has become more sophisticated and takes more variables into consideration, so that fees are now, arguably, implemented on a more informed and fairer basis. It would seem as though trust anarchists may need to wait a little longer for their revolution.
STEP, April 2017