Under New Management
If anything is certain about the beginning of the 21st century, it is the pace of change across all industries. The fiduciary industry is not immune to this and, as professionals, we frequently theorise about how the landscape will be shaped by external pressures in coming years. These pressures include the increased complexity associated with implementing cross-border estate plans and the ongoing, substantial investment required to meet the barrage of new global reporting requirements and changing legislation. Arguably a consequence of these pressures, and one of the most intriguing developments in the offshore trust industry, is the changing model of trust company ownership.
A mere ten years ago, a trust company’s ownership model, with very few exceptions, would have fallen into one of two categories: independent or bank-owned. Each model had its differences but they were perceived to share a long-term commitment to providing fiduciary services. This commitment, which is essential for a relationship-driven business, allowed families peace of mind and provided the building blocks and stability required to establish a successful private client business.
Today, however, ownership models are in a state of flux and a new type of shareholder has entered the industry. A good number of independents have been selling up to either capitalise on the companies that they have built or because they are too small to meet today’s complex fiduciary demands. Furthermore, banks have re-evaluated their trust company ownership strategy and are exiting their fiduciary businesses altogether or undertaking a sizable de-risking exercise in relation to their jurisdictional exposure and the assets held by their trust businesses. This has created perfect conditions for some relatively new entrants to the industry, such as private equity firms. In our capacity as an independent corporate trustee, we are often asked why, taking into account low-growth forecasts and increasing external pressures, trust company ownership has suddenly become such an attractive proposition for private equity funds.
The Allure Of Trust Companies
Trust companies provide steady annuity income and, historically, the industry has been quite fragmented (something that seems especially true when you consider the operations that are now deemed too small but which historically could have operated to a relatively high level). Private equity funds have been more than happy to purchase these fragmented firms, as they offer the opportunity to consolidate businesses and, in so doing, grow their international footprint. There is also the possibility of diversifying their offering to include corporate, fund administration and private client work. Throughout the process, the firms will increase scale, add efficiencies and eventually, if successful, sell for a tidy profit, in what, from a private client perspective, is a very short time frame. The quick turnaround of an investment and aggressive growth targets do, however, have consequences, including, among other things, increased staff turnover. This increased turnover may be due to a lack of post-acquisition integration or employee disengagement on account of aggressive financial targets.
When considering this trend, it is difficult not to wonder what the future holds. Looking at the market, it is fair to say that many of the better firms have now either been sold or are clearly positioning their business for a sale.
If this is true, all that will remain are firms that value their independence and do not wish to sell, or firms that have been previously considered but passed over for whatever reason. Private-equity-backed firms tend to achieve their growth through acquisition and consolidation rather than organically, so how will these firms continue to meet their aggressive growth targets when many independents have already been purchased and they have achieved all the post-acquisition efficiencies possible? Is it fair to assume that this growth will be achieved from the existing client base?
Also, given the relatively large scale of these trust companies, and the recent sale prices quoted in the press, it is difficult to see who will be in a position to acquire the newly consolidated businesses. With this in mind, the listing of fiduciary businesses may not come as much of a surprise.
The Effect On Clients
Despite these concerns, it would be wrong to suggest there are not some very good trust companies that are now backed by private equity shareholders. It should also be considered that some families take considerable comfort from having trustees with access to greater capital reserves, which often cannot be matched by the smaller, director-led independent companies. This is a significant part of a bank-owned trust company’s appeal (despite trust assets not being held on a trustee’s balance sheet, and trustees, in regulated jurisdictions, being required to have strong professional indemnity insurance). A trustee with larger capital resources will have access to greater financial support from a parent, allowing the company to invest in staff and the sophisticated systems required to implement procedures and controls to capture, segregate and report all relevant financial, tax and regulatory information.
Each family has its own unique requirements of its trustee. However, there are certain core qualities that every family should ensure its trustee has. These include the following:
- A culture and business philosophy conducive to a longer-term private client relationship.
- Sufficient professional indemnity insurance and a workforce with enough scale to ensure its employees have the relevant qualifications and experience to deal with the complexities of cross-border estate planning.
- Fees commensurate with the value added and the professionalism of the offering.
Interest should also be taken in a 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 the shareholders; internal succession planning to ensure longevity of relationships; a proper process for selecting the best investment advisor, accountant, lawyers, etc; adequate controls to ensure actual or potential conflicts of interest are identified and correctly managed; and fee transparency.
A trustee will ideally be owned by a committed shareholder that is able to provide the financial resources required to run an independently minded, multijurisdictional, modern trust business. 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 low staff turnover and its employees should be suitably experienced and qualified to implement bespoke structures, without any obligations to invest assets with or borrow funds from a specific company.
The landscape is rapidly changing and providing insight into future ownership models, given the short-term time horizons of a number of trust companies, is a feat which is beyond even those of us entrenched in the industry. We do, however, know the characteristics that should be demonstrated by a good trustee and we hope that these continue to prevail in future ownership structures. This is surely the very least that families deserve.
STEP, October 2015