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In July of 2021, Moneta chief executive Eric Kittner hired Matt Harlan to help his firm do something unusual.
Moneta, a $31bn RIA based in St. Louis, Mo., had recently chartered a new trust company in Kansas and needed someone to head up the business unit. Moneta had previously worked with a third-party trust services provider, which ‘was fine, and they did a nice job,’ according to Kittner. ‘But at some point, we needed more control over the service offering. We needed them to work with assets that were illiquid and real estate and more complex situations.’
‘The outsourced solutions just didn’t work the way we really wanted to,’ Kittner said. ‘We effectively started from scratch because that was the best way to really build a service model that we thought was going to work best for our clients.’
Harlan had spent the previous 19 years as the principal of the St. Louis Trust Company, and before that worked as a trust officer with Bank of America and Mark Twain Bank. Kittner tasked him with bringing Moneta’s new trust company, a wholly owned subsidiary, online.
And so he did. Moneta Trust has since gathered several hundreds of millions of dollars in assets, some from existing clients looking to replace their trust administrator and some from new clients looking to work with the firm for the first time.
Moneta’s effort to build a trust company from the ground up makes it something of a standout among its peers, but the firm is not alone in its ambition. Large, national RIAs are increasingly moving to bring trust services in-house, sensing that the line of business is a crucial component of the ‘holistic,’ multi-generational wealth management ecosystem that they aspire to offer.
Many, including Hightower, Mercer, Pathstone and Lido Advisors — all of which are backed by at least one private equity firm — have acquired trust companies to that end. Firms that aren’t quite ready to invest in bringing trust services in-house are bolstering their partnerships. Allworth, Carson Group and Procyon Partners — also all private equity-backed firms — have struck new deals this year with outsourcers and white-labelled trust providers.
‘This move towards trust and adding trust companies or trust services — either in-house or getting better with the outsourcing — is an evolution in how wealth management is done,’ said Carla Wigen, chief operating officer and head of trust at $13bn Seattle-based Laird Norton Wealth Management (LNWM). LNWM reverse engineered the trend, having started in 1967 as a trust company and since evolving into a full RIA. The firm last month opened a new trust office in South Dakota, which has among the most favorable trust-related tax laws in the country.
‘Wealth management is broader than just investing,’ Wigen said. ‘Trust is an integral part of that. If you don’t do that, are you really managing somebody’s wealth?’
Not (necessarily) about the profit
While trust services make sense as a piece of the service puzzle RIAs want to offer, it’s a complicated business model with its own host of regulatory issues, and requires specialized experience that generally falls outside of an RIA’s core competencies. Buying, hiring or developing that talent is a big expense, especially to ramp up a business that applies to a small segment of the average RIA’s clientele and doesn’t make as much money as investment management and financial planning.
This dynamic has led some RIAs to stick with their outsourced solutions — at least for now.
‘Right now, we just can’t make the business case to specifically be in the trust business,’ Captrust head of wealth management Eddie Welch recently told Citywire. ‘Can we be profitable at it? Are the margins right for us? Can we really be good at it? … We have outside partners who serve clients really, really well, and that’s all they do.’
RIA executives that have invested to bring trust services in-house assure that it’s not about opening up a new revenue line.
‘If it’s about retaining clients and growing the business and adding new, I don’t really care if the trust company generates a profit,’ Kittner said. ‘It’s not about that. It’s about enhancing the client experience and being in a position where we can continue to serve the clients the way they need.’
Lido Advisors president Ken Stern, whose Los Angeles RIA acquired $800m Enterprise Trust & Investment Company in August 2022, said that the value of an in-house trust business is that it helps boost client retention across generations and exposes the firm to a new pool of clients.
‘As far as the margin, you’re able to work with that client for a much longer period, and you have a deeper relationship with the family,’ Stern said. ‘Just take your numbers out a couple more years, and the business case, the value add, is very apparent.’
Matt Fleissig, chief executive of $100bn Englewood, N.J.-based multi-family office Pathstone, said an in-house trust business is a necessary feature of a truly enterprise-level wealth management firm. With that goal in his sights, Pathstone acquired $35bn Wyoming trust company Willow Street in December 2022.
‘You’re starting to find that these clients are looking at these firms and saying, “I don’t want to join a practice. I want to join something that can be multi-generational,”’ Fleissig said.
Laird Norton’s Wigen added that the opportunity cost for late movers could be severe: ‘If you spoke with some RIAs and they were honest with you, they would say that they have lost business because they did not have trust services or they didn’t have an integrated offering that included trust services.’
The addition of a trust business isn’t without risk for RIAs. The business brings new conflicts of interest that must be mitigated for RIAs — and trust administrators — to adhere to their strict fiduciary regulations.
One such conflict stems from the potential conflation of the trustee role with the manager role: In the financial services industry of yesteryear, the Wells Fargos and JP Morgans of the world would act as both administrative trustee and investment manager to a client’s trust assets, creating a conflict of interest where firms had a financial incentive to use their own, often expensive, investment products. In the RIA space, a joint trustee-manager would mean the trustee couldn’t fire the manager for poor performance or other reasons — or, they could, but only at the expense of their business.
‘We knew we needed to have a solution that clients felt close to, but at the same time had the right firewalls and protections between the companies,’ Fleissig said. ‘We felt the best way to manage these conflicts was to form a sister company … very importantly not a subsidiary but an independent, separate company from the family office that is still owned by the same parent company.’
Kittner concurred: ‘There has to be a bifurcation.’
Another important decision must be made around fees, particularly whether to include trust services as part of the advisory fee or to charge clients a separate asset-based fee or flat retainer.
Pathstone, for its part, has opted for the latter of the three options.
‘We’ve been very against bundled fees since we started the business,’ Fleissig said, noting that Pathstone also charges retainer-based fees for tax, accounting and property and casualty insurance services. ‘You pay for what you want to use versus someone charging basis points and then you hope that they don’t call you to use your additional services because then you have margin compression.’
Moneta also charges a separate fee, but how much the client pays depends on their AUM.
‘It is an additional cost,’ Kittner said, ‘typically a graded schedule based on AUM. It’s obviously a smaller fee relative to a typical RIA fee.’
Who’s it for?
While trusts have traditionally made sense only for ultra-high-net-worth investors, say, those with $20m or more in investable assets, some RIAs have expressed interest in offering trust administration to clients closer to the mass affluent level.
Fleissig, voicing a perhaps contrarian view, said he is skeptical of retail-focused RIAs getting into the trust business and believes that clients with $10m or less who are looking for a third party to take discretionary power over their trust should find a family member or individual service provider rather than hire a professional corporate trustee.
‘Especially in the $5m and under, the math I just don’t think works from an economic standpoint. I’m not sure if you should be paying the dollars it costs to have a corporate trustee to do that,’ he said. ‘When I see a lot of firms acquiring trust companies with smaller client sizes, I actually scratch my head. I think there’s a fad to buy trust companies, and I think people … are potentially using them not for the right reasons.’
Cost alone, Fleissig said, should be prohibitive for clients below a certain wealth threshold. He cited banks and institutional broker-dealers which charge in the 60 to 70 basis point range for trust administration, and even sometimes up to 1% on top of investment management fees.
‘That’s where I struggle to think about the need,’ he said.
Stern holds a different view, and instead sees trust services as a means of helping young people all along the wealth spectrum make smart, safe and fair money management choices, especially during precarious asset transitions where a regular will just won’t do.
‘Who’s going to be in charge if, God forbid, something happens to you?’ he said. ‘It’s not a net worth question at all at that point.’
Kittner acknowledged that the need for a corporate trustee rises with a client’s wealth level but countered that ‘there are scenarios in probably all levels of wealth where a corporate trustee could be pertinent,’ referring to a theoretical $10m client that believes her two children should not be the trustee of their money.
Put simply, he said it’s essential for an RIA with multi-generational aspirations to be able to support multi-generational client assets, whatever the size and whatever the specific need.
‘We talk about playing a game that is kind of the forever game, right?’ he said. ‘Our goal is to continue to transition the firm from generation to generation.’