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 May 19, 2010
Helping Wealth Firms Start Trust Companies

 --The Editors of Dow Jones Newswires. May 19, 2010

Advisors Institutional Services is out to help wealth-management providers figure out if it makes sense to own a trust company and, if it does, help them apply for a trust-company license in South Dakota.

The Marshfield, Mass.-based firm has been around less than a year, with three clients so far. It believes making trust services part of the toolkit can help a wealth manager keep assets that might otherwise take flight as mature clients look to trusts - and their providers - for help transferring wealth to their successors.

In a 2007 study by asset manager Franklin Templeton, some independent investment advisers saw 80% of the dollar value they managed in 2006 going into trusts over the next decade as clients come into big money through business sales and other "liquidity events."

Investment advisers can outsource trust services through custody providers like Fidelity Management and Research LLC and Charles Schwab Corp. (SCHW), but these offerings can lack the flexibility wealth managers need to meet clients' sometimes peculiar needs. Also, adding a trust company to an existing advisory practice can bring in trustee fees.

Having in-house trust capabilities can help boutique investment advisory firms compete with large institutions in terms of fiduciary-service offerings, says Douglas Dannemiller, a senior analyst at Boston-based Aite Group LLC. But they have to meet capital requirements and, up front at least, undertake a fair amount of work - even with a provider like Advisors Institutional Service shepherding things along.

Firms that establish trust companies in South Dakota must have a physical location in the state. Advisors Institutional Services can provide its clients space in its "multi-trust company" offices there - and provide them with contracted trust officers to handle transactions online. The company also makes arrangements for trust custody services and provides a trust-accounting system.

Dannemiller calls the new company's approach "an interesting business model."

"It probably gives firms opportunities to pull in some additional basis points," he says.

The advantages of owning a South Dakota-based trust company come down, in Advisors Institutional Services' view, to a capital requirement of just $200,000 and no state taxes for corporations or individuals. South Dakota trust companies can also serve as custodian trustee for most tax-deferred retirement accounts, and their trusts can hold just about any asset type from stocks to wine collections.

Nevada had a similar trust-company regime until last year when it boosted its capital requirement from $300,000 to $1 million. "With the financial crisis, that was just a lot to ask of advisers," says Jerry Cooper, a relationship manager with Advisors Institutional Services.

South Dakota regulators approved a record six trust companies in 2009, and so far this year they've approved seven, according to Cooper.

Advisors Institutional Services' newest client, Pittsburgh-based fund processor Mid Atlantic Capital Group, has just applied for a South Dakota trust charter with a view to expanding its institutional service menu. The other two clients are private-client investment advisers, which Advisors Institutional Services sees as more typical of the kind of firm it will be doing business with.

Thomas Coyle is a special writer with Dow Jones who focuses on wealth management. His columns are available to Dow Jones Adviser subscribers.
 
 

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