How did the personal trust business go from the natural home for the high-net-worth investor to a shrinking slice of the asset management pie?
This drop in market share has taken place despite a number of built-in advantages, including a superior alignment to client interests compared to the largely commission-based, transaction-driven brokerage model, and it shows little sign of slowing.
A surge in competition for the client investment dollar from brokerage houses and registered investment advisors, changes in regulation and other reasons commonly cited for the relative decline of the trust business all belie an uncomfortable truth: as the world changed, the trust company stayed the same. Like the auto business before it, the trust industry was slow to recognize shifts in customer tastes. And when it finally did, it responded in a ham-handed fashion.
Today, with the ongoing proliferation of money management options and delivery channels, the trust industry needs to adapt or risk being consigned to irrelevance.
Note that the trust structure isn’t going away. At least not until death and taxes do. There will always be a need for vehicles to enable the transfer of wealth across generations. But as we have seen over the last 40 years, trust companies are by no means guaranteed their grip on client purse strings.
The troubles of the trust company can be explained partly in terms of a bias towards tradition at the expense of modernization. Trusts have remained backwaters in terms of adopting 21st century technology and business practices, preferring to rely on high-touch and personalized service to keep their mostly mature clients happy. Paper statements, manual reconciliation and batch processing of transactions are some manifestations of this approach.
Most critically, however, trust companies have failed to develop a sustainable model for their investment management businesses, which is the primary source of their revenue. Most have been slow to build out and scale their investments platforms, and many have not done so at all. Those platforms that in recent years have been constructed for economies of scale are now trending towards commoditization.
In next week’s article, we’ll look at how the trust business arrived at this state of affairs, and the efforts the industry has made to boost its competitive position.