Trust And Fiduciary Services: Questions To Consider

by: CFA Institute Contributors

By Preston McSwain

When considering trustee and fiduciary services, consider the following questions (one that is more common and one that is not discussed enough):

  • Does value equal unconflicted advice or investment products?
  • Are trustee and planning divisions earning enough profit to maintain quality service and make future investments?

As to the second question, some might say, “Just a minute. Aren’t investment fees already too high and aren’t you a big fan of low-cost, keep-it-simple investments?”

My answer to this is yes, but how about compensation for unconflicted fiduciary advice, financial planning, family wealth counseling, and trustee services?

Historically, many firms don’t charge their clients for trustee, fiduciary, or planning services. Often these are bundled with investment management or simply thrown in as “value-added” services.

Because of this, some trust and planning departments are referred to as “cost centers” within their organizations and can lose money each year when analyzed on a fully loaded basis as stand-alone divisions.

What is the likely result of this?

First, clients often minimize the value of trustee and planning services.

We are socialized to believe we get what we pay for, and in this case, does the lack of a stated fee suggest to clients that these services have little value?

Moreover, do the business realities of the model reinforce this perception?

If these fees are too low, or non-existent, it has been my experience that an organization can be prone to skimp on resources and not consistently allocate sufficient funds for continued excellence.

Next, does a trustee business model that relies on fees from proprietary investment management services, shares fees with other investment product development and sales divisions, or receives fees from third-party managers or manager platforms, have the potential for conflicts that might run counter to an objective fiduciary duty?

Organizations strive to manage these conflicts, but as I stated in “Transparency: Do We Protest It Too Much?”: “If we are honest with ourselves, lack of opportunity is what keeps many of us out of trouble.”

Another model properly aligns all interests:

A business that charges separately and appropriately for trustee, planning, and fiduciary services and does not rely on investment management fees or fee sharing to determine profitability.

Yes, this might require clients to pay slightly more, but maybe not.

Would a completely objective firm without any proprietary investment conflicts find they can do better in some cases with simple low-fee investment funds, such index funds? The evidence suggests this has often been the case.

Might this also reduce the likelihood that products dominate client relationships and shift the business model’s focus onto what clients value, such as:

  • Continuity in senior relationship managers and services teams.
  • Continued investment in systems and reporting to provide greater security and transparency.
  • Truly objective fiduciary wealth and investment counsel.

Is it the responsibility of trust organizations and other independent fiduciaries to have honest conversations with clients about the value they bring to the table without linking these services to investment products?

I think so, and feel that it could help decrease some of the conflict-related problems in our industry.

What are other likely benefits of this more forthright communication?

Increased trust and more symbiotic long-term partnerships with clients.

If we focus on adding true, long-term, goal-oriented value in a fully transparent manner, we can create value for the industry and for investors.