Bank Trustees - Rahman anyone?

I've discussed (or disgusted) the lawyers and accountants, so whose next?

If there's an equivalent of a wild west, no rules trust arena then it comes to the bankers, financial advisers, insurance companies and independent trustees. Here, you find the gamut of leaders of the profession to the dredge of the industry and everything in between. Here's where things can get real dicey. Unlike insurance or most investment products, there really is no code of conduct or rules and regulations on marketing trusts.

Although I often downplay the trust skills of some lawyers, accountant and CoSec's, there is one thing that automatically puts them above other trust salesmen is that they are professionals. The ones in "private practice" (law firm, accounting firm, etc), are licensed professionals, with a certain degree of self-respect and professional liability. Rogues are few and far in between. There is a great degree of "yes, I am my brother's keeper" mentality. Beware of those in "in-house" positions. People in banks and non-pro firms giving advice, usually do so without "professional" consequence. They can be wrong, so sue the bank because it's likely negligence (if you can prove it), not professional misconduct nor malpractice. They can get fired, so they move onto the next bank. They could lose their license (if they even had one to begin with), so what? They don't need one, they're in the private sector. Even their bosses do not know whether they are good or competent advisers as they as not lawyers or accountants or trustees themselves.

Although the line is thin and often blurred, recognize that lawyers and accountants are primarily selling advice. You need not used them for their other trust related services (if they have them). With financial firms, they are selling their services not their advice. It is somewhat like an insurance broker versus an insurance agent; while both can give competent (and incompetent advice) one works for you, the other works for the institution.

Also noteworthy is that these trust businesses also have varying business models. Unlike legal/accounting firms which are essentially a partnership of sole proprietors, each partner is running his/her own business, these trust business are either run as profit centers or cost centers, sometimes an odd ball combination of both. Why is that important? If it is a profit center then they need to generate revenue. These trust businesses tend to be more aggressive, much more market savvy and in-your-face and customer-oriented. How much they can spend on good people and systems depends on how much they can make. Cost centers typically behave much more conservatively, less accommodating and managing costs is paramount over drumming up new business. How much they can spend on good people and systems depends on how much someone else makes (usually the private bank). Capitalism versus communism. Each model creates a different set of challenges for the institution. Creates certain advantages and disadvantages. Which is better? I think it varies with the individual institution. I believe that it takes much stronger leadership to manage a profit center. Weak management can lead to disastrous results. It is very easy to fall into a numbers game, where you end up having internal turf wars and getting the "kill" is more important than the service. Cost centers are more stable, perhaps too stable, but often victimized and crippled by those who are steering that do not have the business' best interest in mind. Many a trust company have been left floundering and under-producing, loaded with under-achieving people because it was an albatross around one's neck instead of being considered an asset. A mismatch of models and institutions and you have a mess. Stay away, be you a potential client or employee.

Banks and bank Trustees. Grab a cup of coffee and sit back as this will be a long read.

For much of early private trust history, the trustee was a lawyer or accountant. Often a friend of the family or family business. Trusted adviser. With big money involved, more and more chose to work with bank-owned trust companies instead. With continuity, tax, cross-border and other commercial considerations, a corporate trustee was a much more viable option than your favorite Esquire or Chartered Accountant. Although some rules still make individual trustees a viable option, particularly in the UK and Australia (heck its even better to be the trustee yourself there!), in Asia, it is virtually a corporate trustee's world and why not go with some of the world's biggest corporates, the banks?

The usual appeal for choosing to work with a bank trustee is that it's all in-house, one-stop shop. Fair enough but as with any chain, there is a weak link. Can you live with the weakest links in the chain? Perhaps their trust services is the weak link.

Some also say banks are safe. True but anyone reading the news in the past year have seen banks come and go or get life preservers. In reality, the trust business is just another non-core business division within the bank. It is a separate legal entity if you look at the fine print. Being a non-core business means that the banks can live without it. Divisions can sometimes be bought and sold and sometimes wound down, sometimes merged with another bank. Has happened before and will happen again. I would say that some 15-20% of the trusts in existence in Asia are being managed by a successor trustee company and that the change was due to involuntary changes in the original trust company.

Banks have global capabilities. Yes, some do but do you truly need global capabilities? You really only need one account onshore and one offshore (and preferably with a different bank). Sometimes more is not better as how many foreign governments and tax authorities do you want your wealth to be exposed to? You know, the same ones signing tax information exchange agreements with your home country as we speak. There are often complex and conflicting laws on investments, privacy and tax which you need to account for before signing up for the global package. Communicating with foreigners at odd hours is not always conducive to good long term relationships. Then again, you can sometimes use the banks global network to your advantage has there can be arbitrage opportunities in pricing in different regions.

Banks have deep pockets. Deep pockets also means that they can afford better attorneys than you can.

Banks have reputational risks to protect. Reputations have never been more meaningless than in any other time on our history. You can make humongous blunders, you can commit fraud, you can break the law, you can lose 50% of your capitalization, you can shaft the consumer and it's yesterday's news in a flash. OK, things can be damaging and everyone wants to avoid a messy situation but remember with their deep pockets, they always have the option to rigorously defend any action that may sully their brand.

Banks know investments. Yes, but investing trust funds is just part of the job. Don't confuse that with being a good trustee. A good cook doesn't translate to being a good wife. You have the option of eating out if Gisele Bundchen can't cook.

The main problem with banks is that their trust business is often a means to an end. The trust is the means by which the bank can accumulate and access funds. Generating revenue from the trust funds by investing/churning and purchasing their financial products is the banks' goal. Bank executives drool when they hear things like trust relationships are "sticky" in that trust relationships tend to stay with the bank for longer periods of time than normal banking relationships. When you have a customer with several million which you can milk several hundred bps off from, year after year, that's when they like us trustees. Heck, some will even give you a trust for free, perfectly willing to drain you afterwards. So, yes they like term-term relationships, as long you understand why.

The litmus test for whether the bank is a serious and comprehensive trustee is whether they take on trust relationships with non-bankable assets, such as your company shares, your house, your Gulfstream....you know anything that isn't cash or readily convertible into cash. You know, things that make up a sizable chunk of your wealth and things that you are very likely to need a trust to take care of. Things which banks have a difficult time making money from. Things which banks have a hard time managing. Here's the "for better and for worse part" of the deal. I once met this idiotic banker telling me about their "holistic wealth planning" when his organization refuses to take on non-bankables. Guess what fool? You would have turned away a plaid shirted, Docker wearing, bespectacled Willy H Gates in 84' because all he had were shares of his fledging startup: Microsoft. Guess, in what form, most new wealth in Asia is?

Cash-only trustees are after one thing only. Like teenage boys, who may take you to the movies, tell you they like you and buy you sweets, they are really after one thing and one thing only. Whether that is good enough for you, you decide. There's nothing wrong with cash/stocks/bonds only trust but does it get you where you need to be in your total wealth planning? Be sure to ask whether your bank trustee will allow the trust funds to be deposited with other financial institutions, after all wouldn't any smart investor pick from best of breed and not be stuck with only in-house products and services?

The big bank trustees tend to have high priced help in terms of qualified trust people and external advice from high priced trust lawyers. So what you get is usually up-to-snuff and state-of-the art. Quality control and systems are top notch. This high degree of knowledge and professionalism may work for you and against you too. Look at banks and the money they make. Bend over and take if you so desire. Banks are rarely cheap. Look at the court dockets and half of the trusts cases in litigation are brought on by the trustee not some slighted party. So if you're looking for a pushover, then big banks may not be right for you. If you are looking for a real trustee that will take action then you sign up with those who live in court. Of course there are banks that prefer to be bankers more than trustees. These banks will bend over backwards to ensure you keep banking with them. These are "window-dressing" trustees. They do as you say in fear of losing the account. Great if you need control, but if it undermines the integrity of the trust as it so often does, why bother? This is like installing a burglar/security alarm system but continually turning it off. You have no one to blame but yourself should you wish to override the system and find out it won't help when you need it.

I mentioned the great infrastructure the big banks have but it comes down to people who run the big machine. Many senior trust posts are held by former trust lawyers/accountants but that doesn't necessarily mean that the persons you are dealing with are of similar high quality. Having a trust dream team in the banks' HQ in Zurich or Delaware doesn't mean you get good service in Singapore or Shanghai branch. Your case may never make it that far up the ivory tower to benefit from the expertise the bank has. Remember too, you may be dealing with anex-accountant or ex-lawyer. Despite their implicit and explicit credentials, they are not giving you advice. Take a look at someone like JP Morgan who has traditionally hired former tax accountants and private client lawyers to man their trust advisory business. They proudly say so in their marketing materials. But the fine print says they do not give tax or legal advice and you are required to sign off saying you were told to seek independent advice. You go to them because they are the "experts" but you cannot rely on their "expert" advice. Nice catch-22.

Your first point of contact is usually your banker. How well they understand your needs depends on the individual. You could be dealing with a silver maned private banker who has seen it all or a former hair dresser just dragged off the street (see:Singapore: the paper Lion city)However, by uttering the words: "Have you considered a trust?", most are merely trying to meet their referral quotas and couldn't care less about or even begin to comprehend your needs as long as they get their credit or kickback from the trustee department. Some don't even bother as the kickback they receive is not worth their time and effort when they are making millions conning you into their "structured" products. As well making your funds that much difficult to procure when that banker leaves that bank. A true friend would drag you to a trust adviser before dragging you to their trust department.

The next person you'll likely meet is a "trust expert". This could be a seasoned trust professional or a pimply-faced kid with the glossy trust services brochure in hand. If you don't have your own trust adviser who can assessed the professionalism of the bank for you, ask a simple (and thoroughly ridiculous) question and you'll know: Does your trust deed have a Rahman clause? This is like going into Chanel and asking for a Birkin bag (made by Hermes) or going into McDonald's and asking for a Whopper burger (trademarked by Burger King). If they laugh then you know they know - a good start. If the person doesn't know who Rahman is, then they not trust educated just like every fashionista should know what a Birkin bag is. [Chase v Rahman is a textbook trust case and not likely to be unknown to any personal trust professional] If the person doesn't know if the deed has the subject clause then they are not familiar with the bank's own "product" just like every McDonald's server should know what's on the menu. If the person says yes, then they are dishonest as no such clause exists. How many people it takes to solve your little question tells you how far up the organization it takes to find someone who is a trust professional. If this isn't settled in a matter of minutes, or your question requires clarification or referral back to Head Office, then you should leave and never turn back. This question works equally well in recruitment/assessment interviews. I should have it copyrighted and license it out.

The next person you meet is your Trust Officer/Administrator. This is the person that ultimately takes your telephone calls, tells you what you can and cannot do with trust. Some are just processing paperwork. Some can be your best friend for years to come. As with everything in the banks, the level of service and attention to detail depends on your wealth. You either :enter 5 for trust distributions, you may enter star at anytime to go back to the main menu" or you get the leather sofa and cappuccino service. You may get a seasoned veteran or a glorified clerk. Bear in mind that these people are almost never the ultimate decision makers, they are messengers and don't shoot the messengers, they are just doing their job.

Big banks are getting notorious for their inflexibility. A streamlined, homogeneous product and services means big savings for them. It also means they don't need to retain high-priced, smart, resourceful and knowledgeable people to handle the quirky cases. All their people are compartmentalized and specialist at one job. McDonald's model of fast food efficiency in a bank setting. Ever notice that many of the high end fashion houses have a tailor/seamstress on staff? That's customer service, you walk and get fitted before you walk out. Do you see anyone with a sewing kit at GAP or Bossini? No alterations. No modifications. Take-it-or-leave it. Did you hire interior decorators to do your new flat? Do you have tailored bespoke suits? Did you think about any of the 400 options on your Bentley or Maybach? If so, why would you consider an off-the-shelf solution when dealing with perhaps some of the most personal and financially important decisions of your life and family? Granted that many typical trust needs are met with the "standard" offering, but recognize that sometimes you cannot squeeze a round peg into a square hole. One size does not fit all. If the trustee isn't probing, questioning and measuring you (including uncomfortable jabs into your crotch during inseam measurements) then they are the ones that just don't care.

For those who do want or need special treatment and can afford it, there are the "family office" alternatives that the really big or niche private banks can offer. Not that doing it yourself means getting it right, but with help and a lot of money, a private trust company may be the answer for large complex family arrangements. Most of the really big cases I have witnessed or been part of, involved the collaboration of many institutions. You need not rely on just one bank or pro firm.

Your choices are not just the big international players. A growing trend in Asia is that the smaller, local and regional banks are getting into the game. Now some have been in the trust business for ages, which is a good sign. Heck, HSBC was a local/regional bank for most of its history wasn't it? The general feel I get is that you are dealing with second or third-rate people and services. In general these banks, especially the newer PRC banks, show a lack of understanding for their trust ventures. Trusts for them is sort of their way of keeping up with the Joneses but not knowing how to go about it exactly. It's like Bank X offers bancassurance, so let's get into the bancassurance business too. Despite their glossy appearance, many of these banks are woefully undermanned at the skill positions. Skill sets (which they have a difficult time assessing anyway) are often secondary to cost. A watch is to tell time so forget Rolex or even Omega, a Timex will suffice. I literally coughed up my coffee when a friendly recruiter asked for leads to fill Head of Trust position for some Taiwan based bank for HK$60k/month. For that kind of money you might not even get a 5-years experience trust manager and you want to make them the centerpiece of your trust business? This guy will be your backstop...there is no dream team in Zurich to back him up. Be afraid, be very afraid. Which is unfortunate for the bank because most of them do have some loyal Forbes list-level HNWIs and trust prospects in their client lists. Will a 5-year pro build a good team, a reputable business and capture market share for you? I think not. Foot soldiers may win the occasional battle, but generals win wars.

So who's good and who's not? A good place to start asking lawyers and accountants who regularly send their clients to these banks. They know who knows their stuff and who doesn't. Of course some get referral fees too (where permitted) but in general, they like working only with other professionals and won't steer you to a bank trustee that is crap. Perhaps a little more biased and limited, but you can ask some private bankers (only the ones that have been around the block a few times) which trust companies have served their clients well. At the very least, they can tell you about the mishaps and accidents that occurred with their current and former employers.

Now on pensions, corporate/investment trusts and charities, usually bigger is better. Small trust departments simply can't handle the volume of transactions. Economies of scale and expertise usually lie with the big experienced players. In Hong Kong, a few years ago, a new trust company: Bank Consortium Trust Company was formed by a group of smaller banks and financial houses in order to capture the pension (namely mandatory provident fund) business that none would have been able to going at it alone. With many funds and structures set up under foreign law, you have no choice but to go, say a Caymans lawyer or those banks with Cayman branches as it beyond the scope of what local/region firms can manage.

Next up.....the non-bank or independent trustees