While it may seem like comparing your local sole proprietor CPA to that of a big 4 CPA, boutique hotel versus some mega chain or Pizza Hut versus Joe's Pizzeria down the street, it is a little more complicated than that. The range in every comparable measure, from size, to AUM, to professionalism, that the independents offer is absolutely astounding. Joe's Pizzeria may be better run than Pizza Hut. The boutique hotel may have more rooms than the local Holiday Inn. The little CPA may have a $100million trust he's looking after.
There are essentially 3 types of independent trustees:
- Bank cast offs
- Professional firm cast offs
- ex-staff start-ups
Bank cast offs. These trust companies used to part of major bank. By sale or other deal, they became non-bank owned. The most recent case is the Fortis-Intertrust. At one time a bank trustee, now owned by a private equity group. Orangefield was a former ING trust company. These tend to be larger players with a good infrastructure, systems and procedures and international or region capability. Not McDonald's but more like Mos Burger in Asia.
Professional firm cast offs. Many accounting and legal firms set up dedicated service companies to provide a myriad of services such as company incorporation and secretarial, trade/invoicing services, financing and of course trusteeships, so as not to get the partnership (and the liability of its partners) dirty. [Note - Although we often call them "firms", accountants and lawyers that actually practice their trade, are usually required to do so in a form of a partnership. These used to be unlimited liability arrangements as a means of keeping people on their toes. Now, most, if not all, are limited liability partnerships or LLPs. Perhaps fairly limiting their collective liability. Those that are not technically practicing law or public accounting may do so in a limited (liability) company. The easiest way to tell which is which is the name. Partnerships have partner's names in front of the LLP: Price, Waterhouse, Coopers. Clifford, Chance. Companies have "Inc" or "Ltd". Why is that distinction important? Licensed and practicing professionals are sanctioned by their local governing body (Bar Association, Inns of Courts, ICPA, etc.) and are required to carry professional indemnity insurance, have codes of conduct, etc.. Anyone can start a $2 company, run unsupervised, without any insurance and offer you services from accounting to legal research or trust advisory as long as it isn't technically restricted as professional services.] Due to the crack down on potential conflicts of interest, many of these firms are now "non-partner" owned. They just get a retired partner or manager to leave the practice and step up as the puppet owner to get around the rules but you didn't hear that from me. Although they do deal with the general public, most of their business is derived from the founding professional practice who is sure to make a friendly referral. These tend to be small local players but some like Walbrooks (a former Deloitte Touche Tohmatsu service company) can be quite international. Usually quite professional but sometimes lacking in big time capability. A related group are the Company Incorporation/Secretarial/Management firms. They were usually started by Chartered Secretaries, sometimes independent of the other pro firms so they were not technically cast offs. Some of these have grown very large like Amicorp or Portcullis and encompass many services but their bread and butter was CoSec work.
Ex-staff start ups. These can be former private bankers, asset managers, lawyers, accountants trustees or a combination of them, that start up their own firm. Trusts are usually an ancillary service. They tend to be niche oriented, offer fewer services but are "owner operated" and run hands-on, servicing former clients. Often just local with a handful of staff. While more common in Europe and Switzerland, we starting to see a few more of these "mini family offices" in Asia run by former high profile people. Expect more as the economics force more people out of the big companies.
Over time, these distinctions become less important and less clear. As with any industry, there are mergers and acquisitions, breakups and dissolutions. Tricor was an amalgamation of many CPA service companies' and trust businesses but now owned by a bank!
Some also become incestuous with one another. What many outsiders do not see are the brass plate operations: XYZ bank has a trust license in say the BVI but they have only one person there, a cubicle office. Their trustee operation is really sub-contracted to ABC independent trustees. Happens more often then you might think. Sometimes, due to conflicts with big corporate deals on the investment/corporate banking side, the bank trustees need to back out of the deal. Sometimes it's risk, sometimes its non-permissible assets. So they throw a bone to their favorite independent trustee to "front" the trust instead of letting a real competitor win the job. Some arrangements are known, like Abacus (a former Coopers & Lybrand trust company, the "Coopers" in PwC) linked up publicly with Merrill Lynch a few years ago to handle the stuff ML couldn't or wouldn't touch.
The first question asked is usually about can you trust them? Will they run off with my money? In general yes and no respectively. As long as where the trust is set up has trust laws and the trustee is duly licensed and insured then a safety nets exists. Sure there are thieves and cons but on paper you have the protection of the law. Obviously, the smaller the organization the less controls there are to prevent bad deeds in these companies. But some of biggest and most regulated organizations weren't successful in stopping Heinrich Keiber or Jerome Kerviel or the Carroll Foundation Charitable Trust from their naughty behavior either.
Aren't they too small? Some independent trustee companies can rival the international bank trustees in terms of manpower and geographic coverage. In fact, some are bigger. Some are still 3-man operations. Bear in mind that some independents have more AUM, than many local or even regional bank trustees. Some of the largest trust cases have booked with the independents, but you are unlikely to hear about it. Or unless it blows up like the Esteem/Grupo Torras affair with Abacus were several hundred million trusts. Who knows how much is in the trusts billionaire Eric Hotong set up with Hillhead Trustee - a former Arthur Young (the "Young" in Ernst & Young), trust company? As I mentioned above, some of the big banks often use the independents for sub-contracting jobs so who are you to judge? Ask to visit the office and count the number of trust people. Although it varies according to the to complexity of the cases, 1 trust person rarely looks after more than 50 cases. Yes, there are the really simple cases where 1 person can look after 100 trusts, but there are cases where 1 person looks after only 1 or 2 cases. If your trust is going to be part of your empire that is currently using 2 accountants, 1 tax lawyer and 3 administrative staff, you better make sure your trustee has similar manpower to devote to you.
Now as far as the question of whether they give competent advice, that depends on the individuals. Like the big banks, these trustees may have a great brain trust but if the people in your branch aren't good, where does that leave you? Some of the best and brightest tax/legal professionals work in the independents but so do some of the worst. If you have the ear of a former tax & trust senior partner of Big4 CPA or magic circle firm, can you do worse? You can if you get a former tax associate who couldn't land a job elsewhere in the city or was lured more by tax-free salary, tropical beaches and maitai's than career growth. I haven't checked recently but in the early days of the internet, there were some trust companies that actually tried to sell trusts on-line! Fill out the form and charge $50 your credit card and voilà, you supposedly have a trust! God help those that went this route.
Will they go bust? These are people in business and tend to want to stay in business. But everywhere businesses go bust. Who cares I say you? If a proper trust was created, the laws have successor trustee provisions in place. There are almost no fly-by-night operations as cost of getting trust licenses, CoSec/Management licenses, etc is not exactly easy or undertaken lightly.
So what good are they? These players tend to have strong specific skills and expertise. The ones started by tax experts, tend to be tax experts. The ones started by asset managers then to be good asset managers. The smaller ones tend not to do too much and do only things that they are good at or have a niche in. It's like a pie maker. All he bakes are pies. No bread, no cakes, just pies. Practice does make perfect. The larger (or more aggressive) the firm, the more likely they tried to be everything to everyone, meaning when you have a lot of something, you really have a lot of nothing. The major problem with the independents are they are often stretched too thin. The people they have are often more generalists than specialists. They need to put a lot of items on the menu and of course, they can't be good at doing all of them. Unfortunately, some will be incompetent at some also. These players also offer services from top to bottom: company management, trade services, accounting, investment, etc.. Virtually what every non-cash trust needs. They fill the gaps that banks services won't or can't provide. Whereas many banks are shying away from non-bankable assets, most of the independents are ready and willing to do so. At the extreme, these are some independents of the only major players when it comes to non-conventional assets like planes, ships and artwork. Those with strong business acumen, like the CPAs, make better arguably trustees as they are better equipped to manage assets like operating companies. They are more familiar with commercial deals like leveraging, financing, transfer pricing, IPOs, etc. as that what they used to do (or do for their non-trust clients). Sure, bankers know a few things about these things but remember they were sitting on one side of the table and the finance accountants/lawyers were sitting on the other side.
Like cockroaches (in a complementary way), some of the global players are in every inhabitable place in the world. That can be a plus when you need a structure with moving parts in white listed, grey listed and blacklisted jurisdictions. How well their global networks work depend on the organisation. Anyone who has worked in any global organisation can tell you tales of bitter turf wars, non-cooperation and under-cutting. These issues are not uncommon among the global independents. Again, beware of sub-contractors.
Pricing. Without the massive overhead of their banking and pro firm peers, many of these firms' services are less expensive. Without the obscene bank-like revenues, you also end up with lower paid staff. Usually only those without options choose to work at a low pay, low profile player as opposed to a brand name firm. (Not always as the banking and pro firm industry does spit out many good people for no reason other than politics, appearance, age or some other rather irrelevant factor.) There is a some drop off in talent and skill. So you can't always have your cake and eat it too. There is usually a huge drop off in professional development of staff. For some the learning stops as client work is paramount and you end up being outdated very quickly. There simply isn't time or money for frivolous things like training.
Service. Will you get personalized and detailed service? Likely. Sort of like the TV series Cheers....everybody knows your name....well it can be like that. They know you case and details by heart. It shouldn't take 4 "please hold the line" answers before they can track down who's looking after your case. Senior staff turnover is rarely as problematic as it is with the major banks or pro firms. Their senior employees tend to have been with the firm for usually long periods. How many bank RMs and trust officers have been assigned to your case at the big bank? Probably a new one every year. Heck, your RM at the independent could be the owner/director himself. How many Head of Trusts at Citi or Merrill Lynch have you dealt with? Unless you or your family is on a Forbes richest list, probably never. However, turnover at intermediate and junior levels is usually a chronic problem. They often require cheap, multi-talented people who are able to hit the ground running which is hard to find. They often are poor judges of talent and can't afford to hire/retain the best.
Are they above board? Yes and no. Sure the industry is rampant with allegations of assisting tax evasion and money laundering but when you work vice in the bad neighborhoods, there are bound to be some dirty cops. What say you about the shenanigans at UBS and their US marketing efforts? What about KPMG and their tax shelters? Sure, controls and KYC isn't as important as landing the next meal ticket, but hey, Chan Shui Bian (former Taiwan president) allegedly laundered money with some of the biggest banks. So much for their KYC and PEP screens.
Are they good trustees? Yes and no. For some, it's not their core business but just another means to make money. So they make the same mistakes and fall into the same traps as novices do. Some just go through the motions, "window dressing trustees" I call them. Some are too driven by meeting client demands that they forget their fiduciary duties, afraid to bite the hand that feeds them. Being too rigid like the big banks can be takes away from the relationship. Being too flexible may not be in everyone's best interest. Some are the most professional trustees you will ever find.
Are they good at investments? Although some independents have their "investment team" at your disposal or are themselves former bankers/asset managers, you typically have the bankable trust assets placed with a bank. Thought you might get away with rigorous KYC didn't you? The trustee simply opens an account at whatever institution, just like you would. Get the same advice you would. Be offered the same products you would. The major difference is that a trust account, in theory, should be much more conservative and have specific investment criteria than an individual's account. There's no point in setting a up trust to gamble. Remember losing less is a gain.
Bottom line, the independents can have a lot to offer. They can be great, understanding and professional trustees. They can offer a rounder/complete picture to your wealth planning than most bank trustees. The biggest hurdle to finding the good ones. It takes some skilled due diligence. Merrill Lynch vetted over 140 independent trust companies before settling on Abacus. It takes a certain degree of trust, the kind you may be giving the big bank trustees far too easily.
Next up, the financial providers.
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