No Black Holes
BANKING by Jean Gruss | Editor/Lee-Collier
Financial planners and estate-planning attorneys often joke that trust departments are the black holes of the banking world.
Once someone has named a bank trustee to manage assets and later dies, beneficiaries' calls to the trust department often go unanswered. It's easy to understand why: banks have no incentive to beef up their trust departments because beneficiaries often have to jump through time-consuming and expensive legal hoops to change trustees.
What's more, as large regional and national financial institutions acquire local banks, the duties of the local trust department have increasingly been consolidated to out-of-town call centers. The resulting high turnover in the trust department translates to poor service, many attorneys and financial planners say.
Looking at the market and then sensing an opportunity to fill a niche for highly personalized trust services in Fort Myers, three SunTrust Bank veterans started Investors Security Trust Co. in 2004. Using the latest money-management tools, they can efficiently manage hundreds of investment portfolios without having to hire dozens of managers and analysts. That means they can devote more resources to the labor-intensive trust side of the business.
Leading the team is Charles Idelson, who has been a banker in Lee County for nearly three decades and most recently was president and CEO of SunTrust Bank of Lee County. Two other SunTrust veterans, Andrew Sheppard and Chris Gair are executive vice presidents. Sheppard is senior investment officer and Gair is senior trust officer.
To help them grow the business, Idelson recruited a board of directors that includes well-connected individuals such as David Lucas, chairman of Bonita Springs-based The Bonita Bay Group, and Gary Trippe, CEO of Fort Myers-based insurance company Oswald Trippe.
They've apparently hit a lucrative spot in Southwest Florida' crowded financial-services market. In just two years, the company has gathered $210 million in assets and they're well on their way to their goal of managing $1 billion by 2014. Investors Security Trust has started turning a profit this year, two years ahead of schedule, Idelson says.
Their success so far illustrates several lessons. The first is that startups can succeed when they focus intensively on narrow segments of the financial services market that have been virtually abandoned by larger banks. The second is that there's a lot of money to be managed in towns such as Fort Myers, which are often overlooked in favor of glitzier neighbors to the north and south, such as Sarasota and Naples.
A lawyer's suggestion
Fort Myers trust and estate attorney Craig Hersch was the first person to urge Idelson to start a trust company, sometime in the late 1990s. "I told Charles they had a good team," Hersch recalls telling Idelson. "Why don't you take this team and start your own trust company?"
At the time, Idelson was president of SunTrust Bank in Lee County and had no plans to leave a bank he had been with for about 25 years. But when Idelson left SunTrust in 2002 after refusing corporate orders to cut local staff, he reconsidered Hersch's advice.
Idelson didn't follow the typical path of many late-career bankers, which is to start a community bank. "I thought there were too many community banks," Idelson says. "In today's business environment, you need a niche and you need something different."
A trust company fit the bill. Including Investors Security Trust, there are only 15 non-deposit trust companies based in Florida and eight of them are based in Southwest Florida. There are none in Fort Myers, though one trust company in Lee County caters to residents of Sanibel and Captiva islands.
In addition to Lucas and Trippe, Idelson enlisted Hersch to join his shareholder board. To chair the board, Idelson turned to David Jones, a prominent bond-market economist and expert on the Federal Reserve. Jones, who owns a condo on Sanibel, had been a regular guest speaker at gatherings of SunTrust executives and favored clients in Fort Myers over the years.
"We put a business plan together and raised $5 million in capital," Idelson says. "It took about a week [to raise the money]."
Holding beneficiaries' hands
Idelson says Investors Security Trust's mission is to focus on what he says is the weakness of bank trust departments: an intense focus on customer service in the administration of trusts, combined with expert money management.
In particular, Idelson saw an opportunity to focus on trusts and portfolios in the range of several million dollars. Although sizeable for a startup firm, these trusts don't get the attention of bank trust departments because they're relatively small. To emphasize personal service, Idelson and his team prefer to meet clients in their home.
For example, someone might hire Investors Security Trust to be a trustee for a beneficiary spouse who is elderly and not savvy about personal finance. When the person dies, Investors Security Trust steps in to take care of everything for the spouse, from paying bills to helping sell the family home. In addition, the company will manage the trust's investment assets conservatively so that the beneficiary can draw upon them as needed. "We are her family," Idelson explains.
Idelson and his team are well known in Fort Myers from decades of banking experience, making it easy to coordinate trust management with accountants and lawyers as well as winning new business. "We know all the attorneys and CPAs," he says.
Investors Security Trust makes money by charging a fee based on the investment assets it manages. The firm charges an annual 1% of a client's first $1 million. The fees drop gradually as the account grows; it charges 0.45% of assets in excess of $6 million. Roughly half the company's assets are tied to trust management and the other half to investment management. However, the aspect that sets Investors Security Trust apart is that the investment management expenses cover the trust services too. That's so even though the trust administration side of the business is more labor intensive; it has eight employees, versus two who manage the investment accounts.
Gathering assets on the trust side of the business can be challenging. That's because many trusts do not have a clause that allows the beneficiaries to fire the trustee. It can take up to six months of legal maneuvering to get a trustee to resign, a battle few are willing to take. Fortunately, many trusts written in the last 15 years have provisions that allow for beneficiaries to remove the trustee and appoint a new one. And of course, the grantor can change the terms of the trust while he's still alive.
Although the minimum that Investors Security Trust will manage is $500,000, Idelson says the firm strives to earn new business. Recently, he persuaded one investor to allow him to manage $50,000 and told him he wouldn't charge him if he wasn't happy with the service. Within a month, Idelson says Investors Security Trust was managing $2 million for the client.
Trading with technology
Idelson credits the company's success in large part on keeping costs under control using technology, especially on the investment side. "You couldn't do this five years ago," he says.
Sheppard, the firm's senior portfolio manager, uses portfolio-tracking software from Chicago-based investment research firm Morningstar that automatically updates hundreds of individual portfolios. He also uses Morningstar's independent research to sift through 1,800 stocks for good investments.
To keep trading costs low, Sheppard uses an electronic trading program called FutureTrade that lets him trade stocks for pennies per share. FutureTrade has developed complex algorithms to help traders find the best trades in different markets, further reducing costs. That's especially useful when Sheppard has to trade a large stock position because the program can break it up into smaller trades that won't bump up prices.
On the bond side, Sheppard tracks prices with a Bloomberg terminal. Because most bonds don't trade on an open market like stocks, it's critical to have access to the bond-pricing data that Bloomberg provides. Sheppard executes bond trades through Memphis-based bond brokerage Duncan Williams. Since the firm's inception in 2004, Sheppard and Idelson estimate that they saved $225,000 in trading costs using new technology.
With all this technology, Sheppard says he can manage 250 investment accounts efficiently. "Our next open position will be a portfolio manager," Sheppard says. The firm already manages 200 accounts and adding another portfolio manager will let them manage 500 accounts.
Firm plans for growth
Investors Security Trust is considering expanding its business past Fort Meyers.
One area that appears to be underserved is Charlotte County, Lee's northern neighbor. Idelson says Charlotte would be a more logical place to expand than Naples, where 52 trust departments already fight for new business.
"The difficulty of expanding outside our headquarters is staffing," Idelson says. "Good trust administrators are hard to find. They don't make them anymore."
And there are still plenty of opportunities in Lee. In addition to baby boomers and retirees, there are prospects among small-business owners and entrepreneurs who have become wealthy as a result of the real estate boom of the last few years.
"There's a lot of money out there," Idelson says.
Conservative stock pickers
When you're managing trust assets, it's best to stick to conservative investment strategies when it comes to stocks.
"What we look for are stocks trading cheap relative to their growth rate," says Andrew Sheppard, executive vice president and senior portfolio manager with Fort Myers-based Investors Security Trust.
Sheppard filters a database of 1,800 stocks from independent research firm Morningstar at least once a month and looks for companies that meet the firm's "fair value estimate." That's an estimate of how much excess cash a company will generate in the future, adjusted for timing and risk.
Sheppard then scrutinizes the 200 to 300 stocks that trade at meaningful discounts to their fair-value estimate. One recent example of a stock that made the cut was giant drugstore chain Walgreen. "That's one that's been very expensive and hasn't made our screen," Sheppard says. But the company recently appeared on Sheppard's list because earnings have been rising and the stock price has remained relatively flat.
After he's combed through the computer-generated list of potential stocks, Sheppard weeds out those he thinks are too speculative. He usually tosses out a quarter of the stocks that make the list.
Sheppard says he tries to keep his clients portfolios well diversified, without one stock accounting for more than 3% of the stock portion of the portfolio. Ideally, Sheppard says he allocates 70% of a portfolio to stocks of large companies. He splits the remaining 30% among stocks of small, midsize and foreign companies. Sheppard declines to reveal his portfolios' performance, though he says they haven't been far off from his bogey, the S&P 500.
To keep costs under control, Sheppard limits the annual turnover in the portfolios to about 20% to 30%. Still, when stocks are overvalued, Sheppard will sell. He uses independent research from firms such as Zacks Investment Research to help him make sell decisions.
SOUTHWEST FLORIDA TRUST COMPANIES
Gulf Coast-based non-deposit trust companies (data as of December 31, 2005; amounts in thousands)
Total Total Total Net
Name County Assets liabilities Capital Income
Brown Bros. Harriman Trust Co. Collier $1,592 $398 $1,194 $13
Caldwell Trust Co. Sarasota 2,387 84 2,303 736
Bank of Florida Trust Co. Collier 2,786 130 2,656 428
Investors Security Trust Co. Lee 3,910 20 3,910 ?164
Raymond James Trust Co. Pinellas 6,473 1,357 5,116 ?701
Sabal Trust Co. Hillsborough 6,131 1,389 4,742 723
Salem Trust Co. Hillsborough 3,227 354 2,873 240
Sanibel/Captiva Trust Co. Lee 4,134 215 3,919 443
Source: Florida Office of Financial Regulation