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  • | 10:15 a.m. September 10, 2010
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Business. Trust companies

Industry. Banking

Key. Affluent retirees present special challenges to the financial service industry and companies who can cater to their needs will benefit.

By the Numbers. Click here for a detailed look at the performance of Gulf Coast trust companies.

As the recession tore through the banking and investment world, one little corner of money management largely escaped the carnage: trust companies.

There are a half dozen state-chartered, non-deposit trust companies headquartered on the Gulf Coast and they have been relative islands of stability in a sea of industry chaos. As their name implies, these are banks that manage investor money and have trust powers but don't gather deposits or make loans.

Trust companies from St. Petersburg to Naples manage millions of dollars for mostly retired, high-net-worth individuals who have grown dissatisfied with their banks or brokerage firms. They promise customers conservative investments with advice on nearly every aspect of personal finance, from selecting insurance to buying a car. And when a customer dies, the firms hope to manage the money in trusts for their heirs or other beneficiaries for decades to come.

Although the bulk of their business is managing investments, that's not how trust companies market themselves. In fact, most won't publicly disclose past investment performance and one won't even disclose the fees it charges customers. While that leaves them vulnerable to criticism from more forthcoming competitors, many trust company executives say an investment track record isn't customers' top concern.

For a negotiable fee of about 1% of assets under management, trust companies shower attention on a segment of the market they say has been abandoned by larger banks and investment firms: Retirees who have from $1 million to $10 million in assets and are more interested in capital preservation than appreciation.

In general, trust companies say their retired clients want to be sure they're not going to outlive their savings, they prefer dividend-paying stocks and conservative bonds, they need help with personal-finance decisions such as buying a car and they want a capable manager to handle their financial affairs for their spouse or heirs if they become incapacitated or die. These factors are more important to them than beating a benchmark such as the Standard & Poor's 500-stock index, trust companies say.

While not hugely profitable, trust companies made money for their shareholders in 2008 and 2009 while their counterparts in banking and brokerage firms struggled mightily. Because their elderly customers have come to rely on them for even small financial tasks, customer retention is high and fee income is consistent from year to year.

“To some degree, we benefit from the flight to quality,” says Chris Gair, senior trust officer at Investors' Security Trust Co. in Fort Myers.

Do it for me

What these companies pitch is a sort of personal-finance concierge that will look after affluent retirees' affairs in retirement and after they die.

Trust companies say larger banks have largely abandoned clients who have accumulated between $1 million and $10 million, relegating management of their trusts to distant call centers or trust officers who constantly change.

What's more, many retirees seek alternatives to brokers and money managers who lost money in 2008, a terrible year for stocks. Trust companies say they have the added benefit that they can act as fiduciaries for their clients in case they're incapacitated or die. That's important to the mostly male clients who worry about the welfare of their spouses who often outlive them.

Trust companies usually invest clients' money in large-company, dividend-paying stocks and high-quality bonds. This provides the income they need in retirement while smoothing out the volatility of their portfolios from one year to the next.

“Our clients are saying, 'Help me keep what I have and get a reasonable return. I care about protecting wealth from inflation and having a good lifestyle',” says Ward Curtis, Jr., chairman and CEO of Sabal Trust Co. in St. Petersburg. The firm manages $1.1 billion and charges 0.7% to 1.3% of assets annually depending on the size of a client's portfolio.

Ultimately, trust companies hope that they'll be named the corporate trustee to manage the money for beneficiaries and heirs. “The retention rate on business where you're named trustee or co-trustee instead of just investment manager is significantly higher,” Curtis says.

Trust companies say they stayed out of trouble during the financial crisis because they didn't gather deposits or lend money. “The biggest distinction is the fact that the trust company models do not rely on revenue from lending,” says Terry Igo, president of the Sanibel Captiva Trust Co., which manages $500 million and has added offices in Naples and Tampa. Sanibel Captiva Trust doesn't disclose the fees it charges customers but says they range from 0.8% to 1.5%.

While Salem Trust's clients are municipalities and public-employee pension funds, the idea is the same. The Tampa-based company's business is custody of assets and charges 0.04% to 0.09% annually. It provides investment management for about 10% of the $6.2 billion it manages.

Trust companies say what distinguishes them from bankers or brokers is that they provide a wide range of services to their clients. What's more, they say the fee-based approach means they're not selling clients products based on commissions.

Trust companies work in concert with estate-planning attorneys and accountants to manage a wide variety of client assets, from real estate to stocks and bonds.

“Two weeks ago, one of our partners was involved in helping a client sell a boat,” says Curtis. Sabal Trust also recently helped an elderly client buy a car and visited two assisted-living facilities to help another client establish an emergency evacuation plan.

Expense control

Establishing and maintaining trust operations can be very costly because it's such a labor-intensive business. Each manager must keep track of dozens of accounts and quickly respond to client inquiries.

“We developed our own software for recordkeeping; that's been our saving grace in terms of being productive,” says Kelly Caldwell, president and CEO of Caldwell Trust Co. in Venice, who trained as an electrical engineer. Caldwell Trust manages about $450 million and charges 1% annually for investment management and 1.2% if the firm is also the trustee.

The ability to call up customer information at the click of a computer mouse lets trust-company employees handle more clients than in the paper-file days. For example, at Sabal Trust, employees can handle 75 clients per employee.

That's important because the firms become more profitable as they add clients and assets without having to hire more people. “The only way we can leverage is to let people work smarter,” says Caldwell, who notes that future business opportunities for his firm may include providing trust services for out-of-area community banks that don't have resources to establish their own.

In addition, trust companies don't spend a lot of money advertising. For example, Igo says Sanibel Captiva Trust prefers to contribute money to charitable causes overseen by its clients. “We're not into chandeliers and $5,000 pieces of artwork,” he says.

Some of the firms' best marketers are its own shareholders, who benefit by receiving a dividend and appreciation of stock. In many cases, trust-company shareholders include clients and employees.

Trust companies are generally smaller, flat organizations where top executives often are personally involved in many tasks. For example, Gair says he's been called to help sort through the house of deceased clients for which the firm had been named trustee.

“Where it hits home is when you get into the generational needs,” says Caldwell. “My affairs don't stop when I die.”

Private track records

While past performance doesn't guarantee future results, investors want to know whether managers are competent relative to a benchmark such as the S&P 500, especially over the long term through the market ups and downs.

Most trust companies on the Gulf Coast decline to publicly reveal investment performance. That's surprising considering their principal business is investment management.

“Selling performance isn't really what we do,” says Kelly Caldwell, president and CEO of Caldwell Trust Co. in Venice. “We're not competing on performance,” echoes Ward Curtis Jr., chairman and CEO of Sabal Trust in St. Petersburg. “We don't run a mutual-fund type company for our clients,” says Terry Igo, president of Sanibel Captiva Trust Co. “It's wealth management, not investment management.”

Some trust companies say disclosure constitutes advertising, which is regulated by securities rules. Others say outperforming benchmarks attracts “hot money” from investors chasing the latest investment fads, adding to administrative costs. Still others say they manage individual accounts that are tailored to an investor's risk tolerance and that a composite performance record isn't accurate.

But a few trust companies say investors have become much more savvy about selecting money managers. Increasingly, they are demanding control over the investment choices or choose managers who can back up an investment philosophy with well-established track records.

“Will you make a better decision not knowing? I don't think so,” says Chris Gair, senior trust officer at Investors' Security Trust in Fort Myers. The firm is one of the few trust companies that publicly disclose investment performance information.

Gair says disclosing a manager's investment performance is akin to finding out how many procedures a heart surgeon has performed successfully. “You must be transparent,” he says.

For example, the Investors' Security Trust's investment performance of the stock portfolios over which it has discretion outperformed the S&P 500 index over three- and five-year periods. Since inception in March 2004, the trust company's equity performance has notched an annualized 3.2%, nearly double the S&P 500's 1.7% annualized returns over the same period.

Institutional investors routinely demand the same performance data from their money managers. In fact, they seek this kind of money management from firms such as Salem Trust Co. in Tampa.

Salem specializes in managing money for municipalities and public-employee pension funds.


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