Over the past few years much has been written about the massive transfer of wealth that is about to occur in the US. Experts predict that more than $60 trillion will be handed down from Baby Boomers to their children, grandchildren and others over the next 30 years. But to whom will they entrust these assets?
Industry experts have noted that there has been a devolution in the services offered by large institutions. Instead of offering personalized, comprehensive trustee services as they did several generations ago, they are now more focused on investment management. Wealthy families have noticed this change and are now less likely to use an institutional trustee. Large scale studies indicate that less than 20% of high and ultra-high net worth investors use institutions to manage their trusts¹.
Professional trustees and smaller trust organizations stand to benefit since they can provide the personalized service that consumers want. But the question they need to ask is “Are we ready to capitalize on this opportunity”? Do they have the capacity to take on more clients while still providing high quality service and avoiding operational risk?
Being a trustee requires a diverse skill set. They must be good at quantitative tasks like accounting, investment management, tax issues and administration. But they need to be even better at qualitative functions involving interpersonal relationships and making the big decisions that impact the trust. Often, the urgent matters detract from the ability to take care of the issues that are most important.
Trustees – both corporate and independent – often struggle with accounting, staffing and administration. This stems from issues with technology, people and processes. These difficulties are understandable since it’s challenging for an individual or small trust company to afford the necessary tools and qualified staff.
Professional trustees and smaller trust organizations are often maintaining accounting records using spreadsheets or off-the-shelf programs like QuickBooks. But these systems are not designed for complex trust accounting. They may work for some small, simple trusts but are inadequate for larger, more complicated trusts. And the accounting process becomes cumbersome and prone to failure as the number of trusts increases.
For example, off-the-shelf accounting programs are not designed to distinguish between income and principal or produce the type of reporting that is needed by a trust (i.e., court reports). They are also inadequate for valuing investment portfolios with substantial activity or many diverse positions.
Using spreadsheets to perform accounting tasks can lead to even bigger problems. Spreadsheets require time-consuming and error prone manual input so they are inefficient and lead to delays in reporting. If the spreadsheet is complex, there is usually only one person who knows how to operate it. If that person is unavailable it creates problems. Finally, studies show that more than 80% of complex spreadsheets contain errors, resulting in inaccuracies that can create legal and financial trouble for the trustee.
Similar issues apply to the administrative tasks where documents are often stored only in paper files and key data is tracked using multiple spreadsheets. This means that relationship details and servicing history can be difficult to access when needed. And since today’s trusts can exist for years or even decades, the lack of a trust management database can make life very difficult for a successor trustee.
The same thing applies to staffing. If the trustee is working alone, has a small staff and/or the “wrong” staff, it can impair their ability to serve their clients and expose the trustee to risk.
Finally, some trustees do not have standardized processes to govern how things are done. There are situations where each attorney in a small law firm is using a different operational procedure. This is inefficient and risky. It is advisable to have standardized processes for functions like distributions, bill payments, reporting, record keeping and other operational tasks. Such processes are vital to ensuring quality control and mitigating risk.
So what does the solution look like? Is there is a way to tackle these challenges and improve the quality of service to allow the trustee to grow their business and reduce risk? The most cost-effective solution lies in outsourcing accounting and administrative tasks to a firm with the right technology, people and processes.
By outsourcing, the trustee benefits from state-of-the-art systems designed exclusively for trusts. These include a trust accounting system that can separate principal and income, produce trust specific reports and accountings on a timely basis and properly value investment portfolios. A trust administration system that tracks all important data about each trust. Online document storage plus an experienced staff that performs tasks pursuant to standardized procedures.
Outsourcing can reduce direct costs to the trust and the trustee. But the trustee can also benefit through increases in customer satisfaction, reduced risk, savings in legal fees and reputation, the ability to administer more trusts and more time to focus on important qualitative issues.
In other financial industries outsourcing is the norm. For example, managers of private investment funds typically outsource the accounting, administration and other key functions to third-party administrators. This allows them to focus on investment management and business development rather than administrative details. Outsourcing also makes them more professional by giving them access to technology and qualified personnel they couldn’t otherwise afford. And it saves them money.
Outsourcing administrative and accounting tasks brings similar benefits to trustees which include:
- Allowing the trustee to focus on the most important functions;
- Improving efficiency and quality of service;
- Recording of relationships and servicing history in a database;
- Standardizing processes for quality control;
- Enjoying flexible staffing;
- Reducing cost and risk; and
- Preparing the trust for review and transition.
There is tremendous opportunity for professional trustees and smaller trust organizations as Baby Boomers transfer their wealth to the next generation. Wealthy families seek the personalized service they can offer but many smaller trustees will need to improve their operations to capitalize on this opportunity. An effective way to do this is through outsourcing which can help trustees to both expand their business and be a better steward for grantors and the beneficiaries entrusted to their care.
