For money managers and their competitors, dealing with aging baby boomers can be a matter of trust.
In order to capture their nest eggs - a segment that could be potentially worth more than $10 trillion - they are setting up trust companies which will offer a variety of fiduciary services beyond investment management to tax-weary baby boomers and their heirs. As the aging boomers begin to retire and pass away, a massive transfer of wealth is expected to take place, and managers are positioning themselves to capture those assets. Various forecasts say $5 trillion to $10 trillion in wealth will be passed to the next generation in the next two decades, affecting both the size of the market and its characteristics (Pensions & Investments, Nov. 13, 1995).
"If you believe the numbers, it has the potential in the late '90s to be like the 401(k) market (was) in the '80s," said C. Paul Tyborowski, president and chief executive officer of Columbus Circle Trust Co., the trust company started this year by Columbus Circle Advisors, Stamford, Conn. "If DB and DC is a zero-sum game, then wealth transfer for individuals is a $10 trillion market everyone wants to go into."
While banks - the traditional purveyors of trust services - are spinning off trust departments into money management subsidiaries to seek out institutional business, money managers and insurance companies are going in the opposite direction and setting up trust companies.
"It is absolutely going to be a battlefield," said Kenneth Hoffman, managing director and president of consultant Optima Group Inc., Fairfield, Conn. All kinds of financial companies are joining in the fray, including insurers, brokerage firms and money managers, all seeking to pick up assets, he said.
The wealth transfer is creating a need for fiduciary services that go beyond the traditional investment manager's functions, said the experts. The trust companies are taking relationships that involve tax and estate planning, accounting and other skills that don't normally reside in money management, they said.
Offering trust functions is a way for managers to ensure their wealthy clients maintain their relationship with the firm, even as they are placing their assets in living trusts and other structures to avoid probate, said trust and estates attorney Bruce Wexler, a partner of the law firm of Loeb & Loeb L.L.P., in New York.
Besides insurance companies and money managers, diversified financial companies such as Fidelity Investments, Malvern, Penn. and Charles Schwab Co., New York, have set up trust companies in recent years, as well as brokerage houses including Merrill Lynch & Co., New York, and PaineWebber Inc., New York.
"As the lines become blurred between banks, brokerage firms and money managers, this is really a way to offer all of the services that everybody is offering," said Mr. Wexler.
Among recent developments:
Wood, Struthers & Winthrop, New York, the subsidiary of Donaldson, Lufkin & Jenrette focused on money management for high-net-worth individuals, opened Winthrop Trust Co. as a wholly owned subsidiary last year.
The Chicago Title & Trust Co. separated its trust and investment management operations from its title insurance business this year and placed it under a new subsidiary, The Chicago Trust Co., which manages money for institutions and individuals, as well as its CT&T Funds mutual fund complex.
Phoenix Home Life Mutual Insurance Co., Hartford, Conn. opened a trust company subsidiary in April. The new firm, Phoenix Charter Oak Trust Co., offers trust, administrative and fiduciary services including living trusts, investment management, securities custody, personal and institutional non-profit funds and escrow arrangements.
The trust company was a natural outgrowth of the activities of the insurance company, said Michal Bobryk, senior vice president and senior compliance officer at Phoenix Charter Oak. Phoenix was increasingly trying to provide comprehensive lifetime tax, estate and financial products and planning services to clients, he said. For example, Mr. Bobryk said, when an insurance agent sold a life insurance policy to a client, he or she might suggest that the policy be put in a life insurance trust for tax purposes.
The trust company provides a structure to implement those estate-related services the agent was recommending in its role as financial planner, said Mr. Bobryk.
"The client wins a more efficient use of the policy - conveniently provided by the agent - and the insurance company benefits because, having been placed in the context of a well-thought-out program, the policy is more likely to be persistent and profitable for the company," he said.
Additionally, Phoenix Charter Oak has the advantage of having as a sister company Phoenix Duff & Phelps Corp., the money manager formed last year by the merger of its parent with Duff & Phelps Corp., which handles the management of Phoenix Charter Oak's trust accounts.
"We're trying to make more efficient use of the very substantial tools that the Phoenix organization has at this point," said Mr. Bobryk. He noted the insurance company has been active in the small employer qualified plan market - plans with 25 employees or less - which may not be large enough to interest an organization like Phoenix Duff & Phelps, but which the trust company could handle.
Earlier this year, Columbus Circle Advisors opened Columbus Circle Trust Co., its own trust company. The trust company allows the money manager to extend downward from the traditional pension markets to individuals, smaller pensions and qualified plans of current clients by providing trust services with institutional-quality performance, said Mr. Tyborowski.
The trust company has the advantage of being able to focus on clients better than a bank trust department or mutual fund can, said Mr. Tyborowski.
"The mutual fund is a nice investment vehicle but it may not suit all people. It's sort of an impersonal vehicle," said Mr. Tyborowski. Rather than gather assets from several thousand shareholders, as a mutual fund does, the trust company can give a higher level of service to a more limited clientele and less of a mass market approach, he said.
As for the bank-related trust departments, they are being affected by the wave of bank mergers and their concentration on retail and commercial banking, said Mr. Tyborowski. It's become hard to tell if their private client departments are driven to handle financing or investments, he said. On the other hand, the manager's trust companies are interested only in managing investments.
"We are not a deposit-gathering organization," said Mr. Tyborowski. "We're looking at wealth preservation and wealth appreciation and that's it."
But don't count the major banks out yet, warned Optima's Mr. Hoffman.
He noted some are upgrading their personnel, systems and range of product. The banks have even become willing to serve as a conduit, finding the right product for the client, even if it is outside the bank, in order to keep the trust account.
