GRAND RAPIDS — Trusts services tend to be a steady growth business — these days driven in part by the demographics of an aging society and the fact that people are living longer.
Rising affluence also is a factor in the demand for trust services.
“A hundred years ago very few people had any assets to leave behind. Their estate was maybe some household furnishings and a horse,” said Douglas Klein, president of Northern Trust Bank West Michigan.
“Today, we’re quite an acquisitive society, so we tend to leave all manner of assets and real estate. Somebody said 20 years ago we were a nation of savers and now we’re a nation of investors, and I think there’s some truth to that.
“The explosion of the IRA and 401K world has made everybody have to learn something about the investment world.”
Chicago-based Northern Trust Co. derives about 78 percent of its revenue from trust and investment services, and 60 to 70 percent of that is from the trust world, Klein said. The remainder comes from loan income.
In fact, the company’s Grand Rapids office is the most successful start-up office of the 97 offices in Northern Trust’s 12-state footprint.
“We started at zero assets four and a half years ago and have about $1.1 billion today just in this office,” he added.
There are two main categories of trusts: Corporate-institutional trusts and personal trusts.
The Northern Trust office in Grand Rapids is primarily a personal trust office, but the company as a whole also has a significant corporate trust business, said Thomas Swets, senior vice president of trust administration.
Klein said that’s true of Northern Trust’s competitors, as well. In the institutional world, trusts include pension plan administration, 401Ks and bond trusteeships, among others.
On the personal trust side there are tools such as investment management accounts and irrevocable trusts.
“There are revocable trusts and agency accounts for people who are still living,” Swets explained. “We also have irrevocable trusts, which are primarily set up after people pass away.”
An individual can make changes or additions at any time to a revocable trust, while an irrevocable trust, once established, cannot be changed.
The average Northern Trust client has about $3 million to invest, Klein noted. People typically hire the firm to manage money during their lifetimes, perhaps through a revocable trust or an agency account, and also to set up estate plans in the form of trusts set up for tax purposes and for family protection, Swets explained. The latter usually spring up at the individual’s death.
“Estate planning is something you ought to be doing at a fairly young age,” he advised. “Talking with trust departments about managing your money is something that probably has less to do with what age you are and more to do with how much you accumulate.
Klein said his bank strives to be advice-driven rather than product-driven. Often times Northern Trust officers are part of a “family advisory triangle” that includes an estate-planning attorney and a CPA, all working together to build a mutual client’s estate plan.
Most of the bank’s prospects, Swets said, are people referred to Northern Trust by their attorneys, their CPAs or the firm’s existing clients.
Some companies have all the team members in house, noted Pamela Herr, vice president of private banking at Northern Trust. Herr said that arm of the company provides trust clients with all the traditional banking services.
As for trusts, she said, Northern Trust uses local lawyers and local CPAs, which provides a kind of check system because they’re not all working for the same company.
The “significant” banks have evolved over time and most have begun to adopt a business model that includes investment management services, according to Bruce Vandegrift, marketing business manager for Bank One Private Client Services.
“What services people really need, what they’re coming to us asking about, are not simply trust services as they did in the past.
The demise of the Glass-Seagal Act leveled the playing field for financial service providers and changed the nature of the business, he said. With its abolition, banking, brokerage and insurance firms were at liberty to move into each other’s product lines.
Now most of the larger banks offer the spectrum of services and products that any large investment management firm would have, Vandegrift said, noting that across its footprint, Bank One has about $171 billion under management, and a great deal of it is in the traditional trust format.
“One of the things that distinguishes banks in this area of business is that we do have deep and broad expertise in the trust business and have the ability to deliver that, as well as what’s inside of it, which is investment or asset management.”
For most individuals and investors, the core of the asset management business is stocks, bonds, mutual funds, money market funds and so forth, he said.
“Being good in this business means understanding all those things and being able to recommend to clients the right balance, the right asset allocation.”
Vandegrift said Bank One Private Client Services is seeing increased demand for asset management services across the board.
Like all the other players in this arena, he added, Bank One anticipates an increasing need for services as the huge baby boomer generation receives from the World War II generation — their parents — “the largest wealth transfer in history.”
Trusts used to be the single best tool for minimizing federal estate tax, Vandegrift pointed out, but the federal estate tax has been significantly liberalized in recent years and is legislated presently to go out of existence in a short while . . . for one year. With those changes in the tax law, the need for trust devices that minimize or reduce tax has also diminished.
“That’s very different from where the legal landscape was not very long ago. Now people of rather significant means can leave virtually all of their assets to anyone they choose without paying any federal estate tax,” Vandegrift said. “Fewer people are affected by the tax so fewer people need the structures to help eliminate it.”
Steve Groenink, senior vice president and head of Standard Federal Bank’s wealth management division, said most banks would like to see their trust group make up anywhere from 15 to 25 percent of net income.
Standard Federal, too, is seeing greater demand for investment products and services in general, particularly in the Grand Rapids marketplace.
He said about 80 percent of the wealth management division’s new clients over the last five years have come to the bank for investment management services.
“There aren’t a lot of people walking in saying, ‘I want you to be my trustee.’ They may not need us as a trustee today, but they will down the road. In the meantime, we can manage their assets.”
Initial demand tends to be more investment oriented, and the demand for traditional trust services typically follows as clients accrue wealth, Groenink said.
The goal is to grow with the client. That means meeting clients’ needs at an early point in their financial life and serving their changing investment needs over time.
“You have to have the services and products to grow with clients financially,” Groenink remarked. “More people are coming to banks for investment management because they understand that banks have really taken an aggressive approach to managing money.”