Why did your advisor recommend that trust company?
A trust needs a trustee. The one your advisor suggested was chosen for a reason — and the reason is usually printed on the trust company’s own website, addressed to advisors, not to you.
Consumer education, not investment advice. Paul Powell is not currently a licensed financial advisor.
For most of the last century, naming a bank as your trustee meant the bank took over the investments too — and your advisor lost the account. A newer kind of trust company solved that problem for the advisor. Under a “directed” trust, the trust company handles the administration, your advisor keeps managing the money and billing on it, and you pay both. The referral isn’t corrupt. It’s a retention strategy.
The trust company that promises never to compete
When you set up a trust — for a child, for an aging parent, for your own estate — somebody has to serve as trustee. For a long time, if the family didn’t want an uncle doing it, the answer was a bank trust department. And a bank trustee did two jobs: it administered the trust (the records, the tax filings, the distributions, the fiduciary calls) and it managed the money. One fee, bundled. One community bank’s published 2023 schedule prices the bundled job at 1.20% a year on the first million, with a $5,000 minimum.
From your advisor’s side of the desk, that arrangement has a defect. The day the bank becomes trustee, your account walks out the door. So the industry fixed it. A “directed” trust splits the two jobs: a trust company serves as the administrative trustee and takes its investment instructions from a named “investment adviser” or “trust director” — your advisor — who keeps managing the assets and keeps billing on them. State legislatures competing for trust business wrote the statutes; a uniform version was approved in 2017 and has since been adopted, in some form, in roughly twenty states.
The trust companies built for this arrangement call themselves “advisor-friendly,” and their marketing says the quiet part in bold. One puts it this way: “The wealth stays where it belongs, with the financial advisor.” Another, to advisors: “Unlike large banks and trust companies who may compete with you for your wealth and investment management business, we are dedicated to helping you achieve new levels of growth.” At least one national trust company describes itself as formed “by RIAs for RIAs.” Read those sentences again and notice who they’re written to. You are the wealth that stays where it belongs.
Now the fee math. The same community bank that charges 1.20% for the bundled job charges 0.60% on the first $2 million when it administers and somebody else manages the money. Add your advisor’s fee — commonly around 1% — and the unbundled trust runs roughly 1.6% a year, against 1.2% bundled. Same trust. Two invoices. The trustee fee didn’t get cut in half so you could save. It got cut in half so there’d be room for a second recipient.
And the money can move one more way. Some trust companies pay for referrals: one trust company’s own brochure says it “compensates the respective entity/party for referrals made to [it] that result in the opening of a new account,” and reassures readers that the referral fee “will not increase any fee charged to the client.” Others are owned by the advisory firms that send them business, or are affiliates of the brokerage your advisor works for — so the trustee fee and the advisory fee land in the same house. Every version is legal. Every version is disclosed somewhere. None of them comes up in the meeting where the trust company gets recommended.
Completely. The statutes were written for it.
Directed trusts are not a loophole; they are the design. The Uniform Directed Trust Act, as enacted in Virginia and elsewhere, says a directed trustee must follow the trust director’s instructions unless doing so would be “willful misconduct” — and then adds, in its own words, that the trustee “does not have a duty to” monitor a trust director, or to “inform or give advice to a settlor, beneficiary, trustee, or trust director concerning an instance in which the trustee might have acted differently than the trust director.” That is the law working as intended, not failing.
The referral economics run on disclosure, the same as everywhere else on this site. Form ADV Part 2A requires an advisory firm to describe any material relationship with a “banking or thrift institution” — which is what most trust companies are chartered as — and, where that relationship creates a material conflict, to “describe the nature of the conflict and how you address it.” A separate item requires disclosure when anyone who is not a client provides the firm an economic benefit, and when the firm or a related person “directly or indirectly compensates any person” for client referrals. It is all in a public file. It is not in the conversation.
A traditional corporate trustee was a check on your advisor. A directed trustee, by statute, is not. The old bundled model was expensive, but it bought something: a second institution with a fiduciary duty looking at the investments. The directed model removes exactly that. The trustee’s fee buys administration; the statute relieves it of any duty to monitor the person directing the money — who is the person who recommended the trustee. Sometimes that’s fine: a good advisor, a long history, a family that wants continuity. But understand what was optimized. It wasn’t oversight.
Let the attorney pick the trustee — and add up both invoices
The trustee is a legal decision before it is an investment decision, so start with the person whose only client is you: your estate-planning attorney. Ask for two or three trustee candidates, and insist that at least one of them is a full-service corporate trustee that would manage the money itself. You may still choose the directed structure. Choose it against a real alternative, with both fee schedules in writing.
Then do the arithmetic the proposal didn’t. Trustee fee plus advisory fee plus the expense ratios of whatever the trust holds, in dollars, per year. Put the bundled quote next to it. If the directed version costs more and the only thing it preserves is the advisor, you have learned what the recommendation was for.
Pull the advisor’s Form ADV — it takes fifteen minutes and the same free file you’d use for a background check — and read the items on affiliations and referral compensation. Then ask the question below, in writing, the way the Method asks everything: before the decision, not after. One more thing to get in writing, because trusts outlive the people who draft them: who has the power to remove and replace the investment adviser to the trust? If the answer is “nobody but the adviser,” the trust has been drafted for the adviser’s continuity, not yours.
“Which trust companies did you consider, and why this one? Do you, your firm, or any affiliate own any part of it, receive referral compensation from it, or receive anything of value when clients use it? Under the trust you’re proposing, what is the total annual cost — trustee fee, your advisory fee, and fund expenses — in dollars, compared with a full-service corporate trustee? And who will have the power to replace you as investment adviser to the trust?”
A trust is the one document in your financial life designed to outlive the person who set it up. Whose continuity was it drafted to protect?
Already have an advisor? Run the same six steps on them.
The Evidence-Based Hiring Method — six steps, the minimum criteria, and all twelve written questions with the answer guide. Built for hiring an advisor. It works just as well to audit the one you already have.
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