Trusts become valuable products as assets multiply: banks and trust companies vie for California cash.

Trusts become valuable products as assets multiply

Banks and trust companies vie for California cash

In 1974, trust companies and bank trust departments administered close to $600 billion nationally. Today the figure is $3 trillion

The growth in assets held in trust has been particularly rapid in California. Banks have beefed up their trust departments, and trust companies such as Chicago-based Northern Trust Co. have moved into the state.

Jim Quandt, managing director of financial management and trust services for Security Pacific Bank has seen this growth firsthand. "We have one account that includes a single-family home in La Canada, a second home in Laguna Beach, some Disney stock . . . . This is an account that was worth $1 million four years ago and is now worth $5 million. As California has grown, so has the wealth of individuals and that has fueled the growth in the trust business."

U.S. Trust Co. of California, formed in 1986 when New York-based U.S. Trust Corp. acquired the Los Angeles investment management firm Summit Management Co, followed the money to California.

"You go to places where wealth is being created," said Charles Wert, senior vice president and senior trust officer at U.S. Trust of California. "The East Coast grew up with a great deal of inherited wealth and is a fairly mature marketplace whereas, being the frontier, the West has developed entrepreneurial wealth. Those people are too busy running their enterprises to make sure everything is properly placed."

Trust companies and departments typically offer such services as estate planning, investment management, financial planning, trustee or custodial services and private banking. But only recently have they become significant profit centers for banks.

"Somewhere in the '60s the industry in the aggregate got off track," said Alexander Anderson, executive vice president in charge of the asset management division of Wells Fargo. "They no longer seemed to be providing the services that appealed to people who were amassing great wealth.

"The very large accounts were all the accounts of people who had created fortunes in the '20s, '40s and '50s and a surprisingly small amount of business was coming from people who were creating fortunes in the '60s and '70s. The mindset in the industry was `our profitability is going down,' and they started to cut costs. Since they weren't paying competitive salaries and couldn't attract the best people, the public perception of trust departments worsened," he noted.

That changed in the 1980s when banks began to staff their trust departments with more skilled professionals and to recognize the burgeoning western market.

Quandt noted that Security Pacific employs 675 professionals statewide dedicated to personal trust servicing. "If you compare banks with private money managers you'll find the banks have done an exceptional job," he said. "I have in-house research staff, full in-house real estate investment and management capability with more than 40 people managing real estate, 24 tax specialists . . . . You're looking at a fully integrated trust and investment company within a bank."

People are beginning to realize that banks are very competent investment advisors, according to Anderson. Northern Trust's equity funds posted an aggregate 35.4 percent return compared to 31.5 percent for the S&P 500.

"The typical mutual fund probably will charge 1 percent a year and has investment objectives to appeal to everyone," said Anderson. "There's no custom tailoring. There's no estate planning. There's no tax advice, no ability to deal with specialty types of assets such as real estate. At a bank you have your own portfolio advisor and a trust administrator who can advise on personal financial planning matters. You have an investment record that is every bit as favorable as the mutual fund industry. You get all these extras and yet the cost of a trust is the same as a mutual fund."

Trust companies also claim they can manage money better than the banks. "If you have $400,000 today and want to set up a trust to manage it you will get minimal service, there are fees on it and it will go into a pooled fund," said Franklin Ulf, president and chief executive of U.S. Trust Co. of California. "[Banks] have depersonalized it for the small customer."

Wells Fargo, countered Anderson, has made trust management affordable for more modest net worth individuals by concentrating on individual trusts and not offering corporate or other trust services. Citing the small margins and higher risks on corporate trusts, Anderson said Wells Fargo's decision to concentrate on individual trusts leads to an economy of scale that allows the bank to offer trust services to individuals with as little as $50,000 in assets.

The bulk of trust customers, however, remain individuals with high net worth. "I try to lend to people who are in the process of creating wealth," said William Barrett Jr., senior vice president of private banking with U.S. Trust Co. of California. "When they become wealthy and need someone who can manage their investments, their financial house is in order and ready to be turned over to the next generation."

Northern Trust offers corporate customers a diverse range of services including global custody, securities lending, benefit payments and an electronic delivery system providing on-line access to accounting and performance analysis databases. It also provides specialized services to insurance companies, public retirement systems, unions and foundations in addition to individuals and corporations.

PHOTO : Anderson: Servicing a burgeoning market