06 Dec OWNERSHIP OF FIDUCIARY BUSINESSES IN 2025 – WHAT IS THE OPTIMUM MODEL?
Over the past year or so I have met and spoken with probably a hundred fiduciary businesses of all shapes and sizes in several jurisdictions, both old and new, and under just about every conceivable form of ownership model. It has frequently caused me to consider what is the optimum ownership model for a fiduciary business in 2025, weighing up the very different perspectives of the many stakeholders: clients, shareholders, senior management, other employees, introducers, even the regulator.
Going back 20 years or so, the ownership landscape was heavily dominated by bank-owned and independent trust companies (including those owned and managed by offshore law firms and accountancy firms). How times have changed. With a small number of notable exceptions, the banks have exited the fiduciary sector, unable to manage the huge conflicts of interest where the bank’s core activity is wealth management and private banking. There are still numerous independent trust companies, but they all have to face at some stage the need to manage the succession of the ownership of the business. Many are in that position right now and facing some major decisions.
Model A – Bank Ownership
As mentioned above, for any banks whose core focus is wealth management the obvious conflict of interest from owning the trust business where the underlying trusts have portfolios with the bank has always been there. In many ways it is very surprising that the conflict of interest did not force banks out of the industry many years ago. The huge risk of litigation from the murky world of historic retrocessions, excessive charging by the bank and the bank’s own trust company not properly overseeing investment performance is a very real one now (and very importantly does not disappear with by the bank later exiting the trust business!). Moreover, offshore regulators rightly dislike the “barrier” in the client relationships whereby the fiduciary directors and managers often are obliged to communicate with the other trust parties only via the client relationship manager of the bank. There is concern that awkward but key compliance conversations may not happen, or get “watered down”, which in today’s highly regulated world just does not work.
There are, however, still a few banks who operate with full independence and “open architecture” as far as wealth management and banking services are concerned, with no insistence whatsoever that the bank’s own services are used and, if they are used, then the bank is treated just like any other bank by the trust company when it comes to investment performance, interest rates etc. In other words, the trust company’s independence and fiduciary duty is not compromised by the fact that the trust company is owned by the bank. It is quite logical for fiduciary bank accounts to be opened with the bank for speed and efficiency and for so long as interest rates and credit risk ratings are properly assessed by the trust company, any conflicts can easily be transparently managed. For the client, the bank’s publicly accessible balance sheet provides security and protection regarding the financial strength of the trust company’s shareholder. This ownership model appeals particularly to clients with very substantial trust structures, although even then there is often a desire to spread their trust structures between several providers.
Model B – Listed Companies
One or two listed trust companies have been very successful, others less so as time has evolved. Being publicly listed brings independence from the types of conflict of interest faced by bank-owned trust companies, plus full transparency of the performance of the trust business (which of course can be either positive or negative). One of the biggest advantages of being publicly listed is that it can enable the trust business to avoid being owned by private equity (see below) if that is an objective (which is very often the case). For a trust company which is already PE-owned, listing on a recognised stock exchange is of course one of the obvious exit routes. So listed trust companies certainly do have a place and will be a good option for many trust businesses provided they are of sufficient scale to justify the not inconsiderable costs of listing.
Model C – PE Ownership
PE-owned trust business have become very common over the past decade or so. The attraction of buying businesses with long-term annuity income was always going to attract PE funds, and many of today’s large trust companies are now owned by PE. It must be said that this model of ownership is viewed as an inherent conflict between the long-term nature of trust relationships versus the shorter-term 5-7 year investment cycle of PE and the related need to generate significant return on capital which nearly always leads to increased fees for clients and reduced serviced levels.
Certainly not all PE is bad and it would be wrong to portray that as being the case. There are numerous trust companies which are funded by longer-term PE money (i.e. pension fund money), where the objective is much steadier long-term growth as opposed to trying to build the business aggressively through mergers and acquisitions and then selling on to an even bigger PE fund. In the latter scenario, clients have invariably seen much-increased fees, reduced service and high staff turnover, and it is then quite possible that the process will be repeated by a sale from the first PE owner to a larger one. Not surprisingly, this has led to clients removing their structures to other non-PE owned providers, and to private client advisors being very reluctant to refer further business to PE-owned businesses.
By contrast, longer-term (less aggressive) PE ownership can provide financial strength, funding to make strategic acquisitions, better-planned integrations of acquired businesses, lower staff turnover and a less pressurised environment for management and staff. It may even be the case that a PE house takes a minority stake without fundamentally wanting to change the business and see it sold on, and this type of private equity is more likely to come from family offices. In short, choosing one’s PE owner wisely is hugely important, and the bigger the clash between the short-termism of (most) PE owners and the long-term relationships which the trust industry is built around, the more likely it is PE ownership will not be a happy existence.
Model D – Professional Firms
Ownership by professional firms (lawyers or accountants) used to be very popular. The major international accounting firms all exited the industry in the 1990s due largely to concerns over conflicts of interests where the accountancy firm provided other services (especially audits) to underlying companies owned by trusts of which the firm’s own trust company was the trustee. Law firms did not face quite the same issues, and the partners of several offshore law firms have made very substantial wealth from selling the firm’s trust business, in some cases repeating it two or three times over. The current trend is very much for the offshore law firms to get back into the trust industry. This may or may not cost them referrals of fiduciary-related legal work, but this is less of an issue when just about all of their competitors also have their own trust businesses. Ultimately it is a trade-off between referrals of ad hoc one-off legal work and generating annual recurring fee income. The latter will invariably win out if the partners of the law firm are commercially minded to capitalise upon the much larger wealth-generating opportunity.
Model E – Private Ownership
There are many staunchly independent trust businesses who know that the reason that they attract and retain clients is because of their independence and also due to not being PE-owned. Currently, privately-owned trust companies seem to be winning mandates from the PE-owned trust companies where clients have decided to “vote with their feet” to try to get the level of service that they used to experience in pre-PE days, and with greater fee flexibility and transparency. Many senior employees have also opted to exit the PE-owned (and listed or bank-owned) trust companies and are far more attracted by working for a privately-owned trust company.
Size is very important. If a private trust company is too small, then it will be sub-scale and too much of its profits can easily be eaten up by compliance and regulatory costs. Those private trust companies in the 20-100 employee range seem to be especially thriving right now. Large enough to handle substantial and complex cases, but small enough to be able to offer a level of personal service with clients having closer relationships with a more stable team of administrators and managers, and with greater director involvement. However, with all private trust companies there is an “elephant in the room”. Yes, at some point the owner-managers will wish to sell out and realise their investment. If they want the best price, then it may well be that a PE house is the one waving the biggest cheque book. That brings about a real dilemma as it changes the whole dynamics of the business. A listing might be possible if the private trust company is large enough, but it may well have to first undertake several successful mergers to achieve sufficient scale. A sale to senior management might be possible, but there are very few banks willing to lend to provide the funding. One idea might be to” vendor-finance” the sale to management, possibly using an Employee Benefit Trust, with the selling shareholder(s) then effectively being paid out of future profits. A family office (possibly even one or more clients), or a “soft” PE house might also be a funding partner.
However, this question is one which needs to be considered well in advance by the shareholders because the journey to the desired destination may not be a short one.
Model F – Family Office Ownership
The final model to consider, and one which seems to be becoming increasingly popular, is majority ownership by one of more family offices, with the minority shareholding being held directly by management and/or by an Employee Benefit Trust. This model can protect the business from PE ownership, maintain the ethos of the business, provide sufficient capital for the business’s needs and provide the family office with the security of being able to influence the future shape of the business. From a regulatory perspective there is clearly a potential conflict if the family office’s own structure is managed by the business, as it could be very hard for the directors to say no to a contentious request made in relation to the structure of the major shareholder. This issue can be overcome by the family office shareholders’ structures being held under Private Trust Companies (“PTCs”) with carefully constructed independent boards of directors so that the fiduciary decision-making is removed from the trust business.
Conclusions
Whilst there are pros and cons of each ownership model, the most important party to consider is the client. Without clients, there simply is no business.
Some clients are adamant that “bigger is best”, feeling more comfortable knowing that their structure is being looked after by a financially strong institution. That will cause them to lean towards either a bank-owned trust company (which operates as an independent trustee with an open architecture for wealth management) or a listed one with clear independence and fully transparent published annual audited accounts.
Other clients, and especially clients who have experienced their previously privately-owned trust company being acquired by a PE house and have either already moved their structure or are planning to do so, will strongly favour one of the private ownership models. There are then many shapes and sizes to choose from and clients are likely to want to be satisfied that the privately-owned trust company has a succession plan in place to deal with the exit/retirement plans of their principals which will retain the owner-managed ethos.
There are undoubtedly some clients who have not found the PE-owned trust company experience to date to have been a painful one, and who may well be happy to remain in that environment. They should, however, keep a close eye on what happens next, because the primary objective of PE funds is to realise investments at a gain for their investors, and so there could be a fundamental change of culture every few years. Not all PE is bad by any means, but “good” PE can very quickly become “bad” PE. If the PE house creates the right culture for employees of the trust company, then the issue of high staff turnover, which really annoys clients, can be minimised.
Above all, the private wealth industry is a “people business”. Clients need to be looked after, and close working relationships need to be developed with the teams looking after their structures. Automation of certain functions clearly can assist trust businesses to operate more efficiently, and automation requires capital investment. Outsourcing of some administrative functions makes perfect sense to help keep clients’ fees as low as possible (and to make the business more profitable, which is important given the very high cost of compliance and regulation).
Under every single form of ownership model the other side of the “people” equation is that of the employees delivering the services. If employees are not kept happy and get no job satisfaction, then they will leave. High staff turnover will inevitably result in client departures within a relatively short period. This applies to every single one of the different ownership models and several trust businesses have learned this key lesson the hard way. People really do matter.