Springfield Business Journal Editorial Director Eric Olson sits down with Tracy Barnas, Arvest Wealth Management’s executive vice president and regional manager; Jim Johnson, U.S. Bank Wealth Management’s region managing director and senior vice president; and Richard Russell, Missouri Trust & Investment Co.’s CEO to discuss trust industry trends.
Eric Olson: Boiling it down to one word, how do you characterize the trust industry?
Richard Russell: Dynamic.
Tracy Barnas: Critical.
Jim Johnson: Fiduciary.
Olson: What makes the industry critical?
Barnas: In the next 30-40 years, $30 trillion in financial and nonfinancial assets will transfer through an intergenerational atmosphere. The ability for clients to ensure that their wishes and their goals are achieved is more and more important through a trust vehicle.
Olson: That has to be historic.
Barnas: Certainly, in our lifetimes.
Olson: How is that affecting the types of accounts and conversations you’re having with clients?
Johnson: We lead with goals-based planning and financial planning. It truly comes back to that trust and fiduciary requirement.
Barnas: There’s a different dynamic for the multigenerational transfer. Millennial, or whether it’s Gen X, they’re seeing a lot of ways to access and plan for newfound wealth.
New to wealth
Olson: Are those options changing? Are there new ways to preserve and invest?
Barnas: From a trust perspective, you have to be very cautious. The internet is a beautiful and scary thing. One of our biggest cautions or things that we have to be careful about in that fiduciary role is accessing boilerplate wills and trust documents that don’t necessarily take into account state laws that are specific to them.
Russell: Training is a big deal. To me, it’s teaching generations how to manage that wealth.
Olson: What are the younger generations saying they want to do with wealth?
Johnson: They really are looking at what their grandparents or great-grandparents were most concerned with. You ask them, what are you going to do when you receive your inheritance? The No. 1 answer is pay off debt.
Russell: They’re pretty entrepreneurial. You’ll see that money being transferred and used to maybe start their own businesses, invest in a friend’s business or allow the spouse to do something they always wanted to do.
Johnson: People always ask me who are your best clients? No. 1 business owners, No. 2 business owners, No. 3 children of business owners. That’s where most of the wealth is created. Most businesses fail by the third generation. The No. 1 reason by far is lack of communication from one generation to the next.
Olson: So, you sit them down together as a team?
Johnson: It’s usually a team approach. We actually have a group with ultrahigh net worth that we have teams of literally 13. The education that comes along with the families and helping them work through that is critical.
Barnas: We were talking about the baby boomers and the magnitude of the wealth transfer – that same concept aligns with the advisers. It’s more than just a financial connection. There’s a real emotional connection at different generational levels to that money and what they want to make it do for themselves, for the family and for their community. I don’t think the personal side of it has changed.
Russell: Everything is more team based nowadays, and it’s just flowing to this area.
Olson: It was determined in 2013 that over the next 10 years baby boomers in the Ozarks would transfer $47.2 billion in wealth. Greene County’s share for that was $6.65 billion. To quote Community Foundation of the Ozarks’ President Brian Fogle, “This is the largest transferred wealth in the history of man.”
Russell: We’re fiduciaries, so we have to do what’s in the best interest of the client. That’s the interest of the people at the table, not how we can get paid.
Barnas: At the peak, it says from 2031-2045, 10 percent of the total wealth in the United States will change hands every five years. That’s significant. You want to have diversity in the adviser base and the trust officer base. As the population ages, so do the unique experts and trust advisers that they work with. We have to stick around long enough to pass that baton.
Johnson: The fiduciary expertise in the administration, you’re looking at a bunch of people 50 years old and up. You’re going to lose a lot of experience in the next 10 years.
Russell: It’s not a very sexy industry.
Johnson: I was talking with a very well-known estate-planning attorney in town and his comment was that it gets away from taxes, it gets away from investments, it gets down to families and the issues you have and the reasons you have trusts at times. He said, 10 years ago, they would write documents where it was 1 in 100 they would have clauses where they are dealing with drug issues; he says it’s 1 in 10 now. How you administer the document that is there to protect family members from themselves and exercise the discretion that you have in order to follow the wishes of the family but in a very living and changing environment is an awesome responsibility.
Russell: That’s one of the talking points we use in front of clients. You really don’t want aunt or uncle or somebody in the family to have to make these hard decisions and be the bad guy. That’s why you have corporate professionals.
Barnas: We’ve seen a huge uptick to what we refer to as incentive trust. An incentive trust really outlines the conditions under which the distributions will be made. It’s not just related to substance abuse; it really allows people to ensure that their assets and the legacy that they’ve built is distributed in a way that meets their levels of integrity and family values that they want to instill.
High net worth
Olson: Define high net worth. When does somebody start thinking about needing a trust?
Russell: It’s different for different individuals. If I look at my beneficiaries, I have one daughter. When she’s 18, do I want her to have $500,000 in her bank account? Probably not. Do I want her to have $1 million, $250,000? There’s some restrictions that can be put in place. It’s really that individual discussion that most planners are having with the clients.
Johnson: There’s no hard and fast rule. We look at our minimum account size as $1 million as an investment account. If it’s a trust account, maybe $500,000.
Olson: How do you arrive at those minimums?
Johnson: You’re looking at profitability, you’re looking at efficiency.
Russell: It’s a business.
Johnson: As far as our trust advisers and portfolio managers, we try to keep it and we do well under 100 relationships. It’s all about the relationship and service.
Barnas: We look at the parties involved, we look at the amount of assets, but we also look at the types of assets and the relationships.
Johnson: We’re looking at risk; do we really want to take this piece of business?
Russell: We say that our clients deserve a minimum level of service in order to achieve that. Frankly, it takes a bit of scale for us to be able to deliver a service. We think being local, we have a little bit more flexibility to pick and choose what we want to take. Ours is $250,000.
Barnas: Ours is closer to $300,000.
Olson: With the recent major federal tax reforms, how has that impacted your business and clients?
Russell: We’re seeing a lot on the income tax planning. There were significant estate tax changes, which then kind of pushes a lot of people out of estate tax considerations into income tax planning. It’s not fully fleshed out yet, but I think the corporate income tax is going to have a fairly significant impact on a lot of planning. The big guys, we don’t worry about. They’ll go hire the big firms and deal with it. It’s probably those small to midsize businesses who are probably going to have fairly impactful things that they can do underneath the new tax law. But they have to spend the time and the effort and the will to kind of work through it and figure it out. It may require changing the way they’re taxed from traditional pass through to a non-pass through.
Olson: Are these changes positive or negative for small to midsize businesses?
Russell: Positive. The negative is that a lot of things that small to midsize businesses have to deal with is that it’s pretty complicated. You have to hire a professional and a team and you have to pay them money and invest time and effort into doing this.
Olson: Who’s on the losing end on this equation? I’ve read nonprofits might be challenged.
Johnson: That’s gotten a lot of press. People give to charities because they are passionate about the charity. It’s not because of the tax write-off.
Russell: The tax write-off is nice, but they support the organization.
Johnson: They weren’t giving it because they were getting a tax deduction. Probably will be a lot of charities mad at me, but I think it’s overblown. Time will tell.
Olson: Are there any other laws or regulations out there that have seen an impact on the trust industry?
Barnas: There was a lot of talk over the last two years and a lot of changes made in organizations based on fiduciary rule. In terms of what’s next, I think people are living longer, health care is more advanced, but it’s also more expensive.
Johnson: The regulations that are the biggest headaches for us now are what it would be for our bankers, and that’s the Bank Secrecy Act, anti-money laundering and what it takes as far as the information that you have to even get from a client to open up an account is quite extensive, quite personal.
Russell: The first one for me is elder abuse. This transfer of wealth is generally taking place between generations, older to younger. They see somebody who is in a disadvantaged situation, they start siphoning money away (and) nobody catches it. I think there’s going to be stuff coming around this to fix these issues. I’m guessing it’s going to fall on financial institutions. The second one is something we are big proponents of here in the state: directed trusts. The concept that you kind of separate out the roles in a trust. Traditionally the trust company would serve the role of trust administration, so gathering assets, administering the assets, making distributions and also investing. We are supporting a law here in Missouri that would allow for two different people to serve that role. A traditional broker or investment adviser could manage the money while the trust company would handle the trust administration and the distribution of the property. In the current law, the trust company has to oversee that other investment adviser. It’s a double check on what they are doing. The law that we are proposing and supporting in the legislature would bifurcate that liability.
Olson: Is that a no-brainer among trust companies?
Johnson: The only downside to it is on the investment manager side. The person investing the money still has a fiduciary duty, and if they’re getting pressure from various beneficiaries to do it one way or another, that’s a potential issue.
Death of pensions
Olson: What is your take on the so-called death of the pension? Statistically, in the last 25 years, pensions, or private employer defined benefit plans, cut in half to about 18 percent of workers today.
Johnson: You see pensions mostly in the government sector now. Most of the private companies have divested themselves of the traditional pension.
Russell: It think it’s a more holistic approach we take with our clients, more planning, and I think it’s because of this. You have to create your own retirement plan. You can’t rely on a company to pay you the private pension anymore.
Johnson: What we see now is growing part of our business more and more, IRA rollover. That part of our business is booming.
Barnas: By far, the biggest fear that we hear and see is people outliving their assets. That’s related to the longevity of life and, honestly, the lack of planning. The planning needs to happen early and often.
Russell: They want to know, “What are you guys hearing about health care?” I think that drives a lot of people to try to stay in the workforce.
Olson: How is technology disrupting the industry?
Johnson: The trust industry is really investment management. There’s a lot of change in technology when it comes to the investment side. Today, they put everybody on an individualized, customized asset allocation platform designed specifically for them. The tools that are out there are amazing, and so it lets you focus more on the relationship.
Barnas: From a personal trust perspective, I don’t think that part will ever change. The intimacy related to family dynamics (and) the level of sensitivity, it can’t be replaced by an online substitute.
Johnson: The danger of technology is it gets to the do-it-yourself people. You can get online, but unless you really know, you don’t understand the risks. I’m concerned that we rely too much on technology.
Russell: Certainly, technology is going to help in investment management. But I think the focus is going to shift from what’s my return, to what’s my outcome. So, did I do my planning? Did I achieve my goals? Did I retire when I wanted to? Did I live long enough that I leave enough to my kids?
Excerpts by Features Editor Christine Temple, email@example.com.
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