Key Issue: What sources of revenues are available to trust departments and trust companies ?
Direct Fee Revenue
Trust companies typically charge direct management fees based on assets under administration, often using a tiered fee schedule that decreases as asset levels increase. These fees usually range from 0.5% to 2% annually depending on account size and complexity. Additional direct fees may include trust acceptance fees, termination fees, tax preparation fees, real estate management fees, and extraordinary service fees for unique situations. Many providers also charge minimum annual fees to ensure smaller accounts remain profitable. Direct fees are usually debited directly from trust accounts on a quarterly or monthly basis and represent the most transparent form of trust company compensation.
Asset-Based Indirect Revenue
Significant revenue can come from the investment side through various arrangements. Trust companies may receive 12b-1 fees from mutual funds held in trust accounts, which typically range from 0.25% to 1% annually. Cash sweep arrangements with banks or money market funds can generate significant spread income or revenue sharing, particularly in high interest rate environments. Some providers receive payment for order flow from executing brokers when trading securities. They may also earn fees from affiliated investment products like proprietary mutual funds or collective investment trusts. These indirect investment-related fees must be disclosed but are often less visible to clients than direct trust fees.
Banking Services Revenue
Trust companies affiliated with banks can generate additional revenue through related banking services. This includes spread income on trust deposits held at the affiliated bank, fees from loans secured by trust assets, and revenue from other banking products sold to trust clients. Cash management services like bill pay, wire transfers, and foreign exchange generate transaction fees. Some providers earn referral fees for introducing trust clients to other bank services like private banking or commercial lending. The integrated banking/trust model allows for multiple revenue streams from the same client relationship.
Outsourcing and Third-Party Fees
Trust companies that outsource functions like investment management, trading, or custody often receive revenue sharing or referral fees from their service providers. This can include a portion of management fees paid to external investment managers, commission sharing arrangements with trading desks, or revenue sharing from custody and clearing relationships. Some providers act as distribution platforms for third-party investment products and receive placement fees or ongoing trails. These arrangements must be disclosed but add another layer of compensation beyond direct trust fees.
Fee Disclosure and Regulation
The complex web of direct and indirect fees in trust arrangements has drawn increased regulatory scrutiny. Trust companies must provide detailed fee disclosures covering both direct trust fees and any indirect compensation received. Department of Labor rules for retirement accounts and SEC regulations for investment advisers impose additional fee disclosure requirements. The trend is toward greater fee transparency and potential limitations on certain types of indirect compensation. Some providers have moved to "unbundled" fee structures that separate trust administration fees from investment management and other charges.