Making the Most Out of Trust

Trust is a complex function, bedeviled by intricate accounting requirements and multiple third-party connections. Increasingly sophisticated clients are constantly demanding new products, better service, and more detailed reporting. And the regulations that govern trust are always changing, raising the risk of noncompliance.

It all adds up to a relatively easy decision to outsource trust operations, especially for smaller institutions. “I’d be shocked if almost everyone doesn’t outsource it,” says Robert Boon, executive vice president and managing director of Ledyard Financial Advisors, the wealth management division of $390 million Ledyard National Bank in Hanover, New Hampshire.

But while the decision may be easy, the practical realities often are not. In a report on trust outsourcing, the research firm Celent noted a number of potential drawbacks to trust outsourcing. These include the difficulty of returning to an in-house method once outsourcing has been put in place; the danger of an outsourcer not staffing appropriately in terms of skill set or scale; the possibility of errors and problems during the conversion process; and having less control over future costs if the outsourcer raises its fees.

Some potential negatives may be more perceived than real, according to Boston-based Celent. The firm cites a fear of loss of control over operations, but notes that this may be more of an emotional or psychological concern. It also cites a fear of a decrease in levels of customer satisfaction, but notes that statements from outsourcers tend to be more accurate and timely, even though disbursements may take longer if checks are not cut locally.

Perhaps the most limiting factor to the growth of trust outsourcing is that some trust software providers do not yet offer an outsourcing option. According to the report, financial institutions are most likely to choose an outsourcing option that is compatible with their existing in-house system. That obstacle complicates potential conversions and may explain why Celent predicted only a relatively small number of institutions-33%-would be outsourcing their trust technology by 2017.

Even given these mitigating factors, the practice of trust outsourcing is evolving as banks increasingly embrace new aspects of it. One segment of trust outsourcing that is growing is the outsourcing of associated business processes. Rather than simply offload the software that supports trust, institutions are also outsourcing operations functions that traditionally have been handled by back-office personnel.

Also becoming more common is the outsourcing of investment management activities. Celent estimated that 50% of trust companies would be outsourcing their investment management by 2017.

It makes sense that institutions see fit to strip away the activities they view as nonessential to the main event, which is managing customer relationships. Trust customers are among the biggest customers of any bank, and also tend to be more discerning than most. “Outsourcing to someone with the core competency takes the burden from us and we’re able to focus on the only thing that differentiates us, which is customer relationships,” says Mims Clayton, senior vice president at Memphis-based First Tennessee Bank.

First Tennessee, with approximately $25 billion in assets, outsources both its trust technology and back-office processes to the global provider, SEI, based in Oaks, Pennsylvania. Outsourcing both aspects has enabled the bank to downsize its back-office staff and pick up efficiencies, resulting in “material” savings, Clayton says. “The back-office processes are more of a commodity, not a differentiator,” he adds. “We wanted to focus our resources on client contact.”

SEI has long offered pure trust software outsourcing, and more recently began offering outsourced back-office processing services such as cash and income processing, reconciliation, and employee benefit reporting in response to requests, particularly from small banks, for such services, according to Albert Chiaradonna, senior vice president of private banks at SEI. Now, about 70% of SEI’s trust-outsourcing book of business comes from back-office processing services, he says.

At some banks, outsourcing investment management is another way to provide the best possible service to clients. The advent of open architecture has made it possible for banks to access investment products and money management services from top-flight providers, giving them more time to focus on managing customer relationships. “That’s a very good segregation of duties,” says Doug Dannemiller, senior analyst at Aite Group, a research and advisory firm also based in Boston.

When Richard Riley and several of his colleagues left asset manager Northern Trust to form FineMark National Bank & Trust, they developed a wish list of investment capabilities, none of which involved internal management. “We wanted to have a best-of-breed approach by using resources from the outside,” says Riley, who is executive vice president of the $282 million, Fort Meyers, Florida-based institution, which has nearly $400 million of assets under management.

The first item on the wish list was to develop a relationship with a truly independent equity research firm. FineMark found its partner in New York-based Argus Research Company, which does not manage money nor underwrite securities. FineMark uses Argus’s research to identify, through its internal investment strategy committee, a list of securities eligible for recommendation, Riley says.

FineMark also had a hefty set of desires for its family of funds. It wanted no-load, broadly diversified funds, with strong performance, reasonable management fees, and domestic and international capabilities. So it became the first bank in Florida to offer funds from Austin, Texas-based Dimensional Fund Advisors, which met all of its criteria.

The bank also wanted to offer separately managed accounts, which it now does through GlobalBridge, a Minneapolis-based provider. Finally, it fulfilled its desire for an actively managed bond capability by working through a variety of companies.

In FineMark’s view, outsourcing investment management sends a strong message to clients that the bank is always acting in their best interests. Too often, Riley says, potential clients have found examples where they may have been the second-tier beneficiary of investment decisions. “We wanted to take those issues off the table” by steering away from proprietary products, Riley explains. “We thought the integrity was not only important to us, but to potential clients.”

Not every bank is in agreement that outsourced investment management is the way to go. Boon of Ledyard Financial says his firm offers access to about 50 outside managers, but also supports its own internal investment team. Every single one of Ledyard’s clients has elected to invest through the proprietary team, Boon says.

Boon concedes that outside managers offer the opportunity to receive best-in-class investing expertise. But one big disadvantage is that clients cannot meet with investment managers on a regular basis. “For our clients, that ability to interact outweighs best-in-class,” Boon says.

Outsourcing often becomes a more viable option once banks have made a strategic decision to grow the business. That was the case for $160 million TrustBank of Olney, Illinois. TrustBank switched from an in-house system to an outsourced solution through Reliance Integrated Solutions earlier this year, following a decision in late 2009 to expand its trust asset base, currently at about $50 million.

“TrustBank is willing to invest in the support of its trust business to provide a much higher level of service,” says Bruce Runyon, president and chief executive officer. One big improvement gained through outsourcing has been the ability for employees in any one of TrustBank’s five locations to access the trust system.

That’s because the system is web-based, making it accessible from any computer connected to the Internet. TrustBank may even begin providing trust services through a branch it has in Tempe, Arizona. Previously the bank’s trust software and personnel were available only at its main location. “We were limited to servicing a customer base that found that location to be convenient,” Runyon says.

Bryant Jones, president of Reliance Integrated Solutions, a subsidiary of Atlanta-based Reliance Financial Corp., says outsourcing positions companies well for growth, because it takes concerns about being able to support a growing infrastructure off the table (see sidebar). Outsourcing can also reduce operational risk, he says. For example, if a corporate action is missed under an outsourcing arrangement, then the outsourcer, not the firm, is on the hook for the liability.

Outsourcing is not without its potential complications, however, so experts are quick to give advice on how best to manage the relationships. When selecting an outsourcer, Jones advised obtaining a good understanding of the service levels the institution is already providing, to ensure the outsourcer can match or exceed them. He also advises taking into account expected growth and how well the current internal infrastructure is positioned to support it.

Finally, Jones urges institutions to find outsourcers that share the same values. “If you’re a client-focused bank, you want to make sure the outsourcing provider sees the business in the same way,” he says.

Chiaradonna’s most important insight on how to gain the most out of an outsourcing arrangement is to put in place a single point of ownership for the relationship within the institution. “The worst thing that can happen is multiple intersection points-five different people versus one core contact,” he says.

Riley of FineMark offers advice that is sure to hold true whether an institution outsources its trust department or not: “Always, always, always think of the client first,” he says.

Join OUr Community

Bank Director’s annual Bank Services Membership Program combines Bank Director’s extensive online library of director training materials, conferences, our quarterly publication, and access to FinXTech Connect.

Become a Member

Our commitment to those leaders who believe a strong board makes a strong bank never wavers.