The Pros and Cons of Offering Trust Services

Many community banks today are expanding into the wealth management niche to meet the holistic financial needs of their high-net-worth clients and deepen relationships with these affluent customers. Trust services are sometimes included as part of a wealth management product suite.

There are a few factors to consider if your bank is thinking about offering trust services. These include your client base, growth goals and willingness to assume the risks inherent in acting as a fiduciary, says Adam J. Schlusler, senior vice president and wealth advisor with $2.6 billion-asset ChoiceOne Bank in Sparta, Mich.

ChoiceOne Bank’s trust department was established by one of its legacy banks nearly a century ago. “Trust services have been a component of our wealth management operation from the very beginning,” says Schlusler. “These services have long represented a means of generating income, diversifying the bank’s business and providing elite services to our high-value customers and shareholders.”

Benefits of offering trust services

According to Schlusler, one of the biggest benefits of offering trust services is that it allows ChoiceOne Bank to establish long-term, multigenerational relationships with clients. “We offer comprehensive financial solutions that go beyond traditional banking products,” he says. “Many times, we serve as successor-trustee of legacy trusts established by our clients and manage their family’s assets for generations.”

Another benefit is that trust services help ensure affluent customers’ assets stay at your community bank. “When you offer trust services, you don’t have to refer a customer out the door and risk that they’ll take their deposits with them,” says Amy Mathis, vice president, business development with Osaic FA Inc. and Osaic FS Inc., which offer wealth management solutions to community banks.

Trust services can also generate fee income separate from deposits. “Trust services are an additional nondeposit profit center that helps diversify your bank’s revenue,” says Beth Mihalovich, Osaic’s regional director, business development.

“If your bank approves auto loans up to $100,000, then you’ve probably got affluent customers who could benefit from trust services.”

—Beth Mihalovich, Osaic

In-house vs. outsourcing

If your community bank decides to offer trust services, one of the first decisions to make is whether to offer them in-house or contract with an outside service provider for the services. There are pros and cons to each option.

Schlusler points out that by offering trust services in-house, you aren’t outsourcing a portion of the client relationship. The bank remains the trusted advisor and retains control over the client experience, continuing to nurture and grow these relationships. However, your community bank also assumes all the risk inherent with acting as a fiduciary when offering trust services in-house. 

“These include, but aren’t limited to, compliance risks, operational risks and legal liability,” he says. “For example, a community bank could be sued by a beneficiary for breach of trust and fiduciary duty if the beneficiary believes the bank mismanaged the trust assets or acted improperly or not in line with the terms of the governing document.” 

He adds, “If a bank fails to comply with the complex web of compliance laws and regulations, it may be subject to fines, penalties and reputational risk.”

According to Mathis, outsourcing trust services to a third party eliminates the compliance and fiduciary risk to the bank of administering and managing trust assets. 

“Also, the service provider already has everything needed for community banks to offer trust services, so the bank doesn’t have to build a trust department from scratch,” she says. 

Should your bank offer trust services?

When deciding whether to offer trust services, Mihalovich recommends community banks start by examining the makeup of their customer base. “Are there enough customers who need these kinds of services?” she says. 

One clue is the maximum auto loan offered by a bank. “If your bank approves auto loans up to $100,000, then you’ve probably got affluent customers who could benefit from trust services,” says Mihalovich.

Schlusler suggests gauging market demand for trust services by conducting surveys or interviews with existing customers. “Analyze local market demographics for the presence of affluent individuals or businesses that might require trust services,” he says, “and evaluate competitors who are offering trust services to determine if there are unmet needs or service gaps your bank can fill.”

Before making a final decision, Schlusler recommends performing a cost–benefit analysis. “Calculate the initial setup costs, ongoing operational expenses and potential revenue from trust services,” he says. “Then estimate the expected ROI and timeframe for achieving profitability.”

It’s also important to make sure that offering trust services is a good strategic fit and aligns with the overall mission, vision and goals for your bank. Schlusler adds, “Assess your bank’s readiness to commit long-term resources to develop and grow the trust services division.”