Clients are looking for ways to maximize their advisor’s skills while keeping control of their assets. Directed trusts are one way to achieve this.
In a directed trust, an independent advisor is named to carry out essential functions like distribution or investment advice, separating these duties from the corporate trustee.
Clients Want More Control
A key reason why directed trusts are gaining popularity is that clients want more control over their assets. They’re tired of large, impersonal trust companies managing their portfolios and deciding where to invest them.
Clients also want to be able to delegate the investment management of their trust to a professional advisor. This gives them more flexibility and lets their family member or advisor manage the specific asset they want.
Advisor directed trust are a powerful tool for advisors who want to give clients more control over their estate plans. It’s an opportunity to create new value-add for your existing clients and attract new prospects.
Clients Want More Flexibility
In general, clients want the flexibility to change or adapt their trusts to meet their current family situation and life circumstances. This is especially true when clients have unique assets like a large concentration in a specific stock, real estate or expensive luxury items.
In these cases, clients would prefer a trustee who is not only familiar with these investments but can also manage them with the expertise of their trusted financial advisors.
This is where directed trusts offer the opportunity to optimize the client’s investment strategy by putting them under the management of their preferred advisors while at the same time delivering increased liability protection for clients and advisors. Several states have introduced modern directed trust statutes that are particularly effective at meeting this desire for more flexibility and choice in a family’s wealth planning structure.
Clients Want More Choice
Clients who choose directed trusts want more choices in managing their assets. They typically have nontraditional assets like closely-held businesses, family limited partnerships, LLCs, and private equity interests that may not fit under the parameters of a corporate trustee.
In traditional trust arrangements, all aspects of the investment and distribution responsibilities are held by one trustee. The trustee may focus on administrative tasks with directed trusts while appointing someone else to direct investments or distributions.
This unbundles the functions of a traditional trustee, bifurcates liability, and distinguishes between the responsibilities of asset management and trust administration. This model is fast gaining popularity as clients seek greater flexibility, control and protection.
Clients Want More Protection
Clients with wealth, especially those with multiple assets such as commercial real estate, complex investment types or oil/gas ranches, want more protection from advisor-directed trusts than a full-service bank trustee can offer.
They would rather have control of these decisions in their own hands and have their trusts directed to a professional who knows the market better than the bank trustee does.
In these circumstances, a family-owned business or a separate family entity, such as an LLC, can become the trustee for the directed trust and have the management firm manage the assets within the trust. This very powerful and flexible solution has gotten a lot of attention from advisors in recent years.
Clients Want More Flexibility
Often, families want the flexibility to adapt to unexpected family situations and life circumstances that may arise. Directed trusts are a vehicle to allow for this.
In directed trust statutes, grantors can appoint a trustee to perform administrative and distribution functions and then name an outside investment advisor or manager to manage the investments.
This enables grantors to split the administrative responsibilities from investment management responsibilities and increase liability protection. Wealthy families who choose this new ‘bifurcated’ trust administration services model typically name a bank or large trust company as the corporate trustee. Still, they give an outside investment adviser/manager of their choosing a separate mandate to manage the assets in the trust. This creates healthy competition for the advisor/manager, often to the family’s benefit.