A few weeks ago, Kestra Financial, a Texas-based broker dealer with 2,300 representatives, bought a Delaware trust company.
The deal didn’t make a lot of waves immediately. After all, the trust industry moves slower than grass grows and more people were watching a fragile market unravel than these headlines.
But among those who were paying attention, the acquisition amounted to a declaration of war.
After all, Kestra has those 2,300 reps on the platform. And the company they bought, Reliance Trust, had built its reputation on being open to advisors no matter what their affiliation happened to be.
Mike Flinn, the VP and National Sales Manager for BOK Financial in their Advisor Trust Services division, suspects that assurances of continued independence under the Kestra umbrella won’t hold up.
Sooner or later, he says, Reliance will settle into the role of “captive trust company,” meaning it is unable to truly function autonomously from its parent group.
That’s not independence. It’s how corporate culture naturally evolves.
Management at a newly acquired company naturally wants to perform well for its new affiliates. It finds synergies and ways to cross sell. Internal relationships get prioritized over business that feeds other people’s bottom lines.
Flinn believes that for advisors outside the Kestra universe, Reliance just became less interesting as a partner. Granted, reps within the network will direct their trust business to the friendly in-network trust company, but there are a lot more people outside the network than in it.
As Flinn says, ““They’ve taken their prospecting net and made it a lot smaller.” That’s obviously a good thing for Reliance competitors who are still willing to swim where the client pools are at their widest.
Of course more than a few non-Kestra advisors steered their client trusts to Reliance over the years on the promise that the company was (at the time) truly free from all third-party industry entanglements.
Clients introduced to Reliance trust officers wouldn’t end up swept into larger CRM systems where a competitor could start cold calling your best relationships. And fee revenue going to Reliance wouldn’t directly or indirectly feed a rival.
Now both of those propositions are under stress. Given the suspicious nature of many advisors, Reliance will now be presumed guilty until it proves itself innocent.
Even if it proves itself innocent, it’s got to keep proving it. We’ve all survived years of disruptive M&A changing the corporate landscape and altering corporate promises.
For Flinn, the strategic nature of the trust business makes independent firms especially vulnerable to opportunistic M&A. True independents are already an endangered species. As consolidation picks up, big players will emerge and start squeezing the others.
To Mike Flinn and others on his side of the debate, the net loss in choice and freedom could be bad for advisors who want the most personalized solutions for their clients.
Kestra advisors once had a free field of trust companies to choose from. Now, corporate culture will nudge them toward the in-house solution.
“Remember,” Flinn tells advisors who find themselves in a captive situation, “you don’t have to use that default trust company. You still have choice.”
Christopher Holtby, a principal at Wealth Advisors Trust, a leading independent trust company based in South Dakota, strongly agrees.
“Any time a big company buys a smaller company, money dictates who’s going to win. And it won’t be the financial advisor. It will be the big money.”
He noted that custody is the key. Growing financial firms love taking over custody because they see it as a way to scale into enhanced profitability, but advisors naturally have their own relationships already in place.
We don’t know what custody arrangements Kestra will mandate for outside advisors bringing assets to Reliance. But if history is any guide, the temptation to make those accounts conform to what in-house advisors currently use will eventually become too hard to resist.
When that happens, outsiders who liked the trust relationship will find the rules of the road changed without their input.
The strategic exit plan
And if Kestra doesn’t change the rules, a future corporate parent might do it instead.
The company’s private equity owner has already marked the brokerage operation for sale. They clearly want to cash in now while the market is relatively hot.
Adding a $2 billion trust company to the package enhances its market value as well as its ability to attract the next buyer.
Everyone knows that trust accounts are the key to the will vault, which is handy as we approach a huge generational wealth transfer. And everyone wants these lucrative accounts for as long as possible, ideally forever.
But again, a revolving door of management doesn’t line up well with long-term account retention. Trusts can move under the right circumstances. Alienating the family advisors is a great way to start that process.
It won’t matter to Kestra’s current owners because they’ll be gone. The customers, on the other hand, need to know.
Current management is cheerful. Michael Roberts, the executive vice president of Reliance Trust, is thrilled to have Kestra as a parent.
Ever since FIS had purchased his company in 2014, it was an odd marriage that seemed destined for divorce. Reliance was too peripheral and too small to be relevant to the FIS banking software business.
Roberts believes that Kestra is a much better partner in terms of culture and synergy of offerings. At least it’s a more synergistic fit.
He also emphasized Reliance independence will remain intact. Contracts with UBS, Morgan Stanley and Wells Fargo aren’t going away and continue to offer considerable value to independent advisors.
In his view, Reliance Trust would be “more advisor-friendly than ever” and this purchase would allow the company to expand and enhance their level of service to all advisors, including those outside of the Kestra base.
Of course, that’s the core argument. Consolidation like we see so often in technology — while narrowing choice on the surface — leads to far higher levels of innovation and ultimate service to the end client.
After all, you’ve got to have resources in order to build truly breakthrough customer experiences. Many would argue a company like Apple is able to continually innovate and refine its products precisely because of the outrageous revenue it makes from controlling the premium segment of the smartphone market.
If you subscribe to this line of thinking, then you would probably also agree that trust company consolidation will likely lead to higher levels of technology innovation — and add value to all parties, including advisors and clients — in the long run.
Whichever side of the debate you fall on, it’s clear that events like these are rare in our industry, akin to a triple eclipse of the moon.
We’re watching grass grow before our eyes. The trust business is actually evolving. Once-forgotten firms are becoming hot again, earning an acquisition premium or even being bought purely to enhance other deals on the horizon.
And given the implications, it behooves us all to pause for a moment—and carefully consider all sides of this important debate.
Where do you stand on all this? We’d love to hear your thoughts below.
