Why Advisors Lose the Investment Relationship When a Client’s Trust Is Funded, and How Directed Trusts Prevent It

A wealth advisor can spend years building a relationship with a family. You know the history behind the plan, the family’s priorities, and the personalities involved. You may have helped the client navigate difficult markets, major life changes, business decisions, and conversations with the next generation.

Then the client dies, the trust is funded, and the successor trustee named years earlier takes control of the assets.

If that trustee also manages investments, the family’s existing advisory relationship may be at risk. The assets can move to the trustee’s investment platform even when the family is happy with its current advisor.

That outcome is common, but it is not inevitable. A directed trust can separate trust administration from investment management so each role stays with the professional best suited to handle it.

Why the investment relationship can be lost

A traditional trustee may be responsible for three major functions at once:

• Administering the trust according to its terms
• Making or overseeing distribution decisions
• Managing the trust’s investments

When one institution handles all three, investment management is often part of the package. Many bank trust departments and national trust companies have their own investment platforms, model portfolios, or affiliated asset management businesses.

For the institution, that structure may be perfectly logical. For the client’s existing advisor, however, it can mean losing the assets when the trust becomes active.

The challenge is that the decision may have been made long before anyone was thinking about the eventual transition. A client may have named a bank as successor trustee years earlier simply because that was the institution they knew at the time. The wealth advisor may not have been involved in the conversation at all.

That is why trustee selection deserves attention before a transition is underway.

How a directed trust changes the structure

A directed trust separates fiduciary administration from investment management.

Instead of giving one trustee responsibility for every part of the trust, the document can assign different responsibilities to different parties. The trustee can handle administration while a named investment advisor continues managing the portfolio.

In a directed structure, the administrative trustee may be responsible for tasks such as:

• Interpreting and carrying out the terms of the trust
• Maintaining trust records and accounting
• Coordinating tax filings
• Processing distributions
• Communicating with beneficiaries
• Working with the family’s legal, tax, and investment advisors

Investment authority remains with the advisor or other investment decision-maker named in the trust document.

For families that already have an investment relationship they value, this can provide continuity across generations. The advisor does not have to be replaced simply because the trust becomes funded.

Why Tennessee is well suited for directed trusts

Tennessee’s trust statutes support directed trust structures and allow responsibilities such as administration, investment management, and other fiduciary functions to be assigned separately.

A Tennessee trust can also include a trust protector or other designated fiduciary with specific powers under the governing document. Depending on how the trust is drafted, those powers may include removing and replacing a trustee, modifying certain provisions, or changing the trust’s situs as circumstances evolve.

For advisors, the key benefit is structural clarity. The investment role can be defined directly in the trust document rather than left to the discretion of an institution that may also compete for the assets.

As with any trust structure, the details matter. The drafting attorney should determine how responsibilities are allocated and which protections are appropriate for the client’s circumstances.

Look closely at what “advisor-friendly” means

Many trust companies describe themselves as advisor-friendly, but the underlying business models can be very different.

Some institutions are willing to work with an outside advisor but still have their own investment management capabilities. Others may have requirements around custody, investment platforms, or portfolio construction.

For an advisor evaluating a trustee relationship, it is worth asking a few direct questions:

• Does the trust company manage investments?
• Is the family’s current advisor allowed to remain in place?
• Is the advisor’s role documented in the trust instrument?
• Are there restrictions on custodians, platforms, or investment strategies?
• How does the trustee coordinate with the family’s existing advisory team?

The cleanest separation exists when the trustee’s business is trust administration rather than investment management.

How Magnolia works with advisors

Magnolia Trust Company is an independent corporate fiduciary focused on trust administration. We do not provide investment management services.

That structure allows us to work alongside the family’s existing wealth advisor, attorney, CPA, and other professionals without competing for the investment relationship. Our role is to provide fiduciary administration and help coordinate the team around the terms and objectives of the trust.

More than half of our clients have come to us through wealth advisor referrals, and those advisors continue managing the assets. 

We can serve in several capacities depending on the trust and the advisory team’s needs, including:

• Sole trustee
• Directed trustee
• Co-trustee
• Successor trustee
• Trust protector
• Agent for trustee
• Qualified trustee

What advisors should review before a trust is funded

The best time to address these issues is before a client dies or becomes incapacitated and before the successor trustee is called to serve.

A few items are worth reviewing with clients and their estate planning attorneys:

Review the successor trustee language. Older estate plans may name an institution the client selected many years ago. Make sure that choice still reflects the family’s current relationships and priorities.

Ask whether the named trustee manages investments. Clients should understand whether naming a particular trustee could also cause their investment assets to move.

Discuss directed trust structures during drafting. If maintaining the existing advisor relationship is important, that intent should be reflected clearly in the trust document.

Evaluate whether an existing trust can be updated. Depending on the trust and governing law, it may be possible to modify the arrangement or move the trust to a jurisdiction such as Tennessee.

A trustee transition is already a significant event for a family. Addressing the structure in advance can help preserve continuity when the time comes.

If you have a client whose trust names a successor trustee you have concerns about, or you are considering a directed trust structure for a new plan, we would welcome the conversation.

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Content on this site is for informational purposes only and is not legal, tax, or investment advice. Please consult your own professional advisors regarding the appropriateness of any trust or planning solution for your specific circumstances.