Are you thinking about using a trust company to manage your assets or perform other services best left to a professional? Trust companies can fill an important role in many investors’ financial plans. But before you hire one, there are a few things you should know.
There is a common misconception that laws protect assets placed in trust. The reality is that neither the Federal Deposit Insurance Corporation, the Securities Investor Protection Corporation, nor the federal government provide any reimbursement for trust-account holders in the case of fraud or mismanagement. The exception is insured bank products, such as CDs and money market accounts, which are insured up to $100,000.
The only protection is fidelity bonds or errors-and omissions insurance that trust companies purchase. But the amount of coverage varies between companies and may not be enough to cover a large-scale loss.
When looking at trust companies, one thing to consider is their size. There are certainly many qualified small independent companies that give excellent service, but financial resources can be an important factor. For instance, a trust company that is affiliated with a large financial institution may have a better chance of restoring your losses than an independent would.
Audits play an important part in watching over your money. Larger firms often have internal, full-time auditors whose jobs are to deter fraud. Smaller companies generally rely on outside auditors and only do annual checkups.
Smaller trust companies are often state chartered, whereas larger federally-chartered institutions are under the eye of the Office of the Comptroller or the Office of Thrift Supervision. Not that one set of regulations is any better than the other, but state requirements vary from state to state.
There are some things you can do when looking at trust companies:
I have a good working relationship with several trust companies. Just return the enclosed coupon, and I’ll put you in contact with them.