In the US, there is a movement for large law firms to establish their own trust companies, and even worse, their own financial service companies to manage the client’s assets within the trust. This may create conflicts of interest.

In the US, we are seeing a movement that has developed over the last ten or so years for large law firms to establish their own trust companies, and even worse, their own financial service companies to manage the client’s assets within the trust.

In the traditional business model, trust agreements were written by the client’s attorney, and then the trust agreement was managed by independent corporate trustees, very often a banking organization, with fiduciary responsibility. The assets could be managed in-house by professional investment people or outsourced to other investment firms.

Nowadays, many large US law firms, like Nixon Peabody of Rochester NY and Washington DC, own, as part of the larger law firm organization, a trustee firm (Nixon Peabody Fiduciary Services) and an RIA to manage the trust assets (Nixon Peabody Financial Advisors). Part of avoiding a conflict of interest is to first avoid the perception of a conflict of interest, and the law firms that use their own trust companies and investment advisories fail on all counts. Despite the claimed ability for some firms to manage these multiple conflicts of interest, the opportunity for client abuse remains a real concern.

The first potential for abuse is when law firms write themselves into the trust agreement as corporate trustee. At this point in time, is the law firm taking care of the client’s best interests, or their own? The client pays a legal fee for development of the trust, and the law firm will receive subsequent fees (often around 1 per cent annually) for the management of the trust as the fiduciary. On trusts above a modest size, the ongoing revenue dwarfs the advice for the fees received for developing the document.

Out of the 1 per cent fee, the law firms must pay an asset manager to supervise the investment of those assets. Once again, a conflict is created when the law firm selects an associated firm for that asset management. After all, as a fiduciary, the trust organization has both a duty of care and a duty of loyalty. Within the duty of care, does the in-house investment firm represent the best investment advice? Under the duty of loyalty, who will the investment manager (often a fiduciary themselves if an RIA) be loyal to?

There are just too many potential conflicts looming for clients to allow their lawyers to hand off administration of a client’s trust to an associated firm. Furthermore, all investment management should be handled by fully-independent firms whose performance can be monitored and who can be replace dif they fail to perform.