As large banks have merged in recent years, the market has opened up for the new, small community bank and the independent trust company. Less than a dozen independent trust companies operate within the state of Tennessee, but they have tapped into an important—and lucrative—niche market. As Daniel Carter, president of The Trust Company of Knoxville, explains: “When some banks merged a few years ago, customers with less than $500,000 in assets got a “1-800” number to call. Those disenfranchised customers be came our clients.”

Although there are very few independent trust companies operating in the state, and although the competition for the business of those trust companies includes brokers, banks and even insurance salesmen, the principals of these companies agree that their unique market niche is a byproduct of the large bank mergers of the past decade. Independent trust companies, which are state-chartered and regulated, can do all the things a traditional bank can do with the exception of two transactions: accepting deposits and generating loans.

What is a trust, and why isn’t the trust department of the neighborhood bank sufficient to handle most trusts? A trust is a legal entity set up by an individual to hold assets and disperse them in accordance with that individual’s wishes. While most banks still have trust departments, the new breed of super-banks manages billions of dollars. Where do individuals, families and companies go that may not have many, many millions of dollars to manage?

Individuals, families or companies with assets in the neighborhood of $200,000 up into the millions of dollars are the client base of independent trust companies. According to Cliff Paessler, president of Investment Counsel & Trust Co. in Memphis, people looking for a higher level of personal service and a closer relationship with a trustee will seek out a private trust company. But trust companies are not for everyone. Because of the administrative costs of operating a trust, an individual or family should have enough assets when establishing a trust to make good financial sense.

Investment Counsel & Trust Co. was founded in the late 1970s and manages assets of $220 million. The company manages money in two ways. With trusts, the company manages assets for the benefit of others and implements trust provisions in a regulated manner. Agency agreements use agency accounts that allow businesses to manage their own money. Trust companies typically manage money in a more conservative and academic fashion than a brokerage house, which is a deciding factor for individuals or companies that want to protect their assets from liability or claims against creditors.

Paessler predicts that a growing segment of the population will look to trusts and independent trust companies to manage their assets, and that the outlook for independent trust companies is promising.

The Trust Company of Knoxville’s Carter agrees. His company, with total assets of $750 million, was founded 18 years ago by Sharon J. Miller and is the oldest independent trust company in the state. Of its total assets, about half of that amount are assets for companies, such as 401Ks, profit-sharing, defined-benefit plans and retirement plans. The other half of that $750 million are the assets of individuals.

“As the larger banks merge, the lower-end clients are left behind,” Carter says, “but this is great for the independent trust companies because we pick up a lot of business.”

Small companies in the $200,000 to $2 million range do not get the same level of service at a bank, even a smaller community bank, according to Carter. Smaller, neighborhood banks often are formed by experienced, senior bank officers who have been displaced when their employer banks merge. These officers form new banks, which typically do not have trust departments since setting up and operating a trust department is expensive. These banks send their customers to independent trust companies.

Carter says that the biggest challenge for independent trust companies is the lack of public education about the services they offer. “We are great problem-solvers and high-end providers of customer service, but we’re not great marketers,” Carter says. Historically, independent trust companies have relied on word-of-mouth to sell their services. The industry association, the Association of Independent Trust Companies (AITCO), is now working to address such marketing issues.

Sam Graham, managing principal and CEO of Diversified Trust Co. in Memphis, says his company has never advertised. With three offices in Memphis, Nashville and Atlanta, and assets under management of $1.26 billion at the end of June 2004, Diversified Trust is the second oldest independent trust company in the state. The company prides itself on “high-touch,” comprehensive wealth management services.

“The catalyst for our company’s formation stemmed from the frustration of key, influential businessmen in Nashville and Memphis,” Graham says. “At the time, a couple of these businessmen served on the boards of directors of large banks, and while they thought highly of the banks, they noticed that the trust departments of the big banks were becoming less an integral part of the bank, particularly after the mergers and acquisitions of the early 1990s.” These businessmen saw the opportunity to serve those families and foundations large enough to receive better-than-retail service from a big bank, but not large enough to start their own “family office”—wherein a family has accumulated wealth over $500 million. “We serve a large market of families and companies out there with wealth in the range of $1 million to $2 million and up to $1 billion.”

One of the founders of Diversified Trust Co. is Bill Spitz, who serves as treasurer of Vanderbilt University. According to Graham, Spitz noticed that in the northeastern United States, there were many “white shoe trust companies,” as Spitz called them—entities that were set up at least 100 years ago, primarily to take care of a few affluent companies. These companies were trust companies first, then banks. “In the South, we had banks first, then trust companies,” Graham says.

Graham is proud of the level of service his company offers. “We provide private wealth management in which trust services are a key component. We serve as the client or the family’s personal CFO, working with wills, attorneys and CPAs to make their financial lives simple and well-organized.” The thirteen principals in Diversified Trust’s three offices all have had substantial careers at other organizations, working as attorneys in law firms, vice presidents of banks, CFOs of not-for-profit and for-profit companies, and as accountants for the Big Four accounting firms.

In Nashville, Kirk Scobey of Equitable Trust Co. agrees that the outlook for the future of independent trust companies is good. Formed in 1991 as a solely owned subsidiary of Equitable Securities Corp., Scobey company manages assets of $850 million. “Our entire market focus is on individuals and families,” Scobey says. “That is one of two things that make us different—the second being that we have our own investment management team.”

In 1998, SunTrust Bank Atlanta acquired Equitable Securities Corp., and so acquired Equitable Trust Co., which continued to operate as an individual entity. In 2001, William H. Cammack, Tom Steele and Kirk Scobey executed a management buyout and brought the company back as an independent, privately owned financial services company. The company also has an affiliate broker-dealer and investment advisory firm called Equitable Advisors, with $230 million in assets. When clients want to be involved in managing their own money, they can do it through the broker-dealer. In business slightly over 13 years, Scobey and his co-owners have built a company with total assets of over $1 billion, with the majority of the business within the trust company.

Scobey says that traditional trust business has gravitated away from banks and toward companies like Equitable Trust because customers see that independent trust companies offer stability, localized service and hands-on management.

Joseph Presley, president and CEO of Cumberland Trust & Investment in Nashville, agrees with Scobey about the qualities that their customers value. “People really want local servicing and an organization that will be there for their families.” Presley’s company, with assets of $250 million, has offices in Nashville and Memphis and specializes in trust administration. Founded in 2001, the majority of the company’s staff came from large bank trust departments.

“So many families have different situations and dynamics, and they want to ensure a harmonious relationship after certain family members are gone,” Presley says. “An experienced trustee plays an important role in ensuring that harmony.”

Like his colleagues across the state, Presley sees a bright and lucrative future for independent trust companies. Cumberland Trust does not have a threshold for how much money a family must have to do business with their company, though they do charge a minimum fee of $2,000 per relationship. “We see our biggest opportunity as creating harmony for a family with a trust,” Presley says. “The use of a trust—and working with an independent trust company—is a great way of doing that.”