By Mhicole A. Moral, Special Features and Content Writer, BusinessWorld
The sheer number of investment options, tax laws, and financial regulations may leave even the most astute individuals feeling overwhelmed and uncertain. As financial transactions are becoming increasingly complex, both individuals and businesses are seeking trustworthy partners for their assets and financial affairs.
One of the most important non-banking services is what is commonly referred to as the trust service. At its core, a trust entity is a legal entity that holds and manages assets on behalf of individuals, families, or organizations. Trust arrangements are created for various purposes, including wealth preservation, estate planning, and charitable endeavors. Trust services, therefore, involve the administration and management of these trusts by financial institutions or professional trustees.
A trust company is empowered to act as an agent or trustee on behalf of an individual or group for the purpose of the administration, management, and eventual transfer of assets to a beneficiary. These services are designed to provide solutions to specific requirements of clients such as the administration and distribution of assets in accordance with the wishes of the client.
In the Philippines, the TOAP is the country’s oldest professional association in the financial industry, working closely with the Bangko Sentral ng Pilipinas (BSP) to unite, professionalize, and promote the trust and investment management industry. The association works closely with the government to discuss regulations and issues concerning the trust industry in a way that suits the best interest of the investing public.
“Trust is still predominantly used by clients for investments though there is increasing interest among the wealth management players to use trust for wealth management, estate planning, protection of interest of minors and the incapacitated as well as the achievement of lifegoals. This expansion of trust beyond investment is crucial in ensuring the growth and longevity of the trust industry,” said Rafael G. Ayuste, Jr., former president of TOAP and former chief trust officer of BDO Unibank, in an interview with BusinessWorld.
Trust services, according to Dr. Robert B. Ramos, CFA, CAIA, president and CEO of RCBC Trust Corp. and former president of Trust Officers Association of the Philippines (TOAP), contribute to the overall financial landscape, offering individuals and businesses a variety of options to secure their financial future.
“Generation of income and growing your funds? We have UITFs (Unit Investment Trust Funds) and IMAs (Investment Management Accounts) for retail clients. Providing retirement benefits to the employees of our corporate clients? We offer retirement fund accounts. Wealth preservation and succession planning? We provide customized estate planning services. There are various tools and products at our disposal that can help us craft a bespoke plan that addresses the complex and special needs of our high-net-worth clients,” said Dr. Ramos.
TOAP’s member-institutions provide a range of trust and fiduciary products, each serving specific purposes within the financial ecosystem.
One commonly known type is personal management trust, an arrangement that helps individuals manage their personal affairs, including financial planning, estate management, and asset protection. The primary goal of personal management trust is to ensure that the beneficiary’s interests are protected and that the trust assets are managed effectively. A revocable living trust allows individuals to maintain control of their assets during their lifetime while facilitating a seamless transfer of those assets upon death. Irrevocable trusts, on the other hand, are often used for tax planning and asset protection, providing a more secure structure.
Trust entities acting in a fiduciary capacity may act as executors in probate cases, ensuring the deceased’s wishes are carried out and overseeing the distribution of assets to heirs. They can also assume the role of guardians, managing the financial affairs of minors or incapacitated individuals.
In an institutional trustee capacity, such as in the case of escrow services, it protects the interests of two contracting parties by ensuring the fulfillment of agreed-upon terms and conditions. This service is valuable for transactions like installment-based purchases or asset dispositions subject to restrictions or clearances.
While personal management trusts cater to individual needs, other fiduciary services extend their scope to corporate and organizational requirements. Corporate trust services involve a trustee acting on behalf of a corporation to manage and safeguard assets, typically related to bonds and securities. Corporate trustees ensure compliance with legal and financial obligations, acting as intermediaries between issuers and investors.
Another common trust service is the UITF. It is an open-ended pooled trust fund, denominated in pesos or acceptable currencies, operated and administered by a trust entity. Governed by a Declaration of Trust, that provide a mechanism for investing, operating, and administering the fund, UITFs allow participation by any type of investor, whether conservative, moderate, or aggressive, and for as low as P1,000 only.
The importance of financial goals
Trust services encompass a range of offerings designed to manage assets and meet financial needs regardless of time horizon. This involves thoughtful consideration of short-term and long-term objectives, risk tolerance, and the desired legacy.
Mr. Ayuste emphasizes that the most important step before embarking on the investment journey with trust services is understanding one’s goals. Whether it’s saving for retirement, funding education, or wealth preservation, identifying the purpose of the investment sets the direction for the entire process.
“This understanding determines what the investment will be and how long it will stay invested. A second factor and just as critical is the investor’s capacity to undertake risk. This is easily determined through the Customer Suitability Assessment (CSA), which is provided by all trust entities,” he explained. “An investor with medium- to long-term horizon and aggressive risk profile can invest in securities with higher risks such as equities. In return for undertaking such risk, the investor should be rewarded with a higher return on investment. A conservative investor with a short-term goal, on the other hand, can invest in less risky outlets such as short-term government securities and money market securities.”
Similarly, Dr. Ramos noted that it is important to have a thoughtful and strategic approach in determining the right trust products and services that best suit the financial goals and needs of the individuals or businesses.
“We always start with the question — what are your goals and objectives? We then find out what the risk appetite of the client is and if there are other considerations that we need to take into account before we come up with a recommendation, such as liquidity needs, financial capacity, and investment horizon. We always explain to our clients that when it comes to investments, there is no one-size-fits-all approach. What works for one client may not work for another. So, it is important to establish the goals and preferences of the clients first before deciding which investment product to go for,” Mr. Ramos explained.
According to the former TOAP presidents, trust services allow individuals and corporations to tailor their approach based on their unique financial objectives. This customization ensures that the chosen trust structure aligns seamlessly with the overarching financial goals.
Trusts also serve as powerful tools for risk management, mitigating the risks against potential threats to financial stability.
Bridging more Filipinos in a digitalized environment
According to Mr. Ayuste, the advent of online shopping has already familiarized Filipinos with the convenience of accessing goods and services from the comfort of their homes. However, this digital access has not translated proportionally to investments in the financial sector.
The lack of investment in the financial sector can be attributed to the lack of understanding of trust services. While many Filipinos may be familiar with traditional banking services, trust services are often overlooked and underutilized.
Trust services, such as IMAs, personal trust and estate management (PMT), and escrow, can offer clients a range of benefits that traditional banking services may not be able to provide.
“A number of different factors come into play, such as confidence to use digital facilities for other than payments and fund transfers of small amounts of money, challenges in terms of internet speed, and product availability being limited to UITFs, among others,” he mentioned. “A factor, within the reach of TOAP, is the expansion of products and services available digitally. This should contribute to greater participation from the consumer.”
Furthermore, TOAP understands that the younger generation, particularly Gen Z and Millennials, are tech-savvy and prefer to consume information through digital platforms. As a result, the association has taken an innovative approach to engage this market by offering personalized and digitalized financial planning advice and investment opportunities.
For instance, digitalization has enabled more banks to reach more clients and improve their efficiency.
“Because of digitalization, our clients are able to avail of our products and services wherever they are 24/7. Because of the improved access, more Filipinos are able to invest their hard-earned money in the products that they prefer,” Dr. Ramos said.
Steven C. Te of BDO Unibank Inc. – Trust and Investments Group and the current president of TOAP, said that engaging the youth in financial education and trust services requires innovative approaches that resonate with their digital-centric lifestyle.
“TOAP has recognized that to be able to connect to younger individuals, it needs to immerse itself into their world that is primarily driven by social media, digital and mobile banking, electronic wallets, and, recently, artificial intelligence or AI,” Mr. Te said.
Moreover, financial literacy is an essential skill that every individual needs. Mr. Te said that trust services further empower individuals to make informed financial decisions, ultimately contributing to economic stability and individual well-being.
For more information on TOAP and its initiatives, visit their official website at https://www.toap.org.ph/. Get to know TOAP’s member-institutions and know what products and services they offer by visiting https://www.toap.org.ph/members-directory.
This article is in the special edition of BusinessWorld In-Depth digital magazine, in celebration of Trust Consciousness Week. Get the full issue for FREE via BWorldX. Visit www.bworld-x.com.
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