Best Practices in Trust Accounting

Eric Dunn
May 5, 2022

Best Practices in Trust Accounting

Trust accounting is a subspecialty of wealth management, and it has certain rules to follow to ensure your clients receive what they deserve.

As such, you need the right mindset and technological tools to foster best practices for trust accounting.

We’ll go over some of these to help your RIA firm excel at delivering the best value for your clients’ investment.

First, understand the laws & regulations

Financial services are highly regulated, as you well know. States have varying laws, and they sometimes differ from federal regulations.

You and your staff must understand what laws take precedence for your clients’ portfolios.

For example, your firm is based in one state, but your clients are based in other states. How does that affect your advisement? If there are problems, what laws take precedence? Even though you’re not a lawyer, having a licensed attorney on retainer to review contracts can make your firm more insulated against legal action.

Make your contracts clear

Your firm should get everything in writing up front before investing a single penny of someone’s wealth. Provide a written agreement to clients that shows how their funds will be distributed across their portfolio along with all retainer fees and how those fees will be used.

Remember to keep retainer fees and investments separate. Your operational budget and the funds you’re investing for clients must be separated as per your state’s laws. The goal here is to prevent fraud.

Develop relationships with clients

You have all of these analytics tools, investment strategies, and experts helping your wealth management firm.

These mean nothing if your staff can’t build trust and develop relationships with clients.

Trust doesn’t necessarily happen right away, but it starts with understanding why people in your target audience are coming to you for help with their wealth management.

Reasons for hiring you might include:

● Not enough time to manage assets

● Assets are too complex

● Previous wealth management firm or RIAs dropped the ball

● Laws regulating the assets are too complex

● Wants to find new avenues for investing

How do you solve these problems for your target audience?

That’s the basis for developing trust. You need to help your prospective clients understand that you understand them.

After that, you move forward with and continue to develop a relationship with each client.

Maintain a trail of accountability

Whether through traditional paper or e-documents, make sure you and your staff maintain a trail of accountability for every transaction, deposits, asset transfers, bank statements, and client contact. Records of all emails, discussions, phone calls, and letters to and from clients must live in a centralized digital storehouse (usually a cloud-based platform) for quick and easy access in case there are questions, comments, and concerns later.

These are more than just CYA measures. Having a digital accountability trail makes sense because of the complex nature of trust accounting when you have millions of dollars per client. There is little room for error, and your staff must be up to the task.

Having internal accountability also helps maintain trust with your clients.

Robust monthly reporting

Your firm reports on assets and returns monthly. These reports must be detailed and comprehensive just because of the very nature of your business overseeing millions of dollars per client.

They want to know, and deserve to know, how their money is performing.

Your trust accounts must show monthly management and balance by listing all activity into and out of the account alongside the records of  every transaction. Monthly reporting should show bank account reconciliation, any tax filings made (estimated payments to the IRS), dividend reports, disbursements to accounts, and any payments made to your firm for fees based on the agreed-to fee schedule.

Customize reports to each client, and show them the bottom line of their investment activities and trust activities during a month, quarter, and then year.

Providing a detailed balance sheet as part of client services every month helps reduce the chances of fraud or fund mismanagement.

Review disbursements

Trust management means knowing how and when to disburse funds to people named in the trust. Before disbursing funds, allow adequate time for deposits to clear in the account. Your trust accounting software platform should allow you to set parameters for disbursements that automate these tasks every month.

Automate administrative tasks based on account parameters

Managing hundreds of trust accounts means your firm is doing well. It also creates major administrative tasks for your staff.

Luckily, there are affordable solutions available to your firm thanks to top-tier investments in trust accounting software coupled with plenty of competition. Machine learning and AI-based platforms also make these platforms affordable and robust.

Using trust accounting-specific software means there are fewer human errors and mistakes because auditing, communication suites, checks and balances, and reporting are all baked into the platform.

It’s not just accounting software like QuickBooks, which is great.

But accounting is not the same as managing trusts.

The more you automate tasks with trust-specific software, the more your staff has time to analyze data on each account to advise your clients properly.

HWA International can help your firm achieve this higher level of customer service.

Talk to us about our trust account software solutions, and we’ll arrange a demo of what we can do for you.

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