Increased competition among banks, brokerage firms, insurance companies, and mutual fund companies is most obvious in the retail investment areas of brokerage services, mutual funds, and - increasingly - variable annuities.

However, the trust arena is also drawing attention and participation from several nontraditional quarters, with some of the new entrants having sobering capabilities.

One set of examples emerges from the struggle taking place over employee benefit trust services for an increasingly demanding 401(k) plan marketplace.

Money management behemoths, whether bank, mutual fund, or brokerage firm, have built substantial trust companies from these client bases. The competition among these giant firms (such as Bankers Trust New York Corp., Merrill Lynch, and Fidelity Investments) to serve shifting needs of the defined contribution market seems to be just beginning.

The New Providers

However, employee benefit trusteeship revolves around an institutional set of services, and the trust-related issues are only a small skirmish in the much larger battle for defined contribution assets and record-keeping relationships.

The focus here is trust services for individuals, and the emergence of new providers of personal trust services. The increased activity in living trusts is an example.

In its simplest terms, a living trust is one established by a client who is still alive, as opposed to one activated through a will at the time of death.

Living trusts can be irrevocable - in which case it is virtually impossible to change the terms after it is established - or revocable, whereby significant flexibility is retained. These more flexible living trusts are receiving the bulk of the emphasis of the newer participants.

Trust subsidiaries of large brokerage firms, such as Merrill Lynch, PaineWebber, and Dean Witter, have been increasing their promotion of living trusts through their retail registered rep sales forces.

Wirehouse brokers and living trusts may seem an unlikely marriage, but the matchmaking incentives to the parent companies are clear. The full-service (and full-commission) broker sales forces of the old-line wirehouses are well-entrenched with the archetypal "high net worth" and "aging affluent" market segments.

Unfortunately, (for them), they face a significant loss of assets as this wealth is transferred through the inevitable ashes-to ashes process. The recipients of this inherited wealth are more likely to be affiliated with a discount broker or a mutual fund company than with a wirehouse.

Makeup of the Client Base

This is illustrated most dramatically by looking at the demographics of the respective client bases.

Based on management's statements to their brokers made within the last year, Merrill Lynch's investor base has an average age that is well above 60. Vanguard's average client, by contrast, is in the upper 40's.

Scudder, another no-load mutual fund company, is in the enviable position of having the only mutual fund alliance with the American Association of Retired Persons .

This has obvious advantages, but also has resulted in Scudder's having an average client age of 56 in the late 1980s. Promotional efforts have driven that average down to approximately 49.

Not Standing Still

Discount brokerage shows similar characteristics. According to the American Association of Individual Investors, only 30% of their members over age 60 use a discount broker, while approximately 70% of those under age 45 do.

The specific discount brokerage firm information bears this out also. Both Charies Schwab & Co. and Quick & Reilly report their average client age as approximately 47.

While the large brokerage firms appear to have the strongest defensive reasons for pursuing living trusts, discount brokerages and mutual fund companies have not stood still, either. Charles Schwab's Trust Brokerage Account, for example, is supported by a Guide to Estate Planning.

From the mutual fund side, the Colonial Group has established a tie with Massachusetts Co., a long-established personal trust provider which recently was acquired by PNC Bank Corp.

New account applications include a section suggesting that the investor consult a financial adviser (presumably a stockbroker or other commissioned registered representative) to help the client choose among the Colonial funds.

In return, Colonial generates a draft trust document, which can then be reviewed by the client's attorney and signed to create the trust, invested in Colonial mutual funds.

Promoting Living Trusts

How are living trusts being marketed by the new entrants? Promotional materials tend to be general, emphasizing the value of proper estate planning.

Living trusts do have advantages, but it is worth examining which are most significant. Many states, particularly those that have adopted the Uniform Probate Code, have streamlined the probate process to the point that the time and flexibility savings of a living trust often is not significant.

Better Marketing Needed

Finally, since a trust is a contract, trust dispositions can be contested by questioning the grantor's intent or capacity to create the trust.

The strongest advantages of living trusts seem to center on management of assets during disability or prolonged travel. simplified administration of assets in more than one jurisdiction, and choice of the jurisdiction whose law will govern administration.

This implies that a customized and somewhat sophisticated review of each investor's situation is necessary for the client to be served properly. Bank trust departments and certain private banking groups have traditionally developed the client relationships necessary for this customized approach.

However, these same providers rarely have been adept marketers. The entrance of these newer participants in the personal trust business, with their more aggressive marketing organizations, will require bank providers to bolster their sales and marketing capabilities or risk severe erosion of their position.

Other Challenges

Bank trust departments are not fighting on this front alone. There is also increasing competition between trust department investment managers and both brokerage firm and mutual fund company wrap account products.

The stakes in this contest are therefore much higher than just market share in the personal trust business.

Mr. Cerulli is the principal of Cerulli Associates, a Boston consulting firm specializing in business development for financial institutions. Mr. Nadig is a

senior consultant with the firm.

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