The wider distribution of thrift charters is bringing new competition for bank trust departments.

Several of the nonbank companies that have sought thrift charters in the wake of 1995 and 1996 rulings by the Office of Thrift Supervision have been specifically attracted by their trust implications.

Because of OTS preemption of state restrictions, they can refer clients in any state to their trust subsidiaries.

Merrill Lynch & Co. and Morgan Stanley, Dean Witter, Discover & Co. are among those that have already expanded their trust company businesses through thrift charters.

Eight other insurers and brokers including A.G. Edwards, Hartford Financial Services Group, and Paine-Webber Inc. are pursuing thrift charters for trust powers.

In the past, nonbank brokerage and insurance companies watched helplessly as valued clients with no other option established trusts with banks or named individuals as trustees. With the ability to market their federal thrift-chartered trust capabilities, the assets stay under their management and provide continued income streams.

"It has definitely been easier to conduct business," said Michael W. Herlihy, president of Advest Bank and Trust, a subsidiary of the retail brokerage Advest Group Inc. "We handle referrals from brokerage offices in 17 states."

Affluent investors who otherwise would have sought outside referrals and advice on appointing trustees do not have to leave their broker or insurance company, and banks can get cut out of the process.

"I can't even get to see them," said Edward D. Higgins, the head of trust at Mercantile Bancorp., St. Louis.

He called it frustrating that he is unable to pitch clients on the differences between his and the nonbanks' offerings.

"A competitor with less depth and a smaller 'bench' could have a glossier brochure than us and the layman doesn't always appreciate the subtlety and complexity of what makes a truly superior trust organization," Mr. Higgins said.

As a result, Bankers are indeed losing out, said Eugene F. Maloney, corporate counsel of Pittsburgh-based Federated Investors, which sells mutual funds through trust institutions. The loss of individual pieces of business may not be noticeable, but the impact can add up.

"Nobody got punished, the lights went on in the morning, you got your paycheck, but something insidious is going on," Mr. Maloney said.

He commissioned a researcher to determine the growth of trust departments net of market appreciation.

Between 1992 and 1997, personal trust assets under management in bank trust departments, where equity investment performance matched or exceeded the S&P 500 index, fell 16%, he said. Those with performance below the benchmark saw trust assets decrease 27% over the same period.

By contrast, the value of trusts assets administered by 75 thrifts jumped to $80 billion at yearend 1997 from $7 billion in 1985, according to the Office of Thrift Supervision.

Most nonbanks started with trust units chartered by states. The ability to develop business from all 50 states has lured many to the federal thrift charter.

Insurance companies and brokerages can get thrift charters, but not bank holding companies due to Glass-Steagall Act restrictions.

Banks with federal charters-1,066 national banks have trust powers, of which 86 are solely trust banks-are not limited geographically when conducting trust services. That was the gist of a controversial letter issued by the Office of the Comptroller of the Currency in 1995, commonly referred to as the Banc One letter.

Though some lawyers have anticipated challenges to the federal preemptions, no court test has taken place.

The Conference of State Bank Supervisors has circulated a proposal for legislation in all 50 states that would give state-chartered institutions the ability to open trust branches across state lines.

Unless states make such allowances, state-chartered banks will remain at a disadvantage against nationally chartered competitors, bankers said.

"If someone could enter a market more easily at a lower cost, or deliver products at a lower costs than we could, then I think that's a legitimate concern," said James L. Kermes, president of Glenmede Trust Co. in Philadelphia.

Glenmede has Pennsylvania and New Jersey charters and a branch in Cleveland.

"If we're in the same business, why shouldn't we be allowed to do the same thing?," said Mr. Kermes. "There should be a level playing field that allows us to do the same thing."

Hartford, Conn.-based Advest Bank and Trust, which manages about $500 million of trust assets, converted to a federal thrift from a Connecticut charter in April 1997.

"The ability to exercise federal preemptions puts us on an equal competitive footing" with institutions in any given state, Mr. Herlihy said.

Many nonbanks in the trust business still operate with state charters, including Fidelity Management Trust Co., Legg Mason Trust Co., and Raymond James Trust Co.

But a multistate trust operation can be expensive without a federal thrift or banking charter, according to Robert M. Taylor 3d, a partner of the Hartford law firm Day, Berry & Howard.

"You have to get licensed (in each state), post a bond, and be subject to regular examination," Mr. Taylor said. "In some states the laws are so burdensome-why go through that?"

Interest in thrift charters has intensified since Congress began debating financial modernization legislation that would abolish the federal thrift distinction. Unitary thrift holding companies would likely be grandfathered. Several of the 22 nonbank applications pending at the OTS were filed in hopes of getting a charter before the legislation passes.

Martin J. Gavin, president of Phoenix Home Life Mutual Insurance Co.'s trust unit, which opened in April 1996 with a state charter and now has two, said the thrift charter for trust is unnecessary and those who want it are looking to build other banking businesses.

"We started a trust company before this whole OTS storm," Mr. Gavin said. "This is largely a platform to get into broader banking services. It is a positioning strategy."

Mr. Gavin said Phoenix Charter, which has $900 million of personal trust assets under management, is set up to capture money its parent pays out in life insurance benefits. Half of those benefits consistently go into trusts, he said.

Brokerage firms had been building trust market share regardless of the flurry of interest in thrift charters, observers said.

"The trust business is getting bigger in and of itself" and banks have not been sufficiently aggressive, said David Ross Palmer, an industry consultant based in East Falmouth, Mass. "You have to be able to pick up a fork and dig in, and the banks don't do that."

"The brokers are out there very actively," said Howard Sharfstein, partner in charge of the individual clients department of Schulte Roth & Zabel LLP, a New York law firm. "They're creating a market that might not have existed before."

He mentioned a client who appointed Merrill Lynch as trustee for $9 million. He said someone with that kind of money would typically name an individual as trustee, while much wealthier people would use corporate trustees.

This new marketplace is characterized by the holding of smaller, more liquid trusts, which some bankers said is still attractive. The assets are primarily in securities and even cash.

"The impact on the community banks would likely be greater, since they would be more inclined to handle straightforward investment trust accounts," said William E. Thonn, executive vice president of private banking at Harris Trust and Savings Bank, Chicago. "That's not say it wouldn't affect the larger providers," he added.

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