by Paul Joyce, Partner at LAVA Advisory Partners 

The Trust & Company Service Provider (TCSP) sector looks very different today from how it did 20 years ago. Then, the market was full of boutique independent firms, who provided personalised services to small, loyal client bases.  

 Compliance was a smaller burden for owner-managed businesses back then; a team of 20 might need just one compliance officer to manage the load. The space was also full of accountancy and law firms, as well as banks who offered similar services as part of their asset and wealth management (AWM) offerings.  

But things have changed. Regulators have significantly tightened frameworks across the board in that period, initially in the wake of major financial crises and scandals, and more recently in response to increasing concerns around data protection and sources of funds or wealth.  

These more stringent frameworks, which were designed to protect end clients and reinforce global standards, have greatly increased reporting and oversight costs, making life tough for boutique TCSP operations.  

That same 20-person firm today would need a compliance team of a half dozen people, adding a fixed cost that requires scaling of both costs and client bases, and making profitability a constant challenge.  

The end of the “Mom-and-Pop” TCSP firm? 

These changing conditions have made life difficult for these smaller operations and have also attracted a great deal of PE investment to the sector. A wave of early consolidation for scale swallowed up a number of local players into global platforms, where compliance costs can be spread across multiple jurisdictions.  

Those economies of scale allow for a far lower unit cost on the larger players’ services, which in turn made life even harder for small firms. With rising costs and fee pressure, they were stuck between a rock and a hard place.  

But, as you might have noticed from the title above, this was not the end for smaller TCSP firms. The personal touch (something that economies of scale struggle to replicate) has proved to be their greatest strength: high-net-worth (HNW) clients still value high-quality, relationship-driven service, which larger operators simply can’t match. 

Play to your strengths 

Many TCSP firms today are playing David to the Goliath of the global players, leveraging their premium service and longstanding presence in their area to great effect, and the envy of many.  

Firms in the Crown Dependencies (Jersey, Guernsey and the Isle of Man) illustrate these dynamics perfectly, remaining highly desirable, well-regulated jurisdictions for structuring wealth and corporate entities.  

Smaller operators now have to prioritise service excellence to maintain relationships with high-value clients in the face of huge competition. To maintain higher standards and increase resilience, many are considering partnerships and external investment, but these firms are often only in this enviable position because they resisted the temptation to just sell up to the first consolidator to come knocking.  

Patience pays off 

That’s the lesson to take away from the current high interest in TCSP firms, especially those in the crown dependencies: don’t panic when regulatory or market changes change the way you have to operate, and buyers come knocking. Businesses with a clear culture and identity are more likely to find their niche, and exiting too early can leave you missing out on a better deal down the line.  

With interest in consolidating and acquiring Crown Dependency TCSP firms continuing to ramp up, this is a crucial moment for founders and operators. Weighing your options and showing restraint are key to victory… but that’s a story for another blog.  

Watch for part II, coming soon!

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