To our Stockholders, Clients and Friends,
Fiduciary’s 137th year of operation will be measured by our distinctive client service, navigation of challenging global investment markets, transition to our hybrid operating model, and continued growth as new clients migrate to our differentiated offering.
2022 was an important year as the Company transitioned from the pandemic and launched itself into its new hybrid-operating model. Leveraging the silver linings learned over the prior two years, the Company crafted a flexible working model that provides an attractive work/life balance for our team. The new hybrid model is still a work in progress—and likely will be for some time. However, we have prioritized active mentorship of early-career professionals, assimilation of new colleagues and collaboration across the organization as we continue to refine the new paradigm.
The Company maintained its decades-long 98% average annual client retention rate during 2022. Furthermore, due to the team’s continued focus on distinctive client service, strong investment results and a holistic approach to each client, many new families and institutions choose Fiduciary for their financial management needs. As a result, the Company had its second best new business year in its history. The combination of low client-attrition rate and increasing new business continued the Company’s trend of organic net new business growth that began in 2015. With greater awareness of Fiduciary’s distinguishing qualities, macro trends in favor of the Company’s operating model and the Company’s structured new business development initiatives, we are confident this will continue.
Investment performance was resilient across client accounts despite the broad downdraft in the global investment markets. The work of the Investment Department with the Investment Officers benefited clients’ portfolios and enabled the majority of client accounts to exceed their investment return targets on multiple time horizons. Also of note was the continued expansion of investment offerings identified, researched and vetted by the Investment Department in order to provide tailored solutions for our clients.
During the year, several new professionals joined Fiduciary. Two new additions to the Company’s Senior Management Team included Suma Nair, who joined as Chief Fiduciary Officer and Anne Nolen, who took on the responsibilities of Chief People Officer. Additionally, Katie Collins and Nadi Son joined as Investment Officer and Senior Wealth Advisor, respectively. Anne Katsas and Aimee Bryant joined our Trust and Estates Legal team as Trust Counsels, and Judy Leung joined our Wealth Planning department as a Senior Wealth Planner.
In its seventh year of operations, the Company’s New Hampshire affiliate trust company had continued strong growth. The combination of favorable fiduciary laws, hard work by our New Hampshire team, and the evolving trust needs of our clients has made this growth possible. With increasing national recognition of both New Hampshire’s trust laws and Fiduciary’s capabilities, we have established, and continue to cultivate new partnerships with larger financial service firms to enable them to access our offering.
2022 was an active year for our white-glove custody business as competitive dislocations caused several large new clients to select Fiduciary’s client-focused services. Fiduciary’s long history of responsive and flexible custody services continued to differentiate the firm from the impersonal mega custodians.
Fiduciary Trust Charitable, which provides donor-advised funds and direct gifting program for our clients, continued its awareness-building activities and made modifications to further enhance our ability to facilitate clients’ philanthropic goals.
Given the progress that the Company has made over recent years, Fiduciary was recognized by a number of professional organizations during 2022, including being awarded “Best Wealth Manager Over $5 billion – Client Service” by Private Asset Management, as well as “Best Custodian” and “Outstanding Achievement in Trusts: ESG and Sustainability” by Wealth Management.com.
Record of the year’s milestones would not be complete without acknowledging and thanking Robert Irwin, who retired in June after 28 years at Fiduciary. During his tenure, Rob played multiple roles at the Company including Investment Officer, Director, Chair of the Trust Committee, Senior Management Committee member, mentor and, importantly, a friend to all. We wish Rob good health and happiness in his retirement and thank him for his service.
DIVERSITY, EQUITY, AND INCLUSION
During 2022, the Company continued its focus on seven long-term initiatives to enhance diversity, equity, and inclusion. These broad-based initiatives are both internally and externally focused and include: 1) Education, Training & Discussion, 2) Mentorship / Internships, 3) Volunteerism & Corporate Support, 4) a Diversity, Equity, and Inclusion Committee, 5) Hiring & Promotion Practices, 6) Marketing & Communications, and 7) Measurement & Tracking.
The Company took the following actions during 2022 in pursuit of its ongoing evolution as a more diverse, equitable and inclusive firm: conducting our third year of mandatory Company-wide DEI training, holding facilitated brown-bag lunch discussions, continuing our corporate contribution program focused on DEI initiatives, continuing our internship program with the Posse Foundation, and sponsoring several targeted volunteer opportunities.
Since raising our DEI priorities three years ago, the Company has made steady progress. On December 31, 2022, the Company had 139 full-time employees. Of these professionals: 56% were female; 22% were non-white; and, 18% were under 30 years of age, 43% were between the ages of 30 and 50, and 39% were over the age of 50. These statistics represent 6% more women and 5% more non-white professionals from our measurements three years earlier.
Most future perspectives are reflections of the present. Not surprisingly, because of the pandemic’s seismic impact on wealth management, current industry prognostications not only reflect temporal Covid issues, but also longer-term trends. Given these overlapping influences, the industry’s future will likely be characterized by two periods. The first will focus on addressing the immediate effects of the pandemic upon professionals and their relationship with the companies for which they work. The second period will transpire over a much longer period—the next decade and beyond—and will grapple with the implications for profitability across the industry as a whole. Existing macro-trends—demographics, technology and additional regulations—will play large roles in influencing how these periods unfold and in how those with generational wealth are served in the coming years.
Over the next few years the wealth management industry will continue to address the rippling effects of the pandemic. As discussed in last year’s Annual Report, between 2020 and 2022, the industry worked tirelessly to keep clients insulated from the pandemic’s disruption. Clients continued to open accounts, buy and sell securities, transfer money, receive statements, and engage with their investment professionals. The most material effect of the pandemic for clients was to accelerate the adoption of technologies that had already begun gaining steam—Zoom and DocuSign being two examples.
In contrast to the continuation of traditional client service, the pandemic greatly impacted wealth management professionals immediately and directly. Processes, protocols and norms that had been optimized for in-person operations over decades were put aside and companies reset their operating paradigms based on remote work and greater professional flexibility. The balance between work and home life changed as did employee expectations. Like other aspects of the pandemic, it accelerated pre-existing trends—such as the “war for talent” when a larger proportion of later stage career professionals left the industry or redefined the terms upon which they would work. This has left a number of wealth management firms—and professional service firms more broadly—grappling with fundamental operating questions. How do you mentor early career professionals remotely? How do you facilitate cross-departmental problem solving? What is a leading hybrid culture? How do you better measure productivity in a relationship business that is now remote? These questions and more are—and will be—the priorities for management teams for the foreseeable future and will define this next period across the industry.
From the vantage point of a professional service firm that has operated for over a century, Fiduciary Trust approaches this current post-pandemic period with excitement. We see it as a time of experimentation that will allow us to reexamine everything we do to help clients. However, to ensure our successful navigation, we are prioritizing three principles. First and foremost, we continue to believe this business is based on the provision of two interconnected value propositions: one for our clients and one for our professionals. As such, we continue to center our management decisions on what works best to identify, recruit and retain truly distinctive players. Demographics, new work norms and expectations have changed among talented professionals and we are incorporating these into our people strategies. Secondly, we are focusing on “the why” of what we do. A firm’s culture and its purpose are integrally intertwined in the fabric of an organization. For Fiduciary, the “why” has always been our service to others and is ingrained in our longstanding values of placing clients before ourselves, integrity, transparency and striving for excellence. Living these values is Fiduciary’s raison d’être and motivates professionals who choose to establish their careers at the Company. Finally, during this current post-pandemic period, we are rapidly iterating on new processes and technologies to assist professionals in collaborating and efficiently serving their clients’ most material needs. The world is different than it was before the pandemic, and as a result, we believe these three points: focusing on our professionals, reinforcing our purpose and embracing continuous process improvement will continue to distinguish Fiduciary in the near-term and will position the Company well for the longer-term changes across our industry.
Longer term, we see a second period of change that will be defined by one factor more than any other: the fact that the wealth management industry will be less profitable than it is today. The industry is not so much maturing as it is evolving. The stewardship of capital and the provision of fair and honest counsel has existed for centuries and will continue. However, the professionalization of the industry over the past three decades—particularly in the United States—as the Baby Boomers accumulated wealth during their working lives, has reached an important inflection point. With Baby Boomers beginning to retire, two demographic factors will influence the industry. First, the focus of the industry will shift to greater risk mitigation, larger portfolio distributions, increased servicing requirements associated with older individuals, and ultimately intergenerational wealth transfers: all shifts that will impact profitability. Second, like many professions, fewer individuals are joining and staying within the wealth management industry. This trend has already begun, with the number of financial advisors declining on average 1% every year for the past fifteen years and with another 40% of advisors forecasted to retire during the next decade, the number of professionals will continue to decline.1 In contrast, the number of clients with greater than $5 million of investable assets are estimated to annually increase 5% in the coming years. 2 While productivity gains should assist in the serving of clients, the demand for distinctive professionals among a shrinking pool will likely increase compensation costs.
Additionally, four other trends will likely deteriorate industry profitability over the next decade and beyond. Increased information sharing due to technology advancements should provide greater pricing transparency for consumers and lead to greater pricing pressure. Continued regulatory review and costs are not likely to decline and may accelerate depending upon public policy priorities. The significant investment that private equity investors have made across the industry over the last decade—particularly within the registered investment advisor (RIA) channel—will need to be serviced and will limit capital for professionals and re-investment. And, finally, the increased likelihood of a prolonged period of lower return investment markets will reduce historic “tail winds” across the industry. All four of these factors, coupled with increased compensation expenses, will change the economics of the industry materially.
The implications of a less profitable industry in the coming years are material to clients and professionals. As the industry economics change, it is likely that differentiation among firms will increase. Today, the vast majority of RIAs are largely undifferentiated. With increasing consumer buying power and lower industry economics, it is likely that consolidation will continue among RIAs and many firms will cease to operate. New business models that have not historically gained traction may find adoption. For example, firms with different pricing strategies (e.g., flat or hourly fees or purely performance structures) may appear. These changes will take time and will be modulated by both the pace of the next generation taking leadership roles and the pace of new technological adoption. Of these two, technological adoption may be faster given advances in AI that have the potential to overcome financial services’ historic difficulties transitioning from legacy operating environments to more modern systems.
Because wealth management is a relationship business and switching costs are significant and disruptive to clients, these longer-term factors matter today. Clients who may seemingly be well served today need to examine their existing providers to ensure their firms are well positioned for the future. Indeed, how firms navigate this current post-pandemic period should be a good telltale for the longer-term. Firms that are prioritizing culture, collaborative teams and are iterating new processes will likely be well positioned for the future. Firms that have demonstrated long-term profitability through multiple market cycles and have benefited from well-established stable governance are also likely to be well positioned. And finally, firms that have an awareness of what is likely before them and continue to manage conflicts of interest and align themselves with their clients’ success will most certainly be at an advantage.
For 137 years, Fiduciary Trust has adapted to changing client needs, demographics, investment markets, technology, regulations and more. However, as Fiduciary has evolved its objectives have remained steadfast: excellent client service, alignment with our clients and permanence. While we won’t know if our expectations of the future are correct for some years, these reflections help guide us forward. I continue to be grateful to lead Fiduciary and want to thank the entire professional staff for their dedication and hard work and also for their perpetuation of this special institution into the future.
Austin V. Shapard
President & CEO
1 Cerulli Associates.