Trust Products and Services

Trust

A legal device or arrangement whereby a person delivers part or all of his properties to another person or juridical entity who administers and manages the property/ies for the benefit of the designated person/s

Trust

Legal title to the property is in one person while the beneficial interest is in another person

Trust Banking

Fiduciary relationship where the bank, through its Trust Department (trustee), holds and manages assets on behalf of another party (trustee/beneficiary)

Trust Banking

• Not included in the bank’s balance sheet

• Independent oversight (Trust Officer → Trust Committee → Board)

Trust Products and Services

• Investment Management account (IMA)

• Trust and Other Fiduciary Account (TOFA)

• Unit Investment Trust Fund

Investment Management Account (IMA)

• Primarily intended for yield maximization

• Relieves the investor of the intricacies of day-to-day management of the fund

• Usually requires a higher lot

Types of IMA

• Directional

• Discretionary

Directional

• Client chooses the investment outlet

• Client sends a letter of instruction to the Trustee to invest its fund in the chosen outlet

Discretionary

• Client gives the trustee the authority to invest the fund

• Preferred outlets are presented in a pre-arranged investment mix

Trust and Other Fiduciary Account (TOFA)

• Retirement Plan

• Collateral Trust Indenture

• Custodianship

• Escrow

Retirement Plan

• Established for the benefit of the employees of a company

• Funding of the plan may come from regular contributions of the employer or employees, or both

• The fund will be used to provide for retirement and other benefits to employees in accordance with the retirement plan

Collateral Trust Indenture

• Acts as the intermediary between the borrower and the creditors and among creditors themselves in the administration of the loan agreement and of the properties securing the loan

• Monitors the compliance of both the borrower and the creditors of their respective obligations under the indenture

Collateral Trust Indenture

• Sees to it that the collateral is free from any liens and encumbrances

• Ensures the immediate and proper registration of the encumbrance or lien on the collateral

Custodianship

• Acts as custodian to properties such as marketable securities, i.e., GS and stock certificates, cash, titles, and others placed under custodianship, and

• Delivers the same upon specific written instruction to whomever the client directs

Escrow

• Acts as a third and impartial party to:

  • Intervene or hold in escrow contracts involving money, securities, property titles, or documents

  • To secure the faithful compliance with the terms of the contract by either party or both parties

Unit Investment Trust Fund

• Open-ended pooled trust funds in any acceptable currency, operated by a trust department of a bank and made available by participation.

• Investors contribute money to a common fund, which is then invested in various financial instruments (such as bonds, stocks, money market instruments, etc.) according to the fund’s investment objective

• Each investor owns “units” in the fund, not the underlying securities.

Key Features of UITFs

• Managed by Trust Department of a Bank

• Investors Own Units in the Fund, not the actual assets

• Value Basis Unit Price callled Net Asset Value per Unit (NAVPU)

Key Features of UITF/s

• NAVPU Calculation = (Total Market Value of Fund - Expenses)/Total Number of Units

• Types of UITFs = Money Market, Bond, Balanced, Equity, and Index Fund

• Regulated By = Bangko Sentral ng Pilipinas (BSP)

Common Types of UITFs

• Money Market

• Bond

• Balanced

• Equity

• Index

Typical Instrument (Money Market)

• Shot-term deposits, Government Securities

• Risk Level: Low

• Suitable for: Short-term and/or conservative investors

Typical Instrument (Bond)

• Corporate, Government Bonds

• Risk Level: Moderate

• Suitable for: Medium-term investors

Typical Instrument (Balanced)

• Mix of Stocks and Bonds

• Risk Level: Moderate to High

• Suitable for: Medium to long-term investors

Typical Instrument (Equity)

• Stocks

• Risk Level: High

• Suitable for: Long-term investors

Typical Instrument (Index)

• PSEI index, etc.

• Risk Level: High

• Suitable for: Long-term investors

Transaction Flow

• Engagement and Onboarding

• Document Preparation

• Investment and Administration

• Distributions and Closing

Engagement and Onboarding

• Determines the client’s needs (estate planning, wealth growth, income, capital preservation)

Document Preparation

• Preparation of documents defining duties of the Trustee, fees, and beneficiaries

• Trustor approves and signs

• Assets (money, securities, property) transferred to the bank (through the Trust Department) as trustee

Investment and Administration

• Trustee implements investment strategy per agreement with the Trustor

• Portfolio management and execution

Distributions and Closing

• Trust ends engagement with Trustor

• Trustee distributes assets and proceeds to the beneficiary

• Final accounting and closure

Risk Management in Trust Operations

• Fiduciary and Legal Risks

• Investment Risks

• Operational and Compliance Risks

• Internal Control and Governance

Fiduciary and Legal Risks

• Trustee is expected to act in the best interest of the beneficiaries

• Mismanagement can lead to legal liabilities

• Contracts must be clear to both parties

Investment Risks

• Market risk (change in prices of equities, bonds)

• Liquidity risk (difficulty selling assets)

Operational and Compliance Risks

• KYC and AML obligations

• Transaction monitoring and reporting to prevent fraud and money laundering

Internal Control and Governance

• Proper internal control and accounting standards to safeguard trust assets