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Managing trusts set up for philanthropy has become a lucrative business in a concentrated market – one that is increasingly incentivised to put shareholders before charities. By Mike Seccombe.

The lucrative business of trusts and the charities missing out

Sir Aaron Danks, founder of the Danks Trust.

Credit: Supplied

Dead rich people do a power of good in Australia. People such as Sir Aaron Danks, who was a generous philanthropist before his death on June 5, 1928, and whose will provided a mechanism by which he could keep giving from beyond the grave.

A trust was established, which has distributed tens of millions of dollars over almost 100 years to charitable causes. For much of that time, until 1968, its operations were administered by family members. Then, under the terms of the will, a professional trustee company (PTC) was appointed, alongside Danks’s family members.

No doubt it seemed prudent to Sir Aaron at the time to provide that a couple of generations hence, his successors should have recourse to professional help. Instead, it became a rod for their backs.

He could not have foreseen that, though, because he could not have foreseen the way philanthropy would become a big, lucrative business.

Back then, trustee companies were concerned with relatively straightforward matters of wills, estate planning and trust administration. Today they are big, complex, market-listed financial services companies.

That concerns a lot of individual trustees, advisers and other stakeholders in charitable trusts and foundations, including Peter Danks, descendant of Aaron and a trustee of the Danks Trust.

“The crux is that they are ASX-listed financial services companies, who have a duty to shareholders … and they are also the trustees of charitable trusts, who have a duty to the beneficiaries of the trust, which is the community,” he says.

In this clash of purposes, between maximising profit and maximising giving, he believes it is charity that is losing out, to the tune of maybe $50 million a year, eaten up in excessive fees charged by these licensed trustee companies (LTC).

Over 10 years, that’s $500 million the community has missed out on – money that could be going to local kindergartens, schools and hospitals.

This, he stresses, is just an estimate, because of a lack of transparency around fees charged. There are other concerns as well, around the lack of “portability” of charitable money – once it is in a trustee company, it’s nigh-on impossible to move it elsewhere – and a lack of independence in the way LTCs invest, regularly parking the funds with related entities.

Peter Danks does not suggest the big trustee companies are breaking any laws.

“The law allows this. The frustration is that the law never envisaged them being listed financial services companies.”

He is not alone in holding these concerns. For well over a decade, the Charitable Alliance, a body representing many of the big players in the philanthropic sector, has been agitating for change in the laws relating to trusts.

The big change in the way trustee companies operate is down to former treasurer Paul Keating, says Dr Elizabeth Cham, industry fellow at University of Technology Sydney Business School and a former chief executive of Philanthropy Australia.

“In 1983, before Keating deregulated the finance market, there were 35 trustee companies established through state legislation, which said they weren’t allowed to be taken over, given the work they were doing. And they couldn’t merge,” she says.

“After Keating, they all became part of the finance sector. They’ve all eaten each other up, merged or been taken over, and today we have just two big trustee companies,” she says.

They are Equity Trustees, established in 1888, and the even older Perpetual, established in 1886.

“Together,” says Cham, “they manage approximately 2000 perpetual trusts and foundations and are sole trustee for 91 per cent, and co-trustee for the remainder.

“They have what I estimate is 40 per cent of Australia’s philanthropic capital. Annually they distribute approximately $220 million to the community in grants,” she says.

The Danks Trust is one of the small minority where there is a co-trustee arrangement. More than a decade ago, it became a case study in a submission to government by the Charitable Alliance, protesting, among other things, about changes made in 2010 to the fee regime applied to trustee companies, allowing them to charge up to a little more than 1 per cent of the capital – not the income – of trusts.

“Such a change to the fee structure results in a significant increase in the fees payable to Trustee Companies by many Charitable Trusts & Foundations,” said the submission.

“A large portion of the fees charged by PTCs are paid by Charitable Trusts & Foundations established with monies left by deceased individuals and families on the understanding that the trust/foundation would be maintained in perpetuity for the benefit of the most disadvantaged in the community.”

The Danks Trust was one of them. At that time, it held assets of about $17.5 million, and distributed more than $1 million on average a year. As co-trustees, family members did much of the work of administration, for which they received an honorarium of $200 a year.

In November 2010, the family trustees received notice from the trustee company informing them it planned to charge “the fee to which it is entitled, in accordance with its published fee scale for discretionary perpetual charitable trusts” of 1.056 per cent for the first $10 million of capital, plus 0.88 per cent above that.

The family trustees did not think the company was “entitled” to any such thing. In accordance with the terms of Sir Aaron’s will, the trustee company had been paid 2.5 per cent of income for the previous 43 years.

“If they were successful,” Peter Danks tells The Saturday Paper, “it would have seen an increase in our fees paid to the licensed trustee company … [of] 600 per cent or more. So, understandably, we stood our ground.”

A 10-year private battle ensued, and the family won. But the victory depended on the terms of the will. What about other trusts, with no such stipulation, and where there are no family or independent trustees?

In estimating the amount that charities are losing to high fees, the alliance looked at a number of other examples.

“So we’ve taken four trusts, where we know what their capital is, we know what the income is, we believe we know what they’re paying currently in fees, we also know what was being demanded of us in terms of fees. And then you apply that percentage increase to $6 billion, which is the amount of money we believe – I stress this is an estimate – they held, we think the difference is roughly $50 million a year.”

So why not simply move the money somewhere else, where fees are lower?

“If we want to move our trust to a different trustee company, the advice we have is the individual trustees need to take the financial risk of going to court,” he says.

“And if the individual trustees lose, they are liable for the costs of both sides. If they win, the licensed trustee company can recoup its costs from the trust’s capital.”

Another expert in charity law poses the obvious follow-up question: “What happens when there’s no one alive with standing to change the trustee? What safeguards are there in place to ensure the fees that are being charged [are] fair and reasonable?”

While it is extremely hard to have trusts moved between trustee companies, the companies can and often have shifted them around as the number of trustee companies has dwindled.

In 2020, says Danks, “the original company that was appointed in accordance with a will transferred its assets and liabilities to … another company.

“Then on the first of March this year, the second company has transferred that role across to the third company.”

In both cases, he says, the change was ticked off by the Australian Securities and Investments Commission “without consulting us”.

Then there is the issue of how the trust money is invested. As the alliance’s 2012 submission noted, trustee companies frequently direct the funds, without competitive tender, into their own investment funds, for which they charge additional fees.

“If that’s not a conflict of interest, I don’t know what is,” says Danks.

So, back in 2012, under pressure from the Charitable Alliance, the Labor government ordered an inquiry by its Corporations and Markets Advisory Committee (CAMAC) to examine charitable trusts within trustee companies, with an emphasis on cases where the trustee company was sole trustee.

It recommended a range of measures including the adoption of a “fair and reasonable” requirement for all fees and costs charged, expanded powers for the courts to deal with allegations of excessive fees, potential replacement of trustees and much greater transparency in general.

There was no government response to the CAMAC report. And the succeeding Coalition government abolished CAMAC.

More recently, the Productivity Commission has taken another look at the operations of trustee companies, referring back to the CAMAC report, and echoing some of its concerns. In particular, its report of a couple of weeks ago advocated “greater clarity” where “a licensed trustee company may provide both trustee services and investment management services”.

It also noted that the consolidation of trustee companies down to just two could “lead to situations where fees for services are higher, or the quality of service is lower, than would be the case if there were greater price competition”.

The trustee companies argue that people have the choice to use other vehicles for their money, which is true. They argue companies are more closely regulated than other trustees, such as family members. And that it should be hard to dispense with the services of a trustee company, lest doing so should defy the wishes of the person who set up the trust, as to how their foundation should be managed.

In the end, though, while the Productivity Commission flagged the possible need for “policy reforms in relation to the administration of charitable trusts by licensed trustee companies”, it handballed the issue, recommending the Law Reform Commission examine it.

Meanwhile, the sharks are circling. A deal is pending for KKR, a US-based global investment company that manages a variety of investment classes including private equity, energy, infrastructure, real estate – you name it – to acquire the trust and wealth management businesses of Perpetual, the larger of the two remaining trustee companies.

The $2.175 billion deal would wipe away all of Perpetual’s $770 million debt, and also hand what a KKR source called “a mountain of cash” to its shareholders.

KKR has a reputation for being a rapacious money-making machine.

Danks sees the deal as “a validation of all our concerns”, and poses the question of whether a giant US company is actually looking to deliver benefits for the Australian community by generously disbursing charitable funds, or whether the objective is to “produce outsized returns for investors”.

The deal has yet to go through various regulatory hoops, including approval by the Foreign Investment Review Board, and it will be subject to a vote by Perpetual shareholders late this year or early next.

The parties seem confident it will pass. And, of course, a lot of people who might object won’t do so – the generous people who set up many of the trusts – because they are dead.

This article was first published in the print edition of The Saturday Paper on August 3, 2024 as "Trust exercises".

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