If you’re the beneficiary of a trust, you may not be a happy camper. And it’s easy to appreciate why.
Over the years, bank mergers have swallowed up many hometown banks, which have left plenty of beneficiaries talking with trust officers thousands of miles away. In fact, the concept of a personal trust officer has become endangered. A beneficiary who contacts a faraway call center may talk to someone different every time he or she calls. Many trust officers are now expected to assume roles that look more like salesmen as the pressures to attract more trust assets grow. In this environment, managing existing trusts become less important than trolling for new trust accounts.
Living with an irrevocable trust can be especially frustrating if the document’s provisions do not permit the ability to switch a corporate trustee, whether it be a bank, trust company or some other financial institution. Without this safety hatch, beneficiaries too often find themselves stuck with an unresponsive trust department.
While you may think you can avoid problems for your loved ones by picking a stellar financial institution to serve as a trust’s repository, experts suggest that this won’t necessarily insure that the assets are managed wisely. That’s certainly been the experience of W. Scott Simon, who is an attorney and the author of The Prudent Investor Act: A Guide to Understanding. After serving as an expert witness in trust fights involving two of the nation’s largest and most respected trust companies, he said was amazed at the “moronic” lapses he uncovered. The trust companies did a poor job of diversifying the trust portfolios and and he uncovered no semblance of any sort of fiduciary process. No one, for instance, had bothered to develop investment policy statements for the trusts, which is an absolutely critical document that lays the groundwork for how a trust will be managed.
“If the big boys aren’t leading the pack and getting up to snuff, you can see that it hasn’t filtered down,” says Simon, who is principal of Prudent Investor Advisors, LLC in Camarillo, CA.
Even though a trust account may seem as portable as Mount Rushmore, it makes sense to learn as much as you can about how the cash, real estate or other trust assets are managed, as well as what fees are being charged. Next week, you’ll explore what your options are — beyond simply tolerating poor trust services.
Here’s some things to look for:
Follow the money. If you don’t know how a bank is investing trust money, find out. Don’t be surprised if the cash is tucked inside the bank’s own mediocre retail mutual funds. “Proprietary mutual funds are much more expensive and while you can’t say they are all terrible, they certainly aren’t on top of the heap,” suggests Standish Smith, the founder of Heirs Inc. in Villanova, PA, which is a non-profit organization that promotes trust and estate reform. It’s better when trusts are invested in low-cost index funds, individual portfolios of stocks and bonds or in traditional common trust funds, which are managed by banks for the exclusive use of trust customers.
It’s important to appreciate how proprietary funds can drag down performance with higher costs. Here’s how it can happen: When common trust funds are used, their expense are included in the overall trust fee. But when banks started rolling out their own retail mutual funds, they slapped on an extra layer of costs to their captive trust accounts. So a trust is forced to pay for its management, as well as mutual fund costs. When beneficiaries squawk about these double-dipping fees, some banks will rebate a portion of the mutual fund fees to trust customers. But this doesn’t always happen, says Roger Krasnicki, a St. Louis attorney and principal of Fiduciary Solutions, which is a litigation support and trust consulting firm. “In a number of instances that I’ve seen, it hasn’t worked because someone didn’t pull the right switch in the accounting system.”
Pay attention to benchmarks. Check how the trust investments are performing compared to widely used market indexes. These include the Standard & Poor’s 500 for large-cap stocks, the Russell 2000 or Standard & Poor’s SmallCap 600 for small cap stocks and the Lehman Brothers Aggregate Bond Index for the overall bond market. Your trust statements should include common benchmarks so you can make comparisons. You should be wary if a trust company suddenly switches to more obscure benchmarks for comparisons. This could indicate there is a problem with the portfolio’s performance.
Don’t overlook property and other trust investments. Beneficiaries are more likely to focus on how stocks and bonds are faring, but if there are other investments in the portfolio, such as rental property, timber and oil, they also need to pay attention to them. Corporate trustees can mismanage these assets too, such as unloading property at below market prices. Michael Baker, the chief executive officer of National Advisors Trust Company in Overland Park, KS, conducted a fiduciary review a couple of years ago of a trust that contained timber holdings. (You’ll learn more about fiduciary audits next week.) In the review for the beneficiaries, Baker concluded that the bank could have negotiated more favorable contracts with a saw mill. And he discovered that the bank had steered the bulk of the contracts to the same individual, who maintained close ties to the bank.
While trust fiduciaries are not infallible, you’ll rarely hear of one being held accountable for errors. One reason could be the intimidation factor. “Many people are afraid of banks,” observes Thomas Grzymala, a certified financial planner and principal of Forensic Analytics LLC in Keswick, VA. “It can be scary and the big trustees have deep pockets.” Beneficiary victories are also rarely celebrated publicly. Attorneys often get involved when conflicts arise, but the battles are usually settled before they can reach the courtroom. What’s more, some beneficiaries assume the trust departments will always do the right thing. “Banks have this reputation of being wonderful fiduciaries. They sell that with their gothic columns, the high ceilings and highly polished stone floors that echo when you walk through the lobby,” says Stewart Frank, a Certified Public Accountant and managing director of the Tillit Group, LLC, in Bingham Farms, MI, which conducts fiduciary audits. But, he insists, “It’s all image.”
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