Minyan Mailbag - Fiduciary Trust
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
I realize you probably won't have a chance to read this until tomorrow, but I have a sad story that I thought might be appropriate to share because it represents the antithesis of all that Minyanville seems to stand for.
As you know from some of my previous e-mails, I work for a private Trust company that takes our role as a fiduciary very seriously. Thus it sickens me to read through the 9 inch stack of paperwork that came across my desk this afternoon regarding a Special Needs Trust for a quadriplegic teenager. It came to me for review and analysis regarding a potential lawsuit against the Trustee and the Trustee's broker for negligence and mismanagement.
The Trust was funded in 2000 with proceeds of $1.8 million from the settlement of a personal injury lawsuit, and was intended to take care of this disabled minor for the rest of her life. Instead, the "professional fiduciaries" that were responsible for managing the Trust managed to accrue investment losses in excess of $700,000 over a 3 1/2 year period. After accounting for medical and other expenses, that leaves the Trust with a balance of approximately $900,000. There are of course several annual and quarterly letters from the broker and money managers in the file, "explaining" the poor performance, comparing the returns to various "benchmarks" and saying that it will all work out "in the long term".
I know first-hand, as I am sure most Minyans do, that it was a tough time period to invest, but that is no excuse for the kind of losses that were incurred on this type of account. I find it absolutely deplorable that a Special Needs Trust would be invested in such a way by a broker, and further, that the Trustee would allow it to continue, unquestioned, for multiple years. There is no way this girl will ever make back what is lost, and since she will be unable to work, this is all the money she'll have for the rest of her life. And who knows what quality of life benefits she will have to forego in the future due to these losses.
Anyway, I could continue on about this, but it's getting a bit lengthy so I will wrap it up by saying that perhaps the saddest part of this story is that this the third one of these negligence cases I have reviewed in the last 6 months. (One has settled and one is currently in litigation.) Seems like integrity and responsibility are sorely missing...
It's great to hear from you and I hope 2005 was a smooth transition for everyone in your family. Minyans may remember that your brother (Sgt. Shep) was stationed in the Middle East and you helped organize a critter care package for his unit. I'm glad that he's back home, safe and sound and pursuing his dreams. All of our boys and girls overseas should find a similar fate!
Your story is sad but, unfortunately, not isolated. One of the by-products of overcapacity in the financial industry is the "supply" of financial professionals. Some money managers earned their stripes during the late nineties and confused brains with the bubble. And while the sharp correction that followed weeded out some of the weak hands, the "kick save and a beaut!" by the Fed kept many in the game. Now, as we meander through one of the more difficult tapes in recent memory, the earnings curve has gotten much steeper.
There is a massive transformation occurring in our industry and it will continue to evolve. I believe that research (read: information) is being commoditized and, as it is no longer a revenue driver for the sell-side, outsourced. The onus will--and always should be--on the decision maker to assimilate the landscape and manage risk appropriately. There are no fail-safe solutions other than time and, in many cases, after-the-fact losses and lessons. I would expect the litigation frustration to uptick considerably once the bear resumes his scare. Fingers tend to point when the averages are on their heels.
What can we do? Exactly what we're doing--learn as much as we can, surround ourselves with specialists we trust and have a healthy respect for the powers that be. The mindset of the masses needs to stop perceiving that the market is a vehicle for immediate gratification and understand that capital preservation is the first step towards prolonged profitability. After years of runnin' and gunnin' (both ways), we've been conditioned to shoot first and ask questions later. The sooner we all manage our expectations, the better prepared we'll be when tomorrow finally arrives.
Thanks kindly and please give my best,
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