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Minyan Mailbag - Trusts



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.

Is it really Trust?

I've worked for a bank trust department for a while now and have come to realize that Trust is not an opportune name for most departments.

We promote our expertise and client service skills to potential clients but essentially we're all just asset gatherers, whether we're in the business of hedge funds, mutual funds, money management, trust departments, bank deposits etc.

What it takes to gather assets is questionable at times. Do we really provide greater customer service than the next trust department? Do we really have more expertise than the bank trust department down the street?

I think the more relevant question for potential clients to ask is this: Do you have experience handling complex trusts, and what are some examples? If a bank isn't able to get you a few names of trust clients to speak with beforehand, what kind of relationship do they really have with said client? Most importantly, when it comes to trusts and estates, your biggest friends are your lawyers and accountants. The trust department is just going to keep track and take orders from them anyway. If that is the case, when you actually have to have a corporate trustee as a bank trust department, doesn't the question come down to this: Where and how are you going to manage my money?

Don't let them just give you a buy list like ALL trust departments use, because you can figure that out for yourself. Every trust department buy list I have seen consists of this: The largest five companies in each of the S&P 500 sectors similarly allocated to the current allocation of the S&P 500 (i.e. 22% financials). In fact most trust departments use models whereby, "you are a circle but we think we can get you into this square," kind of thing.

How will the fixed income be allocated? We all know that your complex trust issue can't be handled with just equities. Will the trust department be buying fixed income and equities based on your allocation of 40-60% stocks and 40-60% fixed income? Well, remember, if that is the case then couldn't you just do that yourself, or at least be self-directed? Do you need someone to keep you properly allocated? While you may need help in selecting specific assets, allocation on a quarterly, semi-annual or annual basis is not all that difficult.

So, let's say you are a "typical" trust client with $500k or $5 million in assets. The investment manager discusses with you that he / she is going to buy large cap, blue chip stocks, a diversified portfolio of equities to help minimize the risk, along with a laddered portfolio of fixed income stocks including municipal securities, corporate bonds, as well as select agency bonds.

You say, "sounds great." That investment manager then goes and hits a button, which allocates your equity allocation into the S&P 500 model which they so ingeniously created (even though the S&P Model is available in a slew of places) and then they call their broker and say they are looking for 1, 2, 3, 4, and 5 year fixed income vehicles which they evenly spread about the ladder, and as long as they don't pay higher than a 102 dollar price, they think they've done you a favor.

Of course they haven't taken into account credit spreads, or the fact that the 10 year treasury bill has actually declined in yield since the Federal Reserve has raised rates. All they know is that you have signed the papers, the investments have been made regardless of where the stock prices are and what the outlook is for each company. As long as those stocks say BUY next to them, then they have nothing to worry about from the auditors because they were investing according to their experts.

So you ask your portfolio manager why he still likes Intel (INTC:NASD), or General Electric (GE:NYSE), or Microsoft (MSFT:NASD), or Cardinal Health (CAH:NYSE), or Pfizer (PFE:NYSE), or Merck (MRK:NYSE) and they present you with, "well our research firm, the experts, continue to follow these companies and they are still on our buy list." Amazing...

I'm leaving this world for obvious reasons. Most banks know how to run a trust department, they just do not know how to run an investment firm that is in the best interest of clients and their money.

Sure, most banks can make sure all of your legal files are in order, they can produce a check if you need it, and they even balance your checkbook and pay some bills, but DO THEY KNOW HOW TO MANAGE YOUR INVESTMENT? Is that not the reason you are with them in the first place? Are they able to protect and grow your money according to your wishes? Large Cap Blue Chip Stocks do not equal safety.


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