Looks like a Happy New Year for trust marketers!

Trusts are trendy, according to Rachel Emma Silverman's article in the Christmas Eve edition of The Wall Street Journal.

Assets in personal trusts nearly doubled from 1998 through 2004, soaring to $1.19 trillion.

And that estimate may be low. Corporate trustees alone held more than $1 trillion in personal trusts last year, according to the American Bankers Association.

Driving the trend to trusts, Silverman writes, are the Baby Boomers, now reaching an age when thoughts of wealth-preservation and estate planning begin to be thought.

Not only are more trusts being set up, more are likely to last an heir's lifetime:

Traditionally, many parents would leave money to their children either directly, or would create short-term trusts that would pay out when the kids reached specific ages -- say, some disbursed when a child reaches 25 years old, then more at 30, then 35 -- after which point, the trusts would dissolve.

But in recent years, more lawyers have advised parents to leave gifts or inheritances, even small ones, in long-term trusts. The idea is that money left in trust for as long as possible is safer -- from creditors, divorcing spouses and estate taxes -- than money given outright.

As more trusts last longer, Silverman notes, they have become more flexible. Corporate trustees will be challenged to redefine the role of trustee: no longer merely working for the heirs but working with them.

Here We Come A-Gifting

In the Holiday Spirit, we come bearing gifts, chosen in the knowledge that it's the thought that counts.

• For active portfolio managers, who keep forgetting that hyperactive turnover usually leads to underperformance, a relaxing mug of hot mulled cider.

• For indexers, who need a way to keep awake while their passive portfolios outperform most actively-managed funds, a Starbucks Gift Certificate.

• For hedge fund honchos, who know it's "positive returns or perish," a year's supply of 100-proof Alpha (take only as directed).

• For tax practitioners, the prospect of a new round of Tax Reform. (And you can bet that Congress, once again, will make a glorious mess of it.)

• For trust and wealth-management marketers, a new batch of HNW Hot Buttons. ready to be pushed.

To all, best wishes for a Christmas that is Merry, a Hannakuh that is Blessed, a Yule that is Wicked Cool!

Rich kids need to be carefully taught

As noticed in the preceding posts, Sir Tom Hunter and Mr. Andrew Carnegie advise the New Rich to give their billions away, not heap it upon their kids.

Not all wealthy parents like that advice. What's more, even the few millions one might leave to a son or daughter as a modest life endowment could easily look like making-whoopee money to an untutored young person.

Hence the growing emphasis on helping ultra-high-net-worth parents teach their potential heirs to be self reliant and financially literate. For a discussion of this subject recently commissioned by Northern Trust, see Preparing Children for a Life of Wealth.

This week, by the way, Northern's web site announces a nice honor. Private Banking International magazine has selected Northern Trust as the winner of the Outstanding Private Bank—The Americas Award 2005.

Tom Hunter: “almost accidental philanthropist”

Andrew Carnegie (see preceding post) has a new disciple — and a Scot, to boot!

Alan Cowell profiles Tom Hunter in today's New York Times:

When Tom Hunter says he plans to get serious about something, he seems to mean it. Earlier this year, after touring Africa with former President Bill Clinton , Mr. Hunter - now Sir Tom - resolved to get serious about philanthropy for a continent in turmoil. The result? A promise of $100 million, ponied up for projects to wrest Africans from poverty - not bad for a man of 44 who started off his business career with borrowed money, selling sneakers.

Son of a greengrocer, Hunter borrowed from his family to start a chain of sneakers stores. Seven years ago he cashed in, selling his Sports Division chain for a considerable fortune.

When they first became rich, in 1998, Sir Tom said, he and his wife, Marion, formed a charitable trust because it was "tax efficient," making him almost an accidental philanthropist. Then, becoming frustrated with some of his early giving in Scotland, he turned for advice to Vartan Gregorian, the president of the Carnegie Corporation of New York, a choice of guru that reflected his reverence for the Scottish-born forefather of American philanthropy, Andrew Carnegie.

Indeed, Sir Tom likes to quote Andrew Carnegie, saying, "He who dies thus rich dies disgraced." He matches that adage with a public vow of his own, made in a recent speech: "I would leave this world as we came into it, with nothing. My family and kids would be well looked after but would not be burdened by the challenge of managing phenomenal wealth." ("My kids like to debate that," he added.)

Sir Tom has plenty of room for more philanthropy before he gets to "nothing." He ranked sixty-ninth on last spring's Sunday Times Rich List.

How to keep wealthy clients alive and happy

Money sometimes does make people happy, according to Syracuse professor Arthur Brooks writing in The Wall Street Journal.

According data from surveys by the National Opinion Research Center, for example, people in the top fifth of income earners are about 50% more likely to say they are "very happy" than people in the bottom fifth, and only about half as likely to say they are "not too happy."

There is, however, generally very little change in the average level of happiness in populations getting richer over the years. For instance, the percentage of the U.S. population saying it was "very happy" in 1972 was exactly the same as it was in 2002: 30.3%. Social critics of "consumerism" explain this by claiming that what makes rich people happy is not money per se, but rather the fact that they have more of it than others . . . .

In large, sudden doses, unfortunately, money can make people dead. A December 5 New York Times article reports on the short, unhappy lives of Mack W. Metcalf, a Kentucky forklift driver, and his estranged second wife, Virginia Merida, the daughter of a drug dealer.

Five years ago, Metcalf and Merida met wealth head on, sharing a $34 million lottery jackpot.

Years of blue-collar struggle and ramshackle apartment life gave way almost overnight to limitless leisure, big houses and lavish toys. Mr. Metcalf bought a Mount Vernon-like estate in southern Kentucky, stocking it with horses and vintage cars. Ms. Merida bought a Mercedes-Benz and a modernistic mansion overlooking the Ohio River, surrounding herself with stray cats.

Three years later, Metcalf was dead of complications relating to alcoholism. On the day before Thanksgiving, Merida's decomposing body was found; authorities suspect death by drug overdose. Only hint of a silver lining: $500,000 was salvaged to create a trust fund for Metcalf's daughter by his first marriage.

Wealth acquired more conventionally isn't necessarily fatal but, as Ruth Marcus writes in the Washington Post, the wretched excesses of the new Gilded Age are not a pretty sight:

Washington, of course, has always had its moneyed denizens . . . . What's different about Washington in this latest Gilded Age is the amount of money sloshing around this city -- this region, actually -- and the ostentatious display thereof . . .

The result is a strange version of increasing income inequality . . .The wretched excesses of the former American University president and his wife, for instance, can be attributed in part to their constant proximity to wealthy donors and immersion in Washington's social scene. If everyone else is having their drivers take them to the luncheon with the ambassador's wife, how could Nancy Ladner drive her own car -- even if it was a black 2003 Infiniti Q45? If everyone else has a private chef, why not have yours create a 13-course dinner to celebrate your son's engagement? Why not start with White Truffle & Porcini Egg Custard & American Sturgeon Caviar?

Back in the original Gilded Age, one of the most passionate critics of wretched excess was Andrew Carnegie. Above and beyond the "competence" needed to live in independence and comfort, Carnegie believed wealth should be used for the public good. This charitable work, he insisted, should be done during the wealth-builder's lifetime, not by bequest:

Knowledge of the results of [charitable] legacies bequeathed is not calculated to inspire the brightest hopes of much posthumous good being accomplished. The cases are not few in which the real object sought by the testator is not attained, nor are they few in which his real wishes are thwarted. In many cases the bequests are so used as to become only monuments of his folly.

Professor Brooks tells us why you should take Carnegie's point seriously: "Donating money (and time) is one of the best ways to buy happiness."

People who donate to charity are 40% more likely to say they are "very happy" than non-donors. Psychologists have even tested whether charity makes people happy using randomized, controlled experiments -- the same procedure used for testing pharmaceuticals, except that, instead of administering a drug to one group and a placebo to the other, researchers randomly assign one group to act charitably toward another. The results are clear: Givers of charity earn substantial mental and physical health rewards, even more than do the recipients of charity -- empirical evidence that it is indeed more blessed to give than to receive.

Ready to help your clients help themselves to happiness? Then get to work on those charitable trusts, family foundations and donor-advised funds!

Will review: bad news and good news

How do you hold on to will appointments when your institution has been acquired by Engulf & Devour Bank and Trust? If you are now working for E&D, today's Wall Street Journal item [emphasis added] reminds you to wrestle with that question:

It's probably time to revise your will. In January, the federal estate-tax exemption jumps to $2 million per person, from $1.5 million this year. What's more, some states have different estate-tax exemptions. But many wills don't take into account possible changes in federal and state estate-tax rules.

Check with a lawyer to make sure the language in your estate plan still applies with new exemptions. If some plans aren't adjusted, you could, say, inadvertently leave little to your spouse or face an unexpected state tax hit.

Many people's wills also don't reflect their current inheritance wishes because of a major life change. And if a bank or trust company is the executor of your estate, you might have a new executor due to consolidation in the banking industry. Make sure you trust that executor's judgment.

The good news? If you're with a local institution, you have some will-appointment harvesting to do.

Paint the bullseye on the hedge funds

Hard on the heels of this New York Times article suggesting that pension funds have been investing heavily in hedge funds comes this new report from Investment News—Hedge fund boom worrying regulators (registration required). The net worth limitation, intended to narrow access to hedge funds to sophisticated investors, was set in 1982 at $1 million and has never been amended.

The net worth and income requirements may both be modified if the trend toward bring hedge funds to a wider audience continues, according to regulators. However, such restrictions likely won't apply to pension funds, whose managers presumably have all the necessary financial sophistication to choose investments wisely. Still, given the temptation for underfunded plans to load up on hedge funds in an attempt to reach solvency, coupled with demonstrated industry volatility (and scandal), one has to wonder about the exposure of the PBGC.

Are the wealthy asking their trust officers about hedge funds?

We're all shareholders now

Stock ownership continues to boom in America, according to Half of American Households Own Equities, November 2005, a report from the Investment Company Institute. Some 56.9% of households now own equities, up from 15.9% in 1983 and 40.0% as recently as 1995.

The count includes participants in 401(k) plans, which certainly have been an engine of equity ownership, but according to the report three quarters of those who own shares through an employer's plan own stock outside the plan as well.

Boomers: wealth-management prospects or just "skiers'" kids?

Yeah, Boomers are going to inherit all those trillions. Then again, maybe those trillions are sliding down a slippery slope.

Harken to Tina Brown in her Washington Post column today:

There's a new catchphrase in London: Are you a skier? And it has nothing to do with winter sports. It's a quasi-acronym for Are You Spending the Kids' Inheritance?

Is estate planning going to be a hard sell?

How do you sell the idea of estate planning to HNW prospects who never intend to grow old? According to this Newsweek article on Boomers, you better start looking for the answer:

To say boomers expect to stay young isn't just a figure of speech, it is a statistically verifiable fact. "Baby boomers literally think they're going to die before they get old," says J. Walker Smith, president of Yankelovich Partners, the polling company, which found in one study that boomers defined "old age" as starting three years after the average American was dead.

Are you asking the right question?

A final bit of advice from Peter Drucker, the business management guru who died Friday at the age of 95:

"True marketing starts out . . . with the customer, his demographics, his realities, his needs, his values. It does not ask, What do we want to sell? It asks, What does the customer want to buy?"

Private banking: where the profits are

Forbes magazine sees tough times ahead for banks:

Last year Capco, a consulting firm headquartered in Belgium, produced a startling report entitled "The Emerging Crisis in U.S. Banking Profitability," which convincingly argued that the mainstream commercial and individual banking business was about to enter a prolonged dry spell of price competition and compressed profit margins. The report, though, missed one bright spot: banking services for prosperous customers.

For more on the bright spot, see Daddy Warbucks banking.

Active investment management still reigns supreme

Modern portfolio theory says you can't pick some stocks that will do better than other stocks because the market is too efficient—a "random walk."

Bruce Greenwald, the Robert Heilbrunn professor of finance and asset management at Columbia, teaches the Value Investing course once taught by the venerated Benjamin Graham himself. And Joseph Nocera, in a recent New York Times column ($$$), tells us what Bruce Greenwald says:

"Efficient market theory is basically dead."

Nocera explains the belief that investment portfolios can be intelligently designed:

Most business schools emphasize modern portfolio theory, which has as its central tenet that the market is so efficient it can't be beaten with any regularity. . . . As [Warren] Buffet put it to me recently, "You couldn't advance in a finance department in this country unless you taught that the world was flat."

Although Columbia has its share of portfolio theorists, the value investing program that Mr. Greenwald runs preaches something else: that the world is round. Or, more precisely, that the market can be beaten. Not easily, mind you, and not mindlessly. A "value" stock is, at bottom, a cheap stock. And a value investor is someone who has the facility to ferret out cheap stocks that don"t deserve to be cheap, the acumen to understand why certain such companies have what Mr. Buffett calls "a sustained competitive advantage: that will be borne out over time, the patience to wait for the market to come around to his view of things, and the discipline to stick to his value parameters through thick and thin.

Teaching value investing is one thing. Picking stocks that consistently outperform the market is quite another. As noted in the post below, by most rational standards passive investing via index funds is the better bet.

But while the mind says "index," the heart says, "Indexing is less exciting than watching grass grow." Seeking above-market returns is fun, a mild form of gambling if you will. And what's wrong with a little recreational gambling?

Most investors figure the gambles are worth the (hopefully!) modest cost. Supreme Court nominee Samuel Alito, for instance. In Slate, Henry Blodget (remember him?) analyzes Alito's reported investments and finds them generally praiseworthy. But Henry notes that Alito's Vanguard funds are not limited to index funds. They include actively managed equity portfolios, such as Wellington Management and Windsor II.

Even potential Supreme Court justices like to have a little fun!

Indexing: Investment management goes passive.

The case for passive investing is pretty persuasive, as Jonathon Clements points out in this Wall Street Journal column (subscribers only):

Before costs, investors collectively earn the market's performance. After costs, they must -- as a group -- lag behind. Logically, it can't be any other way.

For instance, over the past 25 calendar years, U.S. stock funds have clocked an average 11.9% a year, according to an analysis of Lipper data by Vanguard Group, the Malvern, Pa., fund company. That is well behind the 13.5% annual gain for the Standard & Poor's 500-stock index, calculated by Chicago's Ibbotson Associates.

Damning statistics like this have been kicking around for years. By the 1960s, we had the computer power, market data and analytical tools needed to study investors' performance -- and the results weren't pretty. It became abundantly clear that even professional stock pickers weren't beating the market.

Although Vanguard introduced the first index fund in 1976, so-called passive investing has only gained significant momentum in recent years. Clements cites two reasons:

1. The emergence of fee-based financial advisers, who can recommend low-cost index funds without taking a personal financial hit.

2. The introduction of Exchange-Traded Funds. ETFs allow brokers to give clients the benefits of indexing while collecting the same commission they would get from a stock transaction.

Currently nearly 10% of all long-term mutual-fund assets are in index funds. See The Great Race, a free WSJ article. ETFs are fast proliferating and now account for almost a third of all passive-investment funds.

Nevertheless, Clements doesn't expect active investment management to go away anytime soon. I tend to agree. Any contrary opinions?

The Patient Gardener

I love it when someone else makes the case for Merrill Anderson's services. This time it a consultant writing in Financial Planning magazineThe Patient Gardener: Here's how drip marketing can help you cultivate your image with clients. (registration required). Sound advice here on list development and management.

The most important lesson: Sales requires many contacts. They don't all have to be high touch contacts, but there have to be many. Newsletters provide one very cost effective to achieve this.

Great commercials: Where there's a Beetle, there's an heir

Back in the golden days of advertising, Doyle Dane Bernbach did cool commercials for a poor-man's Porsche known as the Peoples Car, or, as Hitler liked to say, the Volkswagen. Stuart Elliott of The New York Times in his weekly webletter recalls a classic spot involving inheritance:

A Reader Writes:
I enjoyed your recent item about favorite commercials. One of my absolute favorite spots of all time is the commercial directed by Joe Sedelmaier for Volkswagen in which the guy leaves his entire estate of "one hundred billion dollars" to his nephew, Harold, who drives a Beetle. I still remember a great line from the spot: "To my business partner Jules, whose only motto was, 'Spend, spend, spend,' I leave nothing, nothing, nothing."

Stuart Elliott replies:
Thanks, dear reader, for the memory. The commercial, called "Funeral," is also one of my faves. It was created by Doyle Dane Bernbach in New York, now part of the DDB Worldwide unit of the Omnicom Group. Doyle Dane also created other classic VW ads like "1949 Auto Show," my all-time best, and "Think small."

The "Funeral" commercial, from 1969, is included on lists of best commercials compiled by Advertising Age and TV Guide, among others. The commercial shows a procession of Cadillac limousines and other big cars headed to a funeral as a man speaks in a voiceover narration. The genius touch was that it soon becomes apparent that he is dead and reading his will aloud.

"To my wife Rose who spent money like there was no tomorrow, I leave $100 and a calendar," the man intones. "To my sons Rodney and Victor, who spent every dime I ever gave them on fancy cars and fast women, I leave $50 in dimes."

Then, after the dig at Jules and "other friends and relatives who also never learned the value of a dollar'' - to whom he leaves a dollar - the man talks about Harold. Harold is shown wiping away a tear as he drives his VW Beetle at the end of the procession.

"Finally, to my nephew Harold," the man says, "who ofttimes said, 'A penny saved is a penny earned,' and who also ofttimes said, 'Gee, Uncle Max, it sure pays to own a Volkswagen,' I leave my entire fortune of one hundred billion dollars."

(The script for "Funeral" comes courtesy of the book "When Advertising Tried Harder" by Larry Dobrow (Friendly Press, 1984).

Hedge funds: Trick or Treat?

Hedge funds may be more witches' brew than magic potion, says Mike Palmer of The Trust Company of the South.

Curiously enough, hedge-fund frauds are virtually nonexistent in Europe. In this CNN-Money article, Amanda Cantrell explains why.

The $12,000 annual exclusion is on the way

It's not official yet, but Professor Gerry Beyer reports here that the annual exclusion is expected to rise to $12,000 next year. The last bump was in 2002, and with inflation relatively calm in recent years I'm surprised that we've accumulated the 10% needed for the boost already. But there you have it--it means your 2005 marketing materials will have to be discarded at year-end.

One man's tax incentive is another man's loophole

In order to promote more charitable giving this year, the Katrina Emergency Tax Relief Act lifted the limit on the deduction for cash post-Katrina charitable gifts from the usual 50% to 100% of AGI. And the gifts don's have to be hurricane related. The thinking was, generous donors might have used up their deduction limit already with all of this year's natural disasters. This way, they can keep on giving to their usual charities as well.

Sound like a fair formula for getting the rich to part with their wealth for a good cause? Not to the New York Times— In Hurricane Tax Package, a Boon for Wealthy Donors. This "little-noted" provision is problematic because taxpayers are evidently more enthusiastic about it than expected. Congress thought the revenue loss would be $819 million, but already private estimators have projected a $1 billion to $3.5 billion "cost" to the U.S. Treasury.

To me, that's a sign of a successful tax initiative, but the Times is apparently more worried that some wealthy donors might reduce their tax bill to zero this year, as well as the revenue shortfall. Who favors dynamic revenue scoring now?

Wellington Mara left a Giant estate plan

Wellington Mara, the NY Giants owner who died yesterday, could remember the days when pads were paltry and helmets were leather. The Mara family has been an owner of the Giants for 80 years. Today's NY Times reports that Wellington did all he could to keep the Maras' 50% interest in the family:

As recently as two years ago, John Mara [Wellington's son] said the family had taken the steps to structure the team's ownership so that federal estate taxes would not be so onerous that they would prompt the sale of the team. The goal was to avoid what happened in Miami, where estate taxes and feuding among the trustees of Joe Robbie's estate led to the sale of the Dolphins to H. Wayne Huizenga in 1994.

But in 1995, despite acknowledging that steps had been taken to ensure an orderly transfer of the team within the family, John Mara told The New York Times: "It will be hard to keep control and pay the taxes, that is true. The estate tax laws are so severe. I think we've done some careful planning, which we believe will allow us to carry on control of the organization. But it will be difficult to do."

John Mara says he and his 10 siblings all have ownership interests in the Giants. In addition to lifetime gifts, Wellington Mara is believed to have used the marital deduction, trusts, limited partnerships and life insurance in crafting his estate plan.

Year-end tax planning for mutual fund distributions

The good news for mutual fund owners as a group this year is that distribution of capital gains are projected to reach $22 billion, up sharply from last year's $6 billion, according to Capital Gains Fuel Tax Code Debate. The bad news, of course, is that taxes will have to be paid on the gains, even if they are reinvested. A bill to change that tax treatment has faltered as attention has turned to hurricane relief and other unfinished tax business.

Where's my trust fund check, Dude? I'm outtahere!

According to a Trusts and Estates study cited in this week's Barron's (subscribers only), nine out of ten heirs switch advisers soon after receiving their inheritances.

Are you wooing your young trust heirs as vigorously as you should be? Sounds like you have little to lose and lots to win.

According to Barron's, J.P. Morgan Private Bank does its wooing by inviting young heirs to gatherings in exotic locales, like St. Tropez.

Your marketing budget probably doesn't have room for that, but what about more modest gatherings, offering a combo of financial learning and socializing. A dinner cruise, maybe? A day on the ski slopes? You can think of something.

Top Wealth Managers in the U.S., 2005

Merrill Lynch, Citigroup, UBS, Wachovia and Charles Schwab lead this year's Barron's list (subscribers only) of the top 40 private Banks, just as they did last year. Several names in the top 20 moved up or down a notch. Suntrust hopped up three slots, from 21 to 17.

Newcomers to the top 40 included T. Rowe Price Private Asset Management and Boston Private Bank and Trust.

Here's $5 billion. Can you quintuple it?

That's what Jack Meyer did for Harvard over the last 15 years, generating the highest endowment returns of any university in the country. But it wasn't good enough for folks at Harvard, because they expect such returns without having to pay the managers market rates to get them. A successor was named today:
Harvard Names New Head of $25.9 Billion Endowment Fund - New York Times

The article is silent on the compensation plan for the new managers--not too surprising, as transparency is what did in the last regime. It should be noted that the payments to Meyer that outraged the alumni were entirely performance based, the result of beating well established benchmarks over a period of years. We'll all be watching to see how Harvard does in the future.

Hedge funds, red flags and colorblind investors

An October 7th panel discussion entitled, "Lessons From the Swamp -- What We Can Learn from the Bayou Debacle," attracted about 140 investors, regulators, academia and portfolio managers to the Yale School of Management last week. “There were ‘screaming red flags‘ that with proper due diligence investors could have picked up on,” said one panelist.

And it's likely investors will be fooled again, said Stuart Robinson, an FBI agent who supervises the white-collar investigative squad in Fairfield County.

"I'd like to propose to you that it is overwhelmingly likely that there are other Bayou's out there," he said. "Just because Bayou got caught, nothing has truly changed. It's an industry geared to very smart people that get in over their heads so they commit criminal acts. These are folks . . . who are geared toward reporting perfection in their professional lives."

For some managers who aren't realizing the results they want, "lying is the only way to earn a living the way they are accustomed to," Robinson said.

In fact, "the next Bayou" seemed to have emerged already. A few days earlier, Lehman Brothers charged a West Coast hedge-fund firm, Wood River Capital Management, with fraud. The SEC followed with charges that two of Wood River's funds had invested nearly two-thirds of their assets in one stock while promising clients diversified investments.

The stock, a tiny wireless venture called Endwave, repaid Wood River's faith by losing most of its value.

Yesterday's Wall Street Journal (subscribers only) commented:

As investors and securities firms assess possible losses related to the ailing hedge fund Wood River Partners LP, questions are growing about how sophisticated market participants overlooked a series of red flags surrounding the firm.

Investors, institutions and wealthy individuals, have been pouring money into hedge funds at a prodigous rate. Question is, how many wealth managers can match Yale's David Swensen in his ability to pick top-performing funds and avoid the disasters?

And even if you have a "second Swensen" on your team, hedge funds can be a dicey game for your clients. See The Guardian's cheery news item: World's hedge funds face crisis as Refco suspends trading.

Planners: Business booming; mutual funds losing luster

That's the conclusion drawn here from a recent survey of financial planners around the country. What's the key?

A number of advisers echoed the sentiments of Frank Geremia, president of Geremia Financial Services LLC, an Edison, N.J., firm with $50 million under management. "The farther away we get from 9/11, the more people are getting into the markets," he said. "They're more active and less passive."

Mutual funds are evidently being displaced by Exchange Traded Funds, though they remain dominant.

Yale and Harvard's Dueling Geniuses - FORTUNE

Following up on this post from Mr. Macdonald, here's an interesting comparison of the key investment managers for the endowments at Harvard and Yale. Note that one helpful contributor to Yale's success has been exploiting the expertise of Yale alumni at below-market rates. Also that the manager has left about $1 billion on the table--that's the additional compensation he would have been paid had he performed the exact same work on Wall Street.

And it's a dispute over compensation that is driving Harvard's best managers away.

Hone your marketing skills with psychoeconomics

Want to triple the amounts that employees invest in the 401k plans you handle?

Like to hike the interest rate in a consumer loan offer by four percentage points and still attract just as many new customers?

Check out this Forbes article on Sendhil Mullainathan, a “genius” student of behavioral economics.

Cruising

I went on a cruise to Alaska the third week of September, which was terrific except that I seem to be having a hard time catching up on everything. So the blog has been pushed to the back burner.

But I was thinking about it, even during the cruise. Although it's probably true that the cruise industry was invented for affluent retirees, my impression was that the customers are not quite as affluent as I expected. Most would not qualify as traditional trust prospects, certainly not at larger institutions. But they are part of the "mass affluent," which trusts departments and divisions are courting more and more. Princess was able to deliver a very high quality, "individualized" vacation experience to a heterogeneous group of 3,000. It wasn't cheap, yet my sense was that we got very good value for the money.

Except the day of the storm, when we all got seasick, but that's the risk one takes.

Lessons here for the trust and private bankers?

Merrill Lynch clients have millions

From the cover story in the Oct. 3 Barron’s:

BOB HOPE ONCE CALLED a bank a place that will lend you money if you can prove you don't need it. He might as well be talking about brokers and their increasing pursuit of well-heeled customers -- a chase in which Merrill has a leg up on the competition. Of the nearly $1.2 trillion in individual assets with its brokerage unit, 39% are from clients who have between $1 million and $10 million with Merrill, while another 33% come from clients who've parked more than $10 million with the firm.

Who's even less trustworthy than an accounting firm? Wealth managers!

Accounting firms haven't been getting a lot of good press lately. Latest example, today's reports that KPMG has agreed to pay $195 million to wealthy clients who say the accounting firm sold them illegal tax shelters.

Curiously enough, CPAs and accounting firms were the only financial advisers rated “very trustworthy” by even a bare majority (53%) of respondents to the latest U.S. Trust survey of wealthy folks.

Only 41% deemed private banks very trustworthy, and only 38% were very trustful of fee-based investment managers in general.

Those rated least trustworthy were: mutual fund companies, rated very trustworthy by 21%, insurance companies (20%), and stockbrokers or brokerage firms (19%).

Could it be that today's financial advisers possess less integrity than those of generations past? Or do we simply live in a cynical age?

Keep your rich uncle on life support!

As Tom Herman reports in The Wall Street Journal (subscribers only), “The timeliest tax advice for thousands of the nation’s richest people couldn't be simpler: Keep breathing — at least until New Year’s Day.”

Don Weigandt of J.P. Morgan Private Bank in LA gave Herman illustrations of why the wealthy need to hang on until 2006:

Suppose someone who is single dies this year and leaves a taxable estate of a mere $2 million. The federal estate tax this year would be $225,000, according to calculations by Mr. Weigandt. But if that person lives until next year, the federal estate tax would be zero.

The rewards for survival get bigger as the size of the estate grows. Suppose a single person with a taxable estate of $5 million dies next year, instead of this year. The tax savings typically would be $255,000, says Mr. Weigandt. Or suppose someone with a taxable estate of $10 million dies next year instead of this year. The tax savings would be $305,000.

For someone with a taxable estate of $100 million, the federal estate tax typically would be $46,285,000. But if that person lives at least until Jan. 1, 2006, the federal estate tax would be only $45,080,000 -- a savings of $1,205,000.

There are other financial incentives to survive into 2006. The annual gift-tax exclusion is scheduled to rise next year, to $12,000 from $11,000, allowing wealthy people to move even more money out of their estates, tax-free.

Although the estate-tax issue often has been in the headlines over the past few years, the percentage of estates taxed by the federal government is very small. In recent years, for example, the number of taxable estate-tax returns represented only about 1.2% to 2.3% of total adult deaths each year, according to the Internal Revenue Service. But organizations such as the National Federation of Independent Business say those numbers are deceptive and that the "death" tax deserves to die. President Bush also has called for permanent repeal.

New IRS statistics show only 65,039 estate-tax returns were filed in 2004, says Martha Britton Eller, economist at the IRS Statistics of Income Division in Washington. That was down from 66,044 in 2003. Many estates weren't taxable. For example, of the 2004 total, only 31,329 -- or less than half the total -- were taxable, Ms. Eller says.

Most of these taxable estates represented the merely rich, not the super rich. For 2004, more than 22,200, or more than 70% of all taxable estates, were valued at less than $2.5 million. And only 1,328 were valued at $10 million or more.

Based on current law, the estate-tax exemption level is scheduled to remain $2 million in 2006, 2007 and 2008, then rise to $3.5 million in 2009 before vanishing entirely in 2010 -- only to return at the $1 million limit in 2011, unless Congress changes the law before then, as it probably will.

Copyright 2005 Dow Jones & Company, Inc.

Does your bank or trust company offer health club and/or home health-care services to the elderly wealthy in your market? Think about it!

Where the absolutely awesome wealth is

Thanks to 100+ hedge-fund managers, assorted investment bankers and other Wall Streeters, Greenwich, CT is virtually oozing with money, as today's Stamford Advocate reports.

Hedge-fund managers are crowding into the Forbes 400 list of richest Americans (where it takes darn near $1 billion just to make the cut). Today's New York Times offers a comparison of how today's 400 compare with the those on the list 20 years ago.

"Put not your trust in money, but put your money in trust.”

That advice, offered by Oliver Wendell Holmes Sr. to young ladies, was essential in the 19th century. Back then, women who failed to put their money in trust before marriage had to hand over the funds to their husbands.

And it’s still good advice, according to “Beyond the Prenup” (subscribers only) in The Wall Street Journal.

Protecting wealth from the financial ravages of divorce has long been a key concern of families, who often enlist lawyers to draft a detailed prenup spelling out what's his and hers before the wedding invitations are sent out.

But wealth managers are increasingly trying other strategies -- especially the creative use of trusts, which can be effective in sheltering assets a spouse has earned before the marriage or will inherit.

* * *

Premarital planning tactics vary depending on whether the assets in question were generated by the bride or groom or their parents. If it's the parents that are wealthy, advisers recommend that they leave gifts or inheritances to their children in trust, rather than outright. In general, inherited property and gifts, even those received during marriage, are considered out of the marital estate, but income and appreciation may not always be.

When parents transfer family wealth into trusts, that property is segregated into its own bucket, clearly outlining what's inherited or given and what's not. By contrast, says New York lawyer Arlene Dubin, a gift or inheritance deposited into a bank account runs the risk of being subject to division at divorce, if it's commingled with marital assets such as a joint tax refund or even a paycheck.

Mr. Barnum, meet the hedge funders!

"There's a sucker born every minute," said Phineas T. Barnum. He certainly would have enjoyed the saga of the Bayou funds, chronicled extensively in today's New York Times.

Sam Israel's investment approach for his Bayou funds is said to have appealed to investors because it was understandable. No fancy swaps, no leveraged bets on toxic tranches of CDOs. Just good, old fashioned short-term trading in stocks that always seemed to work out well.

Was he actually the only person on the planet who could trade stocks for consistent profits month and month and year after year? If so, why wasn't he world famous? Some of the smarter money must have had its doubts all along.

As the chart from Bayou's sales brochure shows, the funds never seemed to have a bad year.

They must have had a really great Sharpe Ratio. Alas, William F. Sharpe himself says his ratio is useless for evaluating the "abolute return" potential of hedge funds. The ratio is too easy to fudge. Sharpe points out that Long-Term Capital Managment had a great Sharpe ratio just before it went bust in 1998. The Bayou funds troubles may have started shortly thereafter.

Bayou's admirable returns, it seems, weren't merely merely fudged, they were imagined. (It helps when your "independent auditor" is your CFO.)

Every affluent investor is a potential sucker. Yet in Bayou's case the biggest sucker of all may have been the manager, Sam Israel III. When his funds’ reported assets were over $400 million, he seems to have been down to $100 million or so. And that sum he supposedly entrusted to a miracle worker to invest in “two private, managed, buy/sell leveraged transactions” that in ten years would turn $100 million into $7.1 billion!

LIke to know what annualized return would be required to achieve that miracle?

Fifty-three percent!

Can regulators protect affluent investors against themselves? It won't be easy. The 100 hedge fund managers of Greenwich, CT, are already threatening to leave the country if efforts are made to place them under adult supervision.

Looks like responsible wealth managers and trustees will have to try to provide the protection. That won't be easy, either.

Offer too much protection and clients will think you're way too 20th-century fiduciary and take their business elsewhere.

Offer too little and the suddenly-poorer clients will sue the pants off you.

Life is hard, isn't it?

P. S. According to today's New York Times, Israel told his CFO that the miracle worker had been “referred to us by Alan Greenspan.” Nice touch!

From the databank: Millionaires

Last year the U.S. produced new millionaires at the rate of 619 per day. What a country!

Number of Americans with a net worth (not counting primary residence) of at least $1 million last year, as estimated in the Merrill Lynch/Cap Gemini World Wealth Report:
2.5 million

Number of people worldwide with a net worth of at least US$1 million:
8.3 million

Number of millionaires worldwide with net worth of $1 million to $5 million:
7.4 million

Number of millionaires worldwide with net worth of $5 million to $30 Million:
744,000

Number of millionaires worldwide with net worth of $30 million or more:
77,500

Number of U.S. households, as estimated by the Boston College Center on Wealth and Philanthropy, with a net worth (not counting primary residence) of $1 million or more:
7.4 million

Number of millionaire U.S. households sorted by age of householder:
Under age 35: 211,000
Age 35-44: 1.0 million
Age 45-64: 3.9 million
Age 65 and older: 2.3 million

Notice that most U.S. millionaire households contain no individual millionaires (7.4 million households but only 2.5 million millionaires). Rather, they consist of households where she has $600,000 and he has $500,000, or he has $800,000 and she has $400,000, etc.

If you're looking for business where the big money is, find one of the maybe 20,000-to-30,000 Americans with a net worth of $30 million or more. Grab his or her family-office business and you're all set.

But if you're looking for a host of clients who will need all the trust and investment help you can give them in the challenging years ahead, give a thought to those "no millionaire" millionaire households. There sure are a lot of them!

Charitable IRA rollovers

According to an e-mail that I received yesterday from Trusts & Estates magazine, Congress is poised to try out the "charitable IRA rollover" concept for the rest of the year in connection with tax relief for Hurricane Katrina. Key portion of the e-mail:

If you have clients who would like to donate more to Katrina relief and who have funds tied up in IRA accounts, this could be part of your year-end strategy. Under the pending legislation, anyone 70 1/2 years old and older would be allowed to roll over amounts from their IRA accounts (and other pension plans that can first be rolled into an IRA) directly to a qualified charitable organization on a tax-free basis.

Taxpayers aged 59 1/2 years old and older would be able to transfer IRA funds to a charitable remainder trust and give that remainder to charity without tax consequence.

I've tried to find the legislation, but according to Tax Notes the language hasn't been drafted yet. I take it that the transfer to charity would count toward the year's minimum distribution requirements, which would be a big part of the appeal. The provision would apparently expire at the end of this year, so it will be important to get the word out quickly.

A trustee is held liable for bad estate planning advice

Following up on her banker's advice to create and fund a Crummey trust to lower future estate taxes, an individual had her lawyer draft the trust, and began making contributions to it. Unfortunately, the lawyer neglected to include a Crummey power of withdrawal for the beneficiaries, making this a somewhat rare form of that trust.

After a number of contributions were made, the trustee noticed the drafting deficiency and called it to the attention of the draftsman. The draftsman disagreed that a mistake had been made. Neither of them reported the question to the grantor. Oddly, the trustee continued to encourage contributions to the trust "to lower estate tax obligations." Perhaps the trustee expected a retroactive trust amendment or something. Needless to say, the defective trust saved no estate taxes, so the furious beneficiaries sued the trustee for their mother's lawyer's mistake (deeper pockets, perhaps?).

The Wisconsin Supreme Court held that the trustee had no fiduciary duty to review the trust, nor to call the defects to the attention of the grantor. However, continuing to recommend contributions to a trust when the purpose of saving estate taxes could not be met was negligence. Decision for the beneficiaries. [Hat tip: Gerry Beyer.]

Can US Trust come back?

As reported here, Peter Scaturro, Schwab's choice to head up the once-renowned trust institution, hopes that hedge funds, private placements and other alternative investments can lead to a revival.

Vote delayed

As JLM surmised yesterday, the vote on estate tax repeal was cancelled, given the urgency of finding a good political response to Katrina. That doesn't kill the reformation process, but it may weaken it. Now under consideration: a tax holiday for aviation fuel, and tax incentives for building new refineries.

Estate tax reformation watch

According to today's Tax Notes a cloture vote on the estate tax repeal bill, passed earlier this year in the House, is the second item on the docket when the Senate returns from recess. However, the chances of success are limited, from the same article:

In a Farm Broadcasters News Conference last week, Finance Committee Chair Chuck Grassley, R-Iowa, called the chances of achieving full repeal “zero.”

“We're short of 60 votes,” he said.

What's more, one would think that estate tax repeal wouldn't go down well before all the Katrina-rlated issues are addressed. On the other hand, does this make a compromise plan more likely? Or will the Democrats sense victory and decide to stonewall?

Multi-family offices

Bloomberg Wealth Manager has published its second annual review of multi-family offices (PDF download required). Assets managed by these competitors to trust departments grew by 26.6% last year. These are major firms--the mean amount under management was $1.0 billion, the median $2.8 billion. The account minimum ranges from $750,000 to $100 million, with $10 million being most typical.

Part of the growth in the last year came from the phenomenon of single family offices becoming clients of multifamily offices, presumably because it was too hard to keep up with the technological requirements on a standalone basis.

Although these organizations are primarily about asset management, 63% of them also offer trust management in-house, and 27% provide trust service on an out-sourced basis. Have any of you, our trust and private banking department clients, run into these companies? Do you consider them important competitors?

John Roberts, probate realist

Roberts quote from today's New York Times article on the Supreme Court nominee:

“. . . probate disputes begin with a death but have a way of never dying themselves.”

From the databank: hedge funds

Number of hedge funds reported by The Wall Street Journal to have set up shop in Greenwich, Connecticut, in the last few years:
More than 100*
*The office of Bayou Funds was located just over the Greenwich border on the Stamford shoreline.

The New York Times estimate of the total number of hedge funds at year-end 2004:
3,307

Total number of hedge funds as estimated in today's Wall Street Journal (subscribers only):
Over 8,000

Total assets held in hedge funds at end of 2004:
Over $1,000,000,000,000

Average earnings of a top-25 hedge-fund manager in 2001:
Almost $136,000,000

Average earnings of a top-25 hedge-fund manager in 2004:
$251,000,000

Amount earned last year by Greenwich resident Edward Lambert, called world's highest-paid hedge-fund manager by Institutional Investor:
$1,200,000,000

Number of cases brought by the SEC, 2000-2004, alleging fraud by hedge-fund advisers:
51

Total amount that the SEC alleges hedge-fund investors lost through fraud:
Over $1,100,000,000

How long a retirement should we plan for?

Half of today's college students will live to be 100 years old, according Nobel Prize winning economist Robert Fogel, as reported by Robert Samuelson. That's well above the prediction of today's actuarial tables, which Fogel believes are too conservative. He says that in the late 1920s, life insurers "put a cap of 65 on life expectancy." We all know how wrong that is.

One who enters the workforce at age 25, retires at 65 and lives to 100 will spend nearly one half of his or her adult life in retirement, not working. Is that economically tenable? Samuelson advocates the politically unpopular solution of raising the retirement age to 70 over time. I think he's on the right track.

Do today's trust prospects have a good understanding of their likely longevity?

Personal finance blogs in the spotlight

The Wall Street Journal today offers a roundup of noteworthy blogs covering investment and money management subjects. Only one or two of the mentioned blogs seem even indirectly related to financial services marketing. The value of blogging in this arena remains to be demonstrated, though I think that the potential is huge.

Circular 230 will plague us for some time

The flyer for the 40th Heckerling Institute on Estate Planning (the "Miami Institute" to the old-timers) just came in today. You can find more information here. I note with interest a brand new topic, one of the special sessions: The Gathering Storm—Circular 230: What Does It Mean and What Do We Do? Among the questions to be explored: "Should every item of paper and electronic mail generated by a law or accounting firm contain a statement that it cannot be used to avoid tax penalties?"

I submit that to reasonable men, the question answers itself. When disclaimers get plastered on everything, they soon mean nothing. However, it seems that to the regulators (and those who must follow their commands), there's no such thing as too much information.

Another blog about estate planning

Law professors have been prolific pathbreakers in the blogosphere, and lawyers are entering the fray as well. You and Yours Blawg contains the observations of a New Jersey lawyer about estate planning, among threads. Although the blog (or blawg, as some lawyers seem to prefer) doesn't solicit business, I suspect that it could be a valuable practice development tool.

Repent! The end is nigh

Funny thing happened on the way to the teller window at the bank the other day. Picked up a muni fund prospectus and saw there was a sales load of 4.5%. Gosh, I thought, when you added in the first year's fees and expenses, a hapless investor would lose one-twentieth of his money at the start. How terrible!

A generation ago, that thought never would have occured to most investors. Load funds were the norm. Without brokers, mutual funds never would have gained traction in the first place. Now the tide is turning, as this chart from the Mutual Fund Fact Book shows.

But managers of no-load funds, except for index funds, shouldn't feel smug. Take a look at the new book by David Swensen, Yale's all-star endowment manager. Here's an excerpt from the publisher's blurb:

In Unconventional Success, investment legend David F. Swensen offers incontrovertible evidence that the for-profit mutual-fund industry consistently fails the average investor. From excessive management fees to the frequent "churning" of portfolios, the relentless pursuit of profits by mutual-fund management companies harms individual clients. Perhaps most destructive of all are the hidden schemes that limit investor choice and reduce returns, including "pay-to-play" product-placement fees, stale-price trading scams, soft-dollar kickbacks, and 12b-1 distribution charges.

To read more about Swenson, see Joseph Nocera's column in The New York Times.

Estate Tax: Exempt $3.5 million and tax the rest at 15% ?

According to today's Washington Post, that's the leading alternative to repeal at the moment.

By the way, why do reporters keep writing about the estate tax affecting "only the top 1%"? That top one percent represents those who leave the estates from which the tax is extracted. Being dead at the time, they don't really "pay" anything. Basically, their heirs pay. Mightn't an estate have two or three, six or eight, or even 10 or 12 heirs?

Banking's black eye: How did deferred annuities get misdelivered?

Seemed like a good idea: Wrap mutual fund shares in an annuity contract for tax deferral. Sell the packages to high-tax-bracket investors who have maxxed out their 401(k) and IRA contributions. Sellers would get high but inconspicuous sales commissions; buyers who invested aggressively and held for 20 years might make a buck.

One problem: When the others in your foursome are talking hedge funds, do you want to confess to buying an annuity?

A worse problem arrived with the Bush tax cuts. When you can pay 15% tax now on realized gains and dividends, why pay ordinary income tax of 30% or more later?

The marketing of variable annuities needed rethinking. Apparent result: A new target market consisting of unsophisticated senior citizens who chafed at low CD yields and liked the sound of "Your heirs will get back every cent you invest, guaranteed!"

To make sure the new market wouldn't refuse delivery, sales commissions were revved up. In his June 8 column, Jonathan Clements of The Wall Street Journal marveled at how much "annuity gladiators" could rake in:

I can't recall precisely when I got my first message, and I have no idea how I got on this particular email distribution list. But at some point last year, I started receiving emails aimed at insurance agents, offering to pay me commissions of 8%, 10% and even 13% for selling annuities.

The results have been disastrous. Horror stories abound, like this one from a Jane Bryant Quinn column last year. The selling of variable annuities made a list of Top Ten Investment Scams. An elder law center discusses annuity sales in the same breath as Ponzi schemes. (Rumors that the ghost of Charles Ponzi is suing for libel could not be confirmed.)

Can someone explain how banks got caught up in this sorry mess? Suicidal tendencies? A sick urge to get rid of customers over 65? Bank of America certainly didn't help its public image. Neither did Citizens, a Royal Bank of Scotland unit that's $3 million poorer as a result. Can regulators save banks and other annuity sales channels from themselves, or will stronger steps be necessary?

If that question sounds over-dramatic, read on.

This year, 2005, marks the centennial of the beverage we know today as Classic Coke. In 1905 people probably thought of it as New Coke.

The original Coca-Cola had been formulated in Atlanta a generation earlier, in 1886, and the Coca-Cola Company quickly became the Google of its time. From 1890 to 1900, sales of Coca-Cola syrup increased by 4000%!

Despite, or perhaps because of, this smashing success, in 1905 the Coca-Cola Company revamped its formula. No more cocaine.

Please note that "cocaine" was not a loaded word in the 19th century. Cocaine was merely a routine stimulant, found not only in soda-fountain tonics but also in painkillers, including Bayer Aspirin. Only when cocaine became widely abused by addicts was it outlawed.

Today, one response to annuity sales abuse would be to make variable annuities a "controlled investment product." No sales to investors over 50 without a prescription. To be valid, the prescription would have to be signed jointly by the investor's lawyer, a tax accountant and a trust officer or wealth manager.

Waddiyathink?

Free plug: The old delivery truck shown above is actually a toy coin bank, available from the Coca-Cola store.

The gap between what the wealthy want and what financial advisors are delivering

Interesting, if somewhat predictable, information in this survey by SEI Investments. Another boost for "holistic" planning.

Estate tax reform delayed

Earlier this year a compromise on the future of the federal estate tax looked possible. Senators Kyl and Baucus were negotiating a middle ground that might attract enough democratic votes to avoid a filibuster. However this item from Tax Notes (paid subscription required) indicates that nothing will happen before the August recess. Senate Majority Leader Frist was threatening to call for a vote on full estate tax repeal, but Finance Committee Chairman warned against the move.

"I've observed very intense efforts on the part of Sen. Baucus to work on a compromise and I think that he's sincerely trying to get Democrats on board," Grassley said. "I think that anything that would go for complete repeal, even though I support complete repeal, might blow the whole thing up."

So, maybe in September?

He gave up peddling trusts and annuities.

Yes, this Californian had a better idea. Instead of a slimey life selling living-trust packages and annuities to unsuspecting seniors, he opted for good old, straightforward fraud.

Why estate tax repeal doesn't much matter

William J. Bernstein, the Oregon neurologist who turned his hobby, portfolio theory, into a second career, doubts that estate tax repeal would create a new class of perpetually wealthy Americans.

Even with the widening acceptance of dynasty trusts, says Bernstein, vast familial wealth will shrink "faster than the prawn plate at a Cajun wedding."

Read his reasons here.

"Hi! I'm from the Government, and I'm here to cut your taxes"

Did you notice? President Bush asked Congress to map out income-tax hikes totaling as much as $600 billion to $800 billion over ten years. That's how much the Administration needs to kill the monstrous alternative minimum tax without increasing future budget deficits.

What's that? You say it's long been obvious the AMT soon must be done away with or toned down? Maybe so. But future budget deficits have been estimated on the assumption that those AMT revenues will keep on snowballing, engulfing and devouring the incomes of Americans with incomes of $75,000 and up. As this article in today's New York Times suggests, many of your trust and investment clients are among the victims.

Conspiracy theorists suspect the AMT was deliberately designed to cancel much of the benefit of the Bush tax cuts. Nah! Too clever.

But speaking of conspiracies, what's all this talk about killing the death tax? Even if the federal estate tax is abolished, various states are busy revving up their own death taxes. Incautious enough to die in Connecticut? Beware of a death tax with a top rate of 16%. Washington State? 19%

Florida, by contrast, allows residents to die tax free. Could that have anything to do with the 15%-or-more population increase that Florida expects by 2010?

Does Circular 230 Apply to Bank Newsletters?

When playing audit lottery with a tax shelter, some taxpayers were in the habit of buying "insurance" in the form of a legal opinion. The opinion would provide a basis for going ahead with an "aggressive" transaction. It would not guarantee success in a fight with the IRS, but it would show that the taxpayer had exercised reasonable precautions, enough to preclude the imposition of tax penalties.

An unhappy IRS modified Circular 230 last December, changing the rules for giving tax advice. Estate plannners are now justifiably afraid that the rules may apply to them as well.

Attorney and estate planner Natalie Choate penned "How I Will Comply With Circular 230" for the July 2005 issue of Trusts & Estates magazine (not available online, so far as I can tell). Planners need to be concerned with "covered advice," "other written advice," and, according to Ms. Choate, "preliminary advice."

I believe that articles in bank newsletters fall well outside the scope of Circular 230, and if they are covered, they should be considered preliminary advice. As such, it could be prudent to include a disclaimer that "Articles in this newsletter are not intended to be tax or investment advice. Please consult an appropriate professional before taking action or making any decision."

However, at least one of Merrill Anderson's clients believes that newsletter articles that touch on tax matters that are favorable to taxpayers constitute "other written tax advice." As such, to avoid compliance with all the strictures of Circular 230, such articles must include a somewhat more draconian disclaimer. The one this particular client chose is:

This written advice is not intended or writtten to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Before making any decisions or taking any action, seek the advice of qualified tax or investment professionals.

Yes, the client insisted on the boldface type, which was suggested in the December regulations but relaxed in the May amendments. The type still needs to be as large as the text copy.

My sense is that this is a bit of an over reaction, but at the same time compliance matters do need to be taken seriously. What are the other trust and private bankers saying about Circular 230?

Index funds

Jeremy Siegel's new book, The Future for Investors, Why the Tried and True Triumph Over the Bold and the New, includes an interesting exercise in what happens when you invest in an index fund. The current incarnation of the S&P 500 dates back to 1957. The index has been adjusted over the years, because it has to be. Some companies merge, spin pieces off, or are bought by others. The economy is changing over time, and the Index needs to evolve with it to remain an accurate barometer.

Professor Siegel posed the question, what if I bought the original 500 stocks instead of replicating the index? He had three alternatives for dealing with corporate reorganizations, from sticking to the originals only to owning all their descendants. The critical point is that none of the portfolios ever added any of the 917 stocks added to the S&P 500 over the years.

I was surprised to learn that Professor Siegel's portfolios beat the S&P 500 handily. No Microsoft? Limit yourself to big firms from the 50s, and beat the returns from firms delivering the information age economy? But of course it's true, which is why it made it into the book.

This seemed like just the thing to share with the readers of our Investment and Trust Newsletter, so I did a one page summary of Siegel's findings. I was promptly chastised by our clients, who fell into two camps. One side claimed we were slamming index funds, which was a problem become some trust departments rely on index fund investing for smaller trusts. The other school objected that we were endorsing index funds, or at least offering approval of a passive investment approach, which was inconsistent with their investment service.

Needless to say, we respond quickly to client concerns, and the page now covers tax basis and tax management for investment portfolios.

Any suggestions for covering investment matters for wealth management customers in a way that won't ruffle any feathers out there?

History of the estate tax

As you follow the estate tax debate cited below, you'll need a crib sheet on the history of the tax. I pinched this one from the National Center for Policy Analysis.

The first estate tax -- enacted July 6, 1797, to help pay for naval rearmament -- required only the purchase of federal stamps for wills and estates, but was terminated four years later because the need for the revenue passed.

A direct tax on inheritances imposed in 1862 during the Civil War ranged from 0.75 percent to 5 percent.

The top rate was raised to 6 percent in 1864; but the tax was then abolished July 14, 1870.

In 1898, an estate tax with a top rate of 15 percent on estates over $1 million was imposed to pay for the Spanish-American War -- then repealed on April 12, 1902.

America's fourth estate tax, enacted in 1916, set a top rate of 10 percent on estates over $5 million. It was raised to 25 percent in 1917, but this rate applied only to estates over $10 million. Unlike its predecessors, it was not repealed after the war, although the top rate was dropped to 20 percent in 1926.

President Franklin Roosevelt raised the top rate to 60 percent in 1934, and to 70 percent in 1935. The same bill increased the top income tax rate to 75 percent and increased corporate taxes. Altogether the law raised just $250 million annually.

Today [2005] the estate tax goes up to 47 percent. It exists only to redistribute income, since its revenue yield is negligible. But estate planning makes the tax virtually voluntary, according to estate tax experts.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 19, 2000.

The original modern estate tax, circa 1916, sounds good to me. Ten percent rate, $5 million exemption.* Why can't Congress learn to leave well enough alone?

* February 2010 update. I miswrote here. The ten percent rate only kicked in at $5 million, but lower rates, starting at one percent, applied to estates over $50,000.

The final push on estate tax repeal is coming

The surest signal yet that resolution of death tax issues is near is this article: Few Wealthy Farmers Owe Estate Taxes, Report Says - New York Times. Not mentioned in the article is the fact that the presence of death taxes has pushed many farm families to sell out to corporate agribusiness. I can't document how widespread a phenomenon that is (the same is true in the newspaper publishing industry, which was documented in Congressional testimony), but I have anecdotal first hand experience.

One can see the seeds of compromise here. It is very true that middle class farmers stand to lose if carryover basis is brought back into the law. It was the farm lobby that forced repeal of carryover basis in the late 70s (who the heck can guess the tax basis of a tractor?).

I believe that we were on course for bringing the estate tax issue to resolution this month, either with full repeal (30% chance) or a negotiated settlement that would accelerate a larger exemption (70% chance). However, the O'Connor retirement has upset that applecart, and if Rehnquist (and others?) also decide to retire most other Senate business is predicted to grind to a halt.

How to succeed in business: follow Wachovia's lead

When the Senior Assistant Blogger lived in Connecticut, he banked at Home Bank and Trust Company of Darien, which was acquired by a Stamford bank, which became Fairfield Country Trust, which merged with a New Haven bank and became Union Trust, which merged with First Union. If the SAB still lived there, his bank would now be called Wachovia.

Which is why he was interested to come across this article on Wachovia from the Gallup Management Journal. And like any civilian with long acquaintance with large banks, he was blown away to read therein a truly astonishing research finding:

In recent years, most major companies have realized that improving service quality and increasing customer loyalty are key to driving their bottom-line performance.

Will wonders never cease?

Seriously, folks, the article sheds helpful light on the efforts needed to improve service quality. Remember: The higher the level of bank-customer satisfaction, the more likely that customers will use additional services — like wealth management or trusteeship.

Russians now can die tax free. Why not us?

From an editorial in today's Wall Street Journal:

Karl Marx must be rolling in his grave, and don't even ask about V. I. Lenin: Russia eliminated its inheritance tax last month. Its move comes after January's decision by the government of Sweden, the birthplace of the modern-day welfare state, to eliminate its estate tax. Like the Russians, the Swedes have come to believe that the tax is unjust and economically counterproductive. Russia and Sweden join Argentina, Australia, Canada, India, Mexico and Switzerland as nations that don't make death a taxable event.

Subscribers to the Online WSJ can read the entire editorial here.

Advising the women millionaires

Did you know that most of the young millionaires in the UK are women? So reports this article, which offers provocative thoughts on what women want from their financial advisers.

Do women generally prefer to deal with women advisers? Or are women like my late mother-in-law still around? Daughter of a Wall Street mogul, she was financially astute herself but refused to believe a woman banker or broker could have a useful thought in her head.

Is estate tax reform coming?

According to this morning’s Wall Street Journal (subscription required), the Senate is close to a compromise on reforming the estate tax. We have no details as yet on tax rates or effective dates, but the smallest exemption being discussed is $3 million.

There will undoubtedly be additional adjustments, such as elimination of carryover basis, perhaps an additional exemption for family owned businesses.

Reportedly the White House is holding out for total repeal, which is unlikely. According to the Journal, advocates of repeal in the House are likely to accept the compromise.

The target for passage is the end of summer, which means before the August recess (around the ERTA anniversary?). I put the chance of passage of a compromise by August at 75%, because according to Tax Notes the repeal wing is quite strong, strong enough to see that something happens. Yet the Democrats have proved tenacious enough in blocking certain judges and the Bolton nomination that there is no chance for a stand-alone estate tax repeal bill passing. If Kyl strikes a compromise, the Senate Republican leadership is likely to endorse it, and I doubt Bush would veto it.

If the estate tax is changed, Merrill Anderson will have marketing materials in response.

Selling financial services with newsletters

Haven't posted for awhile because I was in Washington DC at the PrimeVest National Sales Conference. Merrill Anderson creates PrimeVest's client newsletter, and we do this with an unusual sales model. Each individual rep buys copies of the newsletter, for his or her clients (or other usage) and pays for the newsletter through commission reduction. Thus, Merrill Anderson has to sell each rep individually, for the most part.

Do the newsletters work? We didn't get any stories along the lines of "I distributed X copies of newsletters and received Y inquiries." We do have plenty of satisfied customers, and they did report getting comments on a fairly regular basis.

More important, usage of the newsletter is positively correlated with success as a PrimeVest registered rep. Overall, just 8% of PrimeVest reps have signed up for the newsletter. Among the "cream" of the brokers, those attending the National Sales Conference, we had a 27% market share. The top 25 reps constitute the "President's Club," and here we count 35% as our customers.

What do the newsletters do? Mostly, they put the face and contact information of the rep in front of the client. The content is polished and professional, good for the rep to associate with.

Drop me an email if you'd like to see a sample.

Private banks and trust companies: a broker's-eye view

Wealth management? You'll find it offered at any big brokerage firm. How does the service offered by private banks and trust companies differ from the brokerage version?

Here's a broker's eye view, from Registered Rep magazine.

Private banks offer more sophisticated service, catering to the customer rather than "pushing product."

Private banks and trust companies offer in-house expertise in trusts and estates and high-end tax advice.

“They are able to manage all aspects of trust accounts in-house, an increasingly important fact with the aging boomer population.”

And, "at the end of the day, it's also partly marketing. Private banks, quite simply, are chi-chi."

As the Registered Rep article illustrates, the battle for wealth-management business can be intramural. In this case it was Schwab vs. Schwab's U.S. Trust unit.

Anybody care to share other examples of brokers and trust new-business people duking it out to gain or keep a client?

From the databank

Percentage of people with net worth of $10 million or more who say they have no will, trust or healthcare proxy:
37
Percentage of affluent Americans who feel that wealth has made them happier:
46
Percentage of those with $10 million or more who say that money brings more problems than it solves:
29
Percentage of those with $10 million or more who worry that they won't be rich enough to support their desired lifestyle in retirement:
19
Median amount of wealth that those with $10 million or more say they would need to feel financially secure for life:
$18.1 million

Source of data: November 2004 HNW Inc. survey, commissioned by PNC Advisors.

2,270,000 millionaires

That's Merrill Lynch and Capgemini's assessment of the current Hign New Worth market in the U.S., according to this study. The study is as of the end of 2003, and that figure is a 14% over the 2002 number.

Is anyone else worried about the flattening yield curve?

I'm surprised that more people aren't alarmed--especially Alan Greenspan inthis recent testimony before Congress--about the fact that long rates have fallen as the Fed has raised short-term rates during the past year. One might think this a sign of economic weakness ahead--are there many exceptions to this well-known market observation?

When money talks, are you listening?

For the edification of wealth-management marketers, the latest Class Matters articles in yesterday's New York Times served up a cornucopia of quotes regarding those who possess large amounts of money, new or old:

Michael Kittredge (sold Yankee Candle Co. for about $500 million):

Successful people like to be with other successful people. "Birds of a feather." *** If you order a $300 bottle in a restaurant, the guy at the next table is ordering a $400 bottle.

[Really big] money makes a lifestyle. It creates a division between the old money and the new.

Roger Horchow (sold catalog business for $117 million):

The only people who are truly class conscious are the second tootsie wives of men with big bankrolls.

Dr. Nina Chandler Murray, psychologist, an 85-year-old relative of the Poor (as in Standard and Poor's) family:

Coming from a New England background, you had a honed discipline of what was expected. Showing off money was a sin.

What has happened in America is that achievement is so important that everyone wants everyone else to know what they have done. And in case you don't know, they want to tell you with a lethal combination of houses, cars and diamonds.

They have just a colossal amount of money. But they don't have any confidence in how they're living. For instance, one woman calls up her interior decorator every morning to find out what kind of flowers she should have. This seems sad.

Nelson Aldrich, old-money author of a book titled (surprise!) Old Money:

For many self-made men, homes, boats and even membership in expensive clubs are trophy signs of wealth. But for the older money, a boat may well be part of a tableau that has to do with family, with his grandparents and his children. It is part of his identity.

Michael Thomas, Wall Streeter turned novelist:

Ultimately, the new money becomes as insular as the old money, because it gains the power to exclude.

Shame has somehow gone out the window.

Letitia Lundeen, antiques dealer on Nantucket:

The old money doesn't like to spend money because they worry about whether they can make it again. Even when they can spend it, they often think it's vulgar and unnecessary.

Arlene Briard, Nantucket taxi driver and long-time resident:

Class has a certain grace. Just because you can go to Chanel and buy a dress does not mean you have class. A person who just pays their bills on time can have class.

Wealth managers must zero in on each client's attitude toward money. But have a care. Generalizations about New Money and Old Money don't always do well in crash tests against reality.

New Money? The Americans with the most are Bill Gates and Warren Buffett — two guys who probably couldn't look flashy if you paid them.

Old Money? The name most likely to be found on people's lips these days is . . . Paris Hilton!

Can this potion turn prospects into clients?

Sounds simple enough. Before you give your next seminar, just spray the room with oxytocin!

How big is the dynasty trust market?

Bigger than I thought. Guess a number before proceeding.

For those who are not familiar with them, Dynasty Trusts are perpetual private trusts. Under the common law, only charitable trusts were permitted an infinite life, while private trusts were governed by the wonderfully intricate "rule against perpetuities." As a practical matter, private trusts usually could not last much longer than a century. Which, one might think, should be plenty.

But the era of very high estate tax rates created an incentive to make trusts last longer, and so the Dynasty Trust was born. Several states reformed or abolished their rules against perpetuities to make such arrangements possible.

The strategy has born fruit. SSRN-Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes by Robert Sitkoff, Max Schanzenbach reveals that according to banking records, through 2003 about $100 billion has been placed in Dynasty Trusts. Interestingly, states that abolished their perpetuities laws but retained income taxes on Dynasty Trusts did not share in the bonanza. Thus,states do not share in the good fortune driectly through tax revenues, but only from the greater employment associated with trust management.

If the estate tax is repealed, will the market for Dynasty Trusts wither? Or is the urge to leave a permanent family financial legacy strong enough to sustain them without tax benefits?

"What's a special-needs trust, Doc?"

From a recent Forbes article on planning for special-needs children:

Parents are aware of the need to make plans, but 66% say there is little financial planning information available that focuses on children with special needs. Surprisingly, 85% parents turn to their doctor for financial advice.

Should trust business-development programs give more attention to this market segment?

If not, why?

Two erudite views on estate taxes

One of the better web destinations for legal thinkers to visit is The Becker-Posner Blog, a forum for the views of University of Chicago Professor Gary Becker and Judge Richard Posner. Last week they debated the efficacy of the federal estate tax.

Becker is against it. In addition to the efficiency and fairness arguments that we've heard before, Becker also thinks that in the information age, wealth is more that physical assets. He writesL

But after the knowledge revolution took off toward the end of the 19th century, bequests of financial and material wealth have become less important in the overall economy. Instead, the most important way for parents to “bequeath” economic position is through the transmission of knowledge in the form of education, training, and other human capital. Such capital embodied in people now comprises over 70 per cent of all “wealth” in economically advanced nations, far more important than material capital.

Posner, on the other hand, is reluctant to give up this revenue source, though he would prefer an inheritance tax and recognizes that the estate tax raises little revenue. In particular, he raises concerns about social mobility in the absence of such taxes.

Wealthy people seem increasingly able to guarantee that their children and even grandchildren will remain in the upper income tier, leaving fewer places for the children and grandchildren of the poor to occupy. Through “legacy” admissions (as at Harvard!), expensive private schooling and tutoring, including tutoring in taking college admission tests, as well as by means of direct transfers of wealth, wealthy people are able to “purchase” a secure place for their children and grandchildren in the upper class. Even if, as Becker argues, social mobility has not actually declined in recent decades, it is lower than it used to be and the conditions for a decline seem in place.

This is a well-thought-out discussion, free of the emotionalism and sloganeering sometimes found on both sides of the question. The extensive comments to each article are worthwhile also, as are the authors' responses to the comments, though I haven't had time to read them all. But if the ranks of millionaires are growing as fast as JLM suggests below, this will remain an important policy concern.