The Case of the Vengeful Stepson

Money can be used as a weapon of revenge, writes Elaine Morgillo in her Sunday column:

When a friend told me about the sudden death of mutual acquaintance's husband several weeks before, I called the widow to express my condolences.

The woman was distraught, not just because she recently lost the love of her life, but also because she found herself in the midst of a financial battle.

This was a second marriage for both of them. Each spouse had children from a previous marriage, but neither family got along with the other.

The husband had always handled their money, which isn't unusual for a couple in their 70s. They lived very comfortably, traveling between their multiple homes and entertaining their numerous friends, but my friend had no idea how much money they had. She barely knew how to write a check.

Shortly after the husband's death, his wife was shocked to learn from the family attorney that her husband had appointed his son as executor and trustee.

Aside from a small insurance policy and a survivor's pension, virtually all of the couple's assets will be held in trust, to be distributed to the widow at her stepson's discretion. The stepson had already made it clear that he planned to make life very uncomfortable for her.

What good are corporate trustees if attorneys don't work harder to make sure clients use them when they obviously should?

Good Investment Advice is a Hard Sell

Jack Bogle's recent presentation, The Coming Market Environment and Implications for Financial Innovation, is worth a read – and worth pondering.

Addressing a Financial Planning Association gathering, Bogle decries a long-term trend – the shift from long-term investing to speculation on the part of mutual fund managers. Back in the 1960's, a fund manager who turned over 20% of the fund portfolio in a year was considered a Nervous Nellie. In the 2000's, as this chart shows, a manager who doesn't turn over his entire portfolio annually is a dullard.

Bogle then shows why he believes equity returns are likely to average only 7% or so in the next decade. (He's pretty persuasive.) After subtracting inflation and investment expenses, investors won't have much return left. If individuals persist in achieving below-average performance, buying high and selling low, their returns may be close to zilch.

How to improve net investment returns? Bogle's estimates suggest two possibilities: control expenses and avoid buy-high-sell-low syndrome. And, more generally, buy and hold; don't speculate. Bogle winds up telling the financial planners

I understand, I think, the pressure that you financial planners face in assuming the awesome responsibilities of serving your clients, even as you endeavor to build firms that will prosper and endure. I understand the pressure you face from concerned clients who want to follow the traditional response of “don’t just stand there. Do something,” especially in these turbulent markets. But I suspect that your instincts suggest, as mine do, that far more often, the best strategy is likely to be “don’t do something. Just stand there.”

Best strategy? Sure. But it's a strategy many individual investors can't stomach. That's why Charles Schwab commercials show guys complaining about how their brokers never call them.

What about it, dear readers? Is there a way to sell the idea that buy-and hold beats portfolio-churning?

The Daily Trust

A search for details on Chevron's labor troubles in Nigeria led to this page of links to Nigerian newspapers, including . . . the Daily Trust.

The Daily Trust has a motto, please note – a motto that harried trust administrators might appreciate at the end of a hard day:

Trust is a burden

Ten Million People Have a Million or More to Invest

The 2008 World Wealth Report from Cap Gemini and Merrill Lynch estimates that the planet now contains 10.1 million High Net Worth Individuals. That's roughly equivalent to the population of Portugal.

Worldwide, the net worth of the average HNWI tops $4 million. (The median, however, must be lower.)

The full report, which includes a section on wealth-management firms, may be downloaded here.

Living trusts on NPR

As I was driving yesterday afternoon, I happened to catch a discussion on NPR of the advantages of living trusts. I've looked for a transcript at their website, but haven't found one. An "estate planning expert" from Kiplinger's was interviewed, and he was very enthusiastic about the utility of trusts for financial management. In fact, he said that anyone who owns a home and a car is a trust candidate, which seemed overly broad to me.

One bit of good advice that he offered was to be wary of those seminars touting living trusts, especially if they are promising tax benefits. He also emphasized that trusts need to be drafted individually for each family. On the other hand, he didn't discuss the issue of selecting a trustee, or even the idea of corporate fiduciaries.

In what seemed like an organizational oddity, next week's interview with this gentleman will cover powers of attorney.

George Carlin (1937-2008)

Five months before he was to receive the Mark Twain Prize at Kennedy Center, George Carlin died at age 71. A TV regular in the Ed Sullivan and Johnny Carson era, he reinvented himself as the comic voice of the counterculture.

Carlin couldn't always answer life's important questions, but at least he raised them. Like this one:

Why is the man (or woman) who invests all your money called a broker?

Thinking Rich? Think Bicoastal

First Republic, (we took a look at one of their ads recently) is featured in this Boston Globe article on private banking.

Marketing insight: wealth is bicoastal. A hot new-business lead for the Boston office may come from Silicon Valley, or vice versa.

Sir Dennis Weatherstone Remembered

Financial products or services are your game? Heed a warning Dennis Weatherstone liked to dispense:

"If you're not confused, you don't understand the business."

Weatherstone, former head of JP Morgan, died June 13. He worked hard and successfully to break down the wall between commercial banks and investment banks. Repeal of the Glass-Steagall Act may no longer seem a no-brainer (who knew banks weren't ready for subprime time?) but restoring the wall seems unlikely if not impossible.

In PBS-speak, Weatherstone's early life was more Inspector Lewis than Inspector Morse. He became a bank clerk right after finishing high school. Sir Dennis was knighted by his Queen in 1990, the same year he ascended to the top job at JP Morgan.

See Robin Sidel's remembrance of Sir Dennis in The Wall Street Journal and his obituary in The New York Times.

Updated April 1, 2011

The American Way: Wealth or Debts?

Did you read David Brooks' The Great Seduction? His NY Times column asserts that this country has gone astray over the last 30 years:

The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened.

A column Ben Franklin might have admired, it created quite a stir.

On the Posner-Becker blog, Richard Posner says Brooks has it wrong. Saving and wealthbuilding are no longer necessary or desirable in our age of technology. Debt is actually good for us:

[I]t increases the incentive to work hard by making it at easier for people to obtain the goods and services they want by borrowing the money they need to pay for them, yet at the same time increasing the risk of bankruptcy should they slack off on their work and so let their income fall.

Really? Did Tiger Woods limp around Torrey Pines last week because he desperately needed the money?

Gary Becker also writes approvingly of debt. He sees borrowing as modern life's method of risk management. College debt he likes especially because it allows everybody to get a college education. Starting adult life in debt is good and natural, Becker suggests:

The debt of college students does not simply pay for tuition, but also helps cover living expenses while in school. College students earn little then and in the first decade or so after they enter the labor force, while they earn much more when they are older. For this reason, the most forward looking and least impulsive college educated individuals want to borrow, not save, when they are young in order to raise their consumption . . . .

Do his year's college graduates really think debt is so cool? In The Wall Street Journal Terri Cullen points out that many will have trouble finding jobs lucrative enough to pay off their loans, much less permit added borrowing to "smooth consumption."

Cullen cites a study showing the following levels of average debt among 2006 grads:

Student loans: over $21,000
Credit card debt: about $2,200 (about $5,800 for grad students)

As for medical school, new doctors start with a debt burden averaging around $120,000.

Way back in the 20th century, when Posner and Becker finished their higher education, I wonder what their debt burden was?

* * *

Wealth building vs. living deep in debt: the choice Americans make, obviously, will determine the future market for trust and investment services.

If Posner and Becker are right, credit card companies will continue to make heaps more money than trust companies.

Loan sharking, anyone?

What Sounds Better Than "Bank"?

Every new bank – and they keep popping up – faces an immediate marketing challenge: What to name the new institution?

By itself, the word "bank" gives off negative vibes these days. Some megabanks have lost billions and billions of dollars. Regional banks, as the NY Times reports, are cutting their dividends and demoting their investors from the ranks of High Net Worth Individuals.

Two new banks have solved the name problem the same way: Just add "Trust."

Thus, the Darien-Rowayton Bank, in the Senior Assistant Blogger's old home town, calls itself Darien-Rowayton Bank and Trust. And Optima Bank, just opened near the SAB's current home, calls itself Optima Bank and Trust.

Yet judging from their web sites, neither bank actually has a trust division. Darien-Rowayton Bank hopes to install one (and offers trust service via Tompkins Trust in the meantime). Optima appears to be fully focused on loans and deposits.

In recent times many banks renamed their trust divisions as wealth management Divisions. But now that term has been pretty well co-opted by brokers selling investment products. Wonder if those old Trust Division signs are still in the basement?

There'll Always Be An England!

Oh, the sights you see on opening day of Royal Ascot!

In an earlier post, the headgear worn by Autumn Kelly, now Mrs. Peter Phillips, received unfavorable mention. After viewing The Telegraph's photos of her Royal in-laws at Ascot, we understand how the girl was led astray.

We have the English to thank for the concept of trusteeship. The French have The English to thank for making French fashion and cuisine look so good by comparison.

We're so rich, who cares about being wealthy?

A new Pew Research Center Study suggests that being or becoming wealthy is "very important" to just 13% of Americans! What really matters? These items jumped out at me:

Having time to do what you want (67%, the leading vote getter).
Being married (53%).
Living a religious life (52%, hey, where were the atheists the day the survey was taken?).

However, if we expand the focus to include those for whom being wealthy is "somewhat important," the nation appears more ambitious. Fully 53% value being wealthy, while just 10% say it is not important at all.

So I guess it is still safe to focus on financial security in our trust marketing.

Via WSJ's Wealth Report.

Trouble for Trouble?

A New York Surrogate's Court has approved a reduction in the trust fund Leona Helmsley left for Trouble, her reportedly evil-tempered dog. Trouble's inheritance drops from $12 million to $2 million. In addition, the New York Post reports, two grandchildren disinherited by Leona will receive a total of $6 million.

Mortgage Derivatives Explained

Long ago and far away, in my Army days, the Pacific Stars and Stripes had a clever cartoonist named Shel Silverstein. He went on to modest fame in several fields, including the authoring and illustrating of childrens' books and songwriting ("A Boy Named Sue").

In a post on the Marketbeat blog, Jon Hilsenrath suggests the slicing and dicing of mortgage loans and other debt by Wall Street's intripid financial engineers is best explained by a poem Shel once wrote.

Entitled "Smart," the poem begins thusly:

My dad gave me one dollar bill
‘Cause I’m his smartest son,
And I swapped it for two shiny quarters
‘Cause two is more than one!
And then I took the quarters
And traded them to Lou
For three dimes — I guess he don’t know
That three is more than two!

Mr. Hilsenrath may be on to something.

Almighty Dollar

Remember when "dollars to doughnuts" wasn't an even bet?

We may never see "the almighty dollar" again. But at least we know the origin of the term, thanks to William Safire's column.

Joel Schoenmeyer on Referrals

Over at the Death and Taxes blog, attorney Joel Schoenmeyer discusses how he handles referrals from representatives of corporate fiduciaries. "In most cases, there's absolutely no problem, but a problem can arise if the financial planner wants me to benefit Firm X in some way, particularly if the financial planner wants Firm X to act as a fiduciary."

Bayou's Last Bow?

Remember Sam Israel and Bayou, the miraculous hedge funds that never seemed to have a bad quarter? (See Mr. Barnum, meet the hedge funders.)

Yesterday Sam was due to report to a Massachusetts prison and serve a 20-year term for fraud. He didn't show. His car was found, abandoned, on the Bear Mountain Bridge. Scrawled in the dust on the windshield was the phrase, "suicide is painless."

End of the Bayou story? Maybe. Nobody saw Sam jump off the bridge; his body has not been found in the river below. Could the miracle worker have had one last illusion up his sleeve?

Today's CEOs Live Rich, Die Richer

Excerpts from Lavish Posthumous Paydays, a page-one story in today's WSJ:

You still can't take it with you. But some executives have arranged for the next best thing: huge corporate payouts to their heirs if they die in office.

Take Eugene Isenberg, the 78-year-old chief executive of Nabors Industries Ltd. If Mr. Isenberg died tomorrow, Nabors would owe his estate a "severance" payment of at least $263.6 million, company filings show.

• • •

The CEO of Shaw Group Inc. is in line to be paid $17 million for not competing with the engineering and construction company after he dies.

• • •

Companies often say one goal of their pay packages is to keep executives from leaving. But "if the executive is dead, you're certainly not retaining them," says Steven Hall, an executive-pay consultant in New York.

Three Trust & Private Banking Ads. And the Winner Is . . .

My printed copy of The New York Times Sunday Magazine included no fewer than three ads for private banking and trust institutions. Three! Unprecedented, in my memory. The marketing directors of these august institutions must have decided to follow Tom Gerrity's advice and step up their new-business efforts in these uncertain times.

Each of the three takes a different approach to wooing the wealthy.

First Republic, now a unit of Merrill Lynch Bank & Trust Co., employs a client endorsement. (Click on ad for larger image.)


BNY Mellon relies on the familiar theme of relief from investment anxiety. (I'm still not thrilled by their arrowhead logo, but I'm glad they didn't include the shaft.)


Bessemer Trust earns my blue ribbon for Best of Trio. Irresistible headline. Pointed copy. Bessemer's investment pros assert that they dodged the auction-rate securities mess. And they claim to have been smart enough not to invest in "leading financial institutions." It's enough to make a guy wish he could measure up to Bessemer's $10 million minimum.

Does Philip Anschutz owe the IRS $143.6 Million?

Here's one way to diversify out of a large block of stock, without immediate tax on capital gain: dispose of the shares via a "variable prepaid forward contract." Just one problem: the IRS may contend it's merely a disguise for a taxable sale. The Wall Street Journal reports that the IRS is seeking $143.6 million in back taxes from billionaire Philip Anschutz.

A Reuters story based on the WSJ scoop is here.

The Private Foundation Market

Only 5,000 or so private charitable foundations have big money to invest and disburse. But more than 20,000 foundations hold between $1 million and $10 million, according to data from 2005 cited in this NY Times story. And some of their founders are looking for better (but not too expensive) investment help.

This issue won't go away

Waldeck: The Case for Restricting the Charitable Deduction for Gifts to Universities with Excess Endowments via TaxProfBlog.

Bank trust departments are cautiously raising fees

Trust Updates reports on a March survey of fiduciary institutions that revealed trust fees are on the rise. Roughly a quarter of firms raised fees in 2007, with 30% of those with assets over $1 billion doing so. More institutions plan 2008 rate hikes, with bank-affiliated trust departments leading the way. The amount of the fee increases was not disclosed. The primary hesitation to raising fees is the fear of losing accounts.

According to the report, the number of trust accounts has declined in the last five years, but the size of the accounts has increased, with a net result of "consistent asset and gross revenue growth for the industry among all peer groups."

Ed McMahon May Lose Beverly Hills Home

Unable to work because of injuries suffered in a fall, 85-year-old Ed McMahon, Johnny Carson's long-time Tonight Show sidekick, may lose his multi-million-dollar home, It's mortgaged to the hilt.

A sad reminder that living rich is one thing, being rich is another.

Why Private Bankers Should Like Family Offices

Single family offices are reverting to type, according to research from the Wharton School: more emphasis on overseeing the family's investment portfolios, less on serving as facilitator and errand-runner for family members.

Bank and trust people should view SLOs as partners, not competitors, the research suggests. Private banks often supply family offices with hands-on investment services as well as IT infrastructure.

How to beat the AMT

Everyone complains that the Alternative Minimum Tax is snaring inappropriately an increasing portion of the upper middle class, and it is. But a recent Tax Notes item pointed to this piece from the IRS' Statistics of Income that shows that more and more high-income taxpayers—the ones theoretically the object of the AMT's affections—are wriggling free of its grasp. Looking at those with more than $200,000 in economic income (a slightly larger pool than those with more than $200K of AGI), the IRS finds that 10,680 of them paid no U.S. income tax at all in 2005, up from 5,028 in 2004 and 2,766 in 2000.

How do they do it?

For 44% of these taxpayers, the answer was substantial tax-free municipal bond income, which also avoids the AMT in most cases. Another 15.6% had enough charitable gifts to bring their tax liability down to zero. Surprising to me, for 15.9% it was the net casualty or theft loss deduction that eliminated income tax, while another 12.5% had extraordinary medical or dental costs that year.

If the AMT is missing the target by this much, why do we keep it?

Global economic indicator?

Many years ago, my brother-in-law was visiting us from Lithuania—this was back before Lithuania reclaimed its independence. As it happened, I bought a new Honda Civic while he was visiting, so I took him along for the shopping experience and the eventual delivery of the new car.

As we drove off the dealer's lot, he asked, "How much more is it worth now, compared to what you paid for it?" I assumed we were having a translation issue, but no, he was quite serious. At that time in Lithuania the wait for a new car might be 10 years (especially if you lacked the right party connections) and so new cars routinely shot up in value when they were acquired. By perhaps 100%!

I thought of those days as I read today's Wealth Report. Apparently the demand for private jets has vastly outstripped supply. A new Gulfstream sells for $40 million but you can't get one before 2013. Because so many oil potentates can't wait, the price of a used Gulfstream is $45 million, because you can take delivery next month.

For some people the high price of jet fuel is not a problem.

When High Net Worth Gets Downsized

Sell half a drawerful of Patek Philippes.

Ditch the Gulfstream for a Learjet.

Ask Mom to sell her old bling to raise tuition money for Junior's private kindergarten.

Skip the hair salon and (yuck!) go brunette.

Those are some results of turmoil in New York's lucrative financial industry, according to The New York Times. In other words, It’s Not So Easy Being Less Rich.

Whose Ox is Gored under Obama's Plan to Abolish the Social Security Wage Ceiling?

The question is answered by The Tax Foundation with an interesting state-by-state breakdown. Oddly enough, states that have been governed by the Democrats in recent years would be hardest hit, while the red Republican states tend to be at the bottom of the list.

California would be hit hardest, because there are more employees there than in any other state, and far more with earnings above the current wage ceiling. However, in percentage terms, California comes in at sixth, with New Jersey taking top honors. Connecticut is third.

6.25% of workers would be affected by elimination of the wage ceiling, as would their employers. That's a pretty big tax hike, and some would argue it's a middle class tax hike to boot. To reduce the impact, some advocate a "donut hole" approach, in which there is a bracket that is free of FICA, but then it kicks in again at $200K or $250K. Such an approach has the advantage that the number of adversely affected taxpayers drops by about 75%. It has the disadvantage that so little money is raised that it is hardly worth the effort.