Modest ambitions

Washington taxwriters seem to be coasting toward recess. Tax Analysts ($) reports today that Ways and Means and Senate Finance expect to deal only with incidental tax measures related to the energy bill, the farm bill, and the State Children's Health insurance Progam this summer, and not much else. Even the simple one-year patch for the AMT has been put off until the fall.

Conventional wisdom thus suggests that there will be no additional federal transfer tax legislation until after the next presidential election. At that time, in 2009, the taxwriters' minds will be focused by the scary prospect of a 2010 without federal estate tax.

Will We All Look Like Trust Fund Babies?

Down at the general store the other morning, out of his Audi stepped a well-dressed guy: Black blazer, silk-blend black tee, black pants draped over black, genuine leather loafers.

How cool, I thought.

Silly me. When black reaches this far into provincial New England, you know the fashion world has moved on.

Goodbye, black. Hello patch madras!

The preppy look is back, The Wall Street Journal reports (subscription):

The last time we were loving golf shirts and pearls this way, we were entering an era that celebrated wealth, on our way to a time when Gordon Gekko was the king of Wall Street and every aspiring corporate raider had a closet full of Lacoste alligator shirts and Topsider deck shoes. Then, greed was good. Now we call it "luxury."

According to this item ($) in The New York Times archives, Sperry Topsiders have indeed jumped back to the top of the fashion charts:

[O]ne can only wonder what Paul Sperry (the stalwart New Englander who invented the Sperry Top-Sider in 1935 by joining a novel nonslip, nonscuff white rubber sole to a moccasin upper) would think to hear Tommy Fazio, the men's fashion director at Bergdorf Goodman, declare on his cellphone from the Milan men's wear shows last week, ''It's all about a boat shoe.''

What really sparked the preppy revival? The WSJ article mentions the Tea Partay video we called to your attention last fall.

So prepare yourselves, wealth managers. Expect more clients wearing pink and green.

Some of the women may look pretty colorful, too.

Death Bonds

From Business Week's cover story on "life settlement-backed securities:"

Wall Street sees huge profits in buying [life insurance] policies, throwing them into a pool, dividing the pool into bonds, and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.

But the investment banks are wading into murky waters. The life settlements industry increasingly finds itself in the grip of dubious characters devising audacious and in some cases illegal schemes to make money. Many are targeting elderly people with deceptive sales pitches—so many that the National Association of Securities Dealers has issued a warning about abusive practices. Others are promising investors unrealistic returns or misleading them about the risks. Some are doing both.

Be sure to check out the slide show, with the grim reaper as your guide.

Should a Stepmother Get Most of Dad's Estate?

Heck, no! Not in the eyes of dad's kids.

Latest example, the disputed will of King Ranch heir B.K. Johnson. Third wife prevails over adult kids in estate suit, listed as the third most popular article on the Investment News web site, indicates that such disputes aren't necessarily about money. It's a matter of principle.

Mr. Johnson’s children, his son’s widow and his eight grandchildren filed their suit against Ms. Johnson in 2003.

The case, advisers say, illustrates a problem that is becoming more common: wealthy clients grappling with what to leave spouses and adult children from former marriages, and the best ways to structure their estates.

Mr. Johnson, who died at age 71 in 2001, left an estate worth between $40 million and $60 million. The majority of the estate was placed in a trust for Ms. Johnson, who receives an annual income of $800,000 to $900,000 from the trust.

Upon her death, at least half of the money will go to charity, and the remainder to Mr. Johnson’s descendants or to charity. The choice is up to Ms. Johnson. Mr. Johnson included this provision to ensure that if one of his descendants were ill, Ms. Johnson would have the ability to provide money for that child.

Such help probably won't be needed. Mr. Johnson didn't exactly disinherit his offspring. During his lifetime he set up trusts for the children. Each trust is now worth $10 million or more.

Also unlikely to need financial aid are the lawyers who worked on the case. "Attorneys for Mr. Johnson’s children and grandchildren were awarded $6.25 million in attorneys’ fees," Investment News reports, "while lawyers for the estate were awarded $4.8 million."

The JWR Memorial

Tom Gerrity and I attended the memorial service July 18 for Wes Rohn, Merrill Anderson's President and CEO in the late 70s and early 80s. I did not realize just how far it is to Hampton Bays from Stratford—that was one heckuva commute for Wes. Also, there was a tornado and torrential downpours on Long Island yesterday—at times we were driving through 12 inches of water standing on the road!

But it was well worth the effort. Each of Wes's 8 children spoke briefly in his memory, painting quite an accurate and vivid picture of the man we knew in a business context. The First Presbyterian Church provided a very fine setting, the musical selections were charming.

The reception at the Rohn home in Long Island was especially interesting. The house, quite close to the water, was designed by Wes and Joan and features a cathedral ceiling in the great room with picture windows facing the beach. An eclectic batch of paintings adorn the walls, for a very charming effect. Best of all, we had a chance to trade remembrances with several of Wes and Joan's children, as well as having some time to catch up with Joan herself.

Seventeen grandchildren may sound like a lot, but it's even more when you see them in person. What a patriarch.

J. Wesley Rohn, R.I.P.

Merrill Anderson's President and CEO at the time I joined the firm in 1979, Wes Rohn, died earlier this month. Here is his obituary:

Hampton Bays, NY: Joseph Wesley Rohn died in his 85th year at his summer home here on July 5th. He was a son of the late David and Elizabeth Rinier Rohn of West Englewood, NJ and the brother of the late James T. Rohn of Fletcher, NC.

Wes Rohn graduated from the Englewood School for Boys (now Dwight Englewood School) of which he later became a Trustee. He attended the University of Virginia and served as a naval officer during World War II.

In 1947 he began Business News Associates, a company for bank advertising, an open field, as banks traditionally did not advertise at that time. In the seventies he merged the business into the Merrell Anderson Company, later becoming the President and CEO.

The Rohns have summered in Hampton Bays since 1959 and also lived in Closter and Tenafly, NJ, and Litchfield, CT, Wes reconstructing the family’s old houses as he went along. He also enjoyed gardening, boating, fishing and duplicate bridge. He was a diligent worker and a nutritionist and environmentalist ahead of his time. After retiring to Naples, FL in 1986, he volunteered for the Conservancy of Southwest Florida, Habitat for Humanity and Hospice of Naples and joined the Minor League Club.

Surviving him are his wife of 59 years, the former Joan Fagan of Englewood, NJ and his eight children and seventeen grandchildren: daughter Karen, husband Robert Osar and their sons Brian and Daniel of Wilton CT; sons David Rohn of Miami, FL, Frederick Rohn, wife Dana, and their daughters Chloe and Phoebe, of Litchfield, CT; and Peter Rohn, wife Regina and their children James, Alex and Peter of Tenafly, NJ; also Carl Rohn and Michael Rohn of Hampton Bays and Carl’s daughters Jennifer and Emily of Salt Lake City, UT, Meredith of Manorville, NY and Mckayla of Baldwin, NY; and Mary (Molly), husband Jeffrey Morgan and their children Ben, Lucy and Marguerite; and Robert Rohn, wife Katherine and Children Katie, Galen and Nicholas, all of Darien CT.

Wes Rohn belonged to the First Presbyterian Church of Naples, FL and the First Presbyterian Church of Southampton, NY, where there will be a memorial service on July 18th at 12 noon. Memorials may be made to either church, or to the Dwight Englewood School, Englewood, NJ. For further details, contact the J. Ronald Scott Funeral Home, 20 Ponquogue Avenue, Hampton Bays, phone # 631-728-3660.

Can You Cross Sell in an Online Bank?

Banks need more and better tellers, The Wall Street Journal notes (subscribers only):

"For banks, the entry-level teller position has become the primary way to win new customers and sell new services to existing ones."

But how do you cross sell home loans and investment products, or even living trusts, if there are no tellers, no bank branches?

Welcome to the bank of the future. And that future could be, like, tomorrow. Read what Money magazine's Eric Schurenberg said yesterday on the Nightly Business Report:

Until recently, banks that exist online and only online were basically just repositories of high-yield savings accounts. You needed a regular bank to use cash machines and write checks. Well, no more. Pure online banks, like E-trade bank, HSBC Direct and Everbank, have come of age. One of them may just be better for you than your current brick and mortar branch.

Prices change at multifamily offices as well

Following up on JLM's observations below on falling fund expenses, this article from InvestmentNews-- Multifamily offices rethink their pricing-- reveals another new approach for pricing investment services for the wealthy. Interestingly, the multifamily offices are not adopting the 2 & 20 approach of the hedge funds. Instead, they are adopting flat rates!

One of the benefits of flat rates is that they "match up the interests of the multifamily office and the family."

Asset-based fees tend either to overcharge or undercharge the client, according to Brian Hughes, senior vice president and national director of business development for Jenkintown, Pa.-based Pitcairn Financial Group.

What’s more, he said, firms usually lack benchmarks when determining fees to help them accurately gauge a fee break point that is both favorable to the client and profitable for the firm.

That's odd. I've always been taught that a percentage of assets fee is the model that best aligns the interests of the manager and the client—"Our compensation won't go up unless your portfolio is growing." However, asset-based fees are apparently problematic when major philanthropy is on the agenda, according to the article.

Fund Investors are Watching Expenses

In his Wall Street Journal column (subscribers only) today, Jonathan Clements comments on a 2006 survey conducted for the Investment Company Institute.

• Over the past decade, 90% of new stock-fund money has been invested in funds with below-average expenses.

• 74% of recent fund buyers considered fees and expenses, while 69% looked at performance, 61% at risk and 25% at the manager.

Total annual costs for stock funds, including sales loads, dropped to 1.07% of assets in 2006 from 2.32% in 1980.

Was Subprime Lending Just Rocket Science?

A while back, Bearn Stearns launched a hedge fund that invested mainly in complex packages of subprime mortgages. The fund did so nicely that Bear Stearns last year launched a second, more highly leveraged version.

Too bad so many people with subprime mortgages can't pay them off, especially when their low teaser rates expire. The first Bear Stearns fund is now worth nine cents on the dollar. The second, as FT. com reports, is not worth a dime:

Bear Stearns on Tuesday told investors in two stricken hedge funds managed by the bank that one fund had lost all its value and the other had about nine cents remaining for every dollar invested following bad bets on the US subprime mortgage market. The losses, especially for the less leveraged of the two funds, were worse than investors expected. “They are a big investment house. They are supposed to be professional,” said one fund of funds executive. “There is nothing to do now except maybe go shoot the guy who did it.”

Counting leverage, the two funds at their peak may have been worth $16 billion or more. But before we shoot the hedge fund managers who gambled and lost, pause to reflect. Who created this whole subprime mess is the first place?

The New York Times identified a leading suspect back in March: The Subprime Loan Machine($).

Edward N. Jones, a former NASA engineer for the Apollo and Skylab missions, looked at low-income home buyers nearly a decade ago and saw an unexplored frontier. Through his private software company in Austin, Tex., Mr. Jones and his son, Michael, designed a program that used the Internet to screen borrowers with weak credit histories in seconds.

***

The old way of processing mortgages involved a loan officer or broker collecting reams of income statements and ordering credit histories, typically over several weeks. But by retrieving real-time credit reports online, then using algorithms to gauge the risks of default, Mr. Jones’s software allowed subprime lenders like First Franklin to grow at warp speed.

***

The rise and fall of the subprime market has been told as a story of a flood of Wall Street money and the desire of Americans desperate to be part of a housing boom. But it was the little-noticed tool of automated underwriting software that made that boom possible. Automated underwriting software spawned an array of subprime mortgages, like those that required no down payment or interest-only payments. The software effectively helped move what was a niche product only a decade ago into the mainstream. Automated underwriting “replaced the ways we used to extend credit,” said Prof. Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard.

Loan approval by algorithm proved extremely efficient. Remember the ads? “We’ll give you loan answers in just 12 seconds!”

That's not much time to work miracles, even with the help of rocket science. In comes a loan application. The applicant presumably couldn't get approved for a standard mortgage. Whoosh! Twelve seconds later, the applicant is qualified for a costlier (after teasers expire) subprime mortgage.

“Farce is tragedy played
at a thousand revolutions per minute"
– John Mortimer

Let's hope this farce doesn't end in too much tragedy. You can read Bear Stearns letter to clients, reporting the closing of the two hedge funds, here.

Big Mac Index

My all-time favorite feature of The Economist? The Big Mac Index.

As always, this year's edition compares the average price of a Big Mac in the U.S. with what you would pay, translated into U.S. dollars, in other countries.

A sampling:

Hong Kong: $1.54
Russia: $2.03
Czech Republic: $2.51
United States: $3.41
Switzerland: $5.20
Iceland: $7.21

Are the currencies of the first three countries undervalued?

Are the Swiss Franc and the Icelandic Kronur riding for a fall?

Time may tell.

Meanwhile, the Big Mac Index gives wealth managers a fun way to suggest the prudence of globally diversified portfolios.

Banking's "Sales Culture" Goes Global

For most of the 20th century, bank employees served their customers. In the 21st century, they're required to sell stuff. The change can be hazardous to a customer's financial health, even in Malaysia, as Quah Seng-Sun reports in this post on his blog:

Everyone that works in the banking industry today knows that selling their products is very much part of their job. Such is the competition for business among banks that the staff knows no boundaries for the sake of closing a sale, finalising a deal or pushing a product.

There is little care whether the sale, deal or push will actually benefit the customer. As long as there is a transaction that benefits the bank’s bottom line, the bank will want to push it through because ultimately, that’s the pressure on the staff. Many old bank staff feels uncomfortable with this role - they feel that they are betraying the customers that they are so familiar with - but to new bank staff, it is second nature to them that they are bank salesmen. They know of no other alternative.

I met an elderly couple this evening. Both are in their mid-seventies. They knew that I have an active interest in financial planning - investments and estate planning - so they asked me to look at the copies of two application forms in their hands. They were illiterate and wanted an explanation of the two forms.

I was surprised. The forms turned out to be applications for some unit trust funds. One was a third-party global infrastructure fund marketed by Maybank while the other was a Euro equity fund from Public Mutual.

I was surprised because all that the elderly couple had done at the branches of these two banks was to ask the bank staff for alternatives to their maturing fixed deposits.

Thought for the Day, from Joseph Heller

Before novelists start publishing best sellers, they need day jobs.

In twentieth-century New York, that neccessity sometimes led to writing advertising copy. Scott Fitzgerald did it. At The Merrill Anderson Company after World War II, so did Joseph Heller.

Judging from John Bogle's blog, the author of Catch 22 still has a way with words. Mr. Bogle recently told this antecdote to the MBA graduates at Georgetown University:

At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel, Catch-22, over its whole history.

Heller responds, "Yes, but I have something he will never have: Enough."

Wealthiest Americans

Think Bill Gates is rich? The front-page story in today's New York Times compares the relative rank of wealthy Americans, past and present, in terms of the national economy of the time.

As you'll see from this interactive graphic (an elaboration on the chart in the print edition), Gates is nowhere near as rich as Cornelius Vanderbilt.

What's more, Gates will have to more than double his fortune to outrank this country's all-time number-one wealthholder, John D. Rockefeller.

Meet the YAWNs: Super-Rich, Really Boring

The yawns are the subject of this week's Wealth Report (subscription required):

Yawns are "young and wealthy but normal." They are men and women in their 30s and 40s who have become multimillionaires and billionaires during the wealth boom of the past decade. Yet rather than spending their money on yachts, boats and jets, yawns live modestly and spend most of their money on philanthropy. In stark contrast to the outsized titans of the Gilded Age and the slicked-back Gordon Gekkos of the 1980s, yawns are notable for their extraordinary dullness.

The new species of wealth seems to have been first spotted by the Sunday Telegraph. As The Wealth Report notes, yawns may flourish better in the UK than the US, where diffidence doesn't come naturally to the New Rich:

[Natasha] Pearl, the concierge-firm founder, says, "The old-money families that live in a low-key style are doing this without conscious thought. They are behaving as their parents, grandparents, and earlier generations all behaved.

"The low-key new money is far more self-conscious, Ms. Pearl says. "They work very hard, and spend incredible amounts of money trying to be normal and raising their kids to be normal."

The Sunday Telegraph article notes that younger and younger people are showing up on UK rich lists. Seems liquidity events occur sooner for 21st-century entrepreneurs:

"Private equity groups have been buying small family businesses all over the country, as well as companies with household names such as Boots or the AA. That has made it easier for young entrepreneurs to cash in their chips at an earlier stage."

Divvying Up Trustee Duties

Love the way Rachel Emma Silverman of The Wall Street Journal writes about complicated subjects such as trusts and estates. Here's as clear a two-sentence intro to trusts as you're likely to read:

A trust, in its most basic form, is an agreement to hand over your assets to someone else -- the trustee -- who minds the funds or property for your beneficiaries. Depending on how it's structured, a trust can be used for a wide variety of purposes, including avoiding probate proceedings, saving on estate taxes or providing for future generations.

Now why can't banks and trust companies express themselves with such clarity?

Ms. Silverman's subject today (subscription required) is the growing complexity of trusteeship:

Here's how trusts are getting more complex:

• More families are using trusts with teams of multiple trustees or advisers, and some trustees are delegating specific trust assets to outside investment managers.

• Some trusts enlist "trust protectors," who generally have the power to fire and hire trustees.

• Using multiple trustees or advisers may lead to higher fees, state income-tax consequences and legal questions about who is ultimately responsible.

Naming a separate trustee to handle investing is O.K., I guess: "Hope springs eternal." Having a separate decision-maker for discretionary payouts to beneficiaries sounds logical if the administrative trustee is a megabank. (Though the Senior Assistant Blogger is a proud stockholder in Citigroup, he wouldn't expect Citi to provide the equivalent of an old-fashioned, community-bank trust officer.)

Is the slicing and dicing of trusteeship the inevitable wave of the future?

World-Class Trustor, Unlucky Investor

How many trusts does a member of the Forbes 400 need? About 25, according to this article (subscribers) in The Wall Street Journal.

Some trusts set up for Fred DeLuca, co-founder of the Subway sandwich shops, were established offshore, in locales such as Lichtenstein, Isle of Man and Guernsey.

The trusts' investments seem to have been managed right here in the U.S.A., via five trustees and a broker at UBS. Unfortunately, the trusts were victimized by the dot.com bust, plus untimely bets on a couple of health-care stocks.

Recently, a three-person National Association of Securities Dealers arbitration panel rejected claims that UBS had mismanaged the trusts. Says the WSJ:

The case opens a rare window into arbitration claims by wealthy individuals against their brokers, showing how difficult it can be for them to recover losses from Wall Street brokerages. As is often the case with arbitration awards, the panel didn't give reasons for its decision. But rich people have a tough time winning claims, because they tend to know a lot about how the stock market works and as a result don't get a lot of sympathy when they do cry foul.

How tough? A lawyer for the trusts notes that last year, 148 claims for more than $1 million went to arbitration. More than 60% were "dismissed in their entirety."

Credentials that Count

Yesterday we noted The New York Times piece on financial sales people with fancy but dubious initials after their names. Here's a Jonathan Burton column at MarketWatch explaining why the CFA and CFP designations are a different kettle of fish.

How New Money and Old Money Differ (Maybe)

Writing in the Journal of Financial Planning, James Grubman and Dennis T. Jaffe sort High Net Worth families into two groups: immigrants (new money) and natives (old money):

Clients who come to wealth during their lifetime have fundamental differences in life experience, identity, and adjustment compared with clients who come from family wealth. Much like the differences between immigrants and native-born citizens, acquirers and inheritors experience the Land of Wealth from unique perspectives. They also face different dilemmas in parenting effectively and in making choices about estate planning.

Interesting slant, though you may question whether New Money comes only in plain vanilla. What about Greenwich hedge fund managers and other tutti fruitis?

Marketing Annuities? Watch Your Back

Advice to insurance company execs, especially those in charge of marketing deferred annuities:

Avoid dark alleys frequented by belligerent senior citizens.

Reason: this front-page New York Times article, reporting on how "advisers" score big paydays selling annuities to seniors, using tactics that the companies producing the financial products probably don't want to know about.

The side bar below features a guide to "certifications" designed to make sales agents look like experts: (Click on image for clearer view.)


Question for bank marketing people: Will distaste for the tactics used by insurance agents spread a taint over sellers of annuities operating out of banks? Annuity sales in banks already have harvested bad press, as noted here and here.

Wealth managers may be called upon to help clients who bought deferred annuities without realizing the extent to which they were tying up their money. Today's Wall Street Journal (subscribers) offers a guide to possible exit strategies.

This post was composed by a proudly non-certified senior advisor.

Giving Till It Hurts

Extra-generous gifts to charity are on the rise, says this Wall Street Journal story (subscribers). Helping to spark the trend: the popularity of CRATS and charitable gift annuities, plus the Pension Protection Act, which facilitates gifts as large as $100,000 from IRAs.

Have Boomers Become Former Homeowners?

Most Boomers haven't saved enough to retire in comfort. Some haven't saved at all. But not to worry – they're building affluence through the homes they own.

On second thought, maybe it is time to start worrying.

Check out "A False Sense of Security? You Must Own a Home" in The New York Times:

Never before have homeowners actually had such a small ownership stake in the houses they occupy.

* * *

Using one’s home as an A.T.M., as economists like to say, has become so easy since the 1980s that it is hard to kick the habit. Home equity loans proliferated, giving families a readily available line of credit, and government encouraged lenders to reach out to low-income families, allowing them to qualify for mortgages with little (sometimes no) down payment. Mortgage lenders shed their caution, able to sell sketchy home loans on Wall Street and pass on their default risk to other investors (the perils of which have been exposed in the recent Bear Stearns debacle).

The tax code has played its own special role in all of this. Congress changed the law in 1986, allowing individuals to deduct on their tax returns only those interest payments on loans tied to housing. Interest on other loans no longer qualified. With that big change, borrowing against one’s home to buy a car or an appliance or clothing or a vacation became cheaper, after taxes, than standard consumer credit.

* * *

The culture of “own your home free of debt as soon as possible” had endured for decades. Through the 1960s and ’70s, owners’ equity ranged from 65 to 70 percent. As recently as 1983, some 52 percent of American homeowners who were 55 to 65 years old owned their homes without any mortgage debt — allowing them to be free of monthly installment payments during their retirement years. By 2004, however, that percentage had dropped to 36 percent, according to Federal Reserve data.

What about it? Are some of your present or potential clients poorer than they look?

Biased Investment Advice is Costly

More than two years ago, the Securities and Exchange Commission found that many pension consultants had business relationships that might cloud the objectivity of their advice.

Did it really matter?

Yes, according to this item from the news wires:

The Government Accountability Office found that pension plans using consultants considered by federal regulators to have undisclosed conflicts had annual investment returns 1.3 percentage points lower than those whose consultants did not have significant conflicts.

Is your income tax rate higher than Warren Buffett's?

Warren Buffett says he wants to pay more taxes. At a fundraiser for Hillary Clinton, according to the Washington Post (registration required), Buffett complained that tax rates on the "rich" may be less that those on the middle class.

"Buffett cited himself, the third-richest person in the world, as an example. Last year, Buffett said, he was taxed at 17.7 percent on his taxable income of more than $46 million. His receptionist was taxed at about 30 percent."

That must be an unusually well-paid receptionist for Omaha. According to the article, Buffett claimed to not have invested in any tax shelters—and I suppose it is true, most people don't consider tax-free municipal bonds to be tax shelters. But it's his muni-bond income that helps bring Warren's total tax rate down so much.

Although Buffett may say he wants to pay more taxes, his actions tell another story. His philanthropic gifts last year to several foundations were all explicitly conditioned upon the foundations maintaining a tax-exempt status, so as to avoid all gift taxes on his tranfers.

Hedge Clipping

John Cassidy has written a long (and probably entertaining) article on the phenomena known as hedge funds for The New Yorker. You can read along with us here.

“Super-rich get wealthier faster”

But can they afford to retire in style?

Newspaper reporters persist in calling mere millionaires "super-rich." Understandable, given the size of most reporters' paychecks.

Fact is, as Jonathan Clements points out his latest Wall Street Journal column (subscribers), "A million dollars isn't what it used to be."

Sure, it's still enough to pay for a comfortable retirement, and it will put you among the richest 2% of American adults. But it won't put you in the lap of luxury -- and for that you can thank inflation, the current decade's housing boom, and the long rise in stock and bond prices.

According to the World Wealth Report prepared annually for Merrill Lynch by Capgemini (downloadable here, but registration required), about 9.5 million individuals worldwide have investable assets of at least $1 million.

The super-rich are a much, much rarer breed. You could fit all the citizens of the world who have $30 million or more into one of our bigger football stadiums.

Supremes to settle the 2% rule for trusts

On June 25 the U.S. Supreme Court agreed to decide whether the investment expenses of trusts are fully deductible or subject to a 2% floor. The Circuits are split. The case is Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust v. Comm'r of Internal Revenue, and the docket order is here.

What is the Mental State of a Hedge Fund Manager?

Tough question, what?

Especially tough if you read our March post about one hedge fund manager who sought a hired gun (metaphorically speaking) to rape his former paramour.

The now ex-hedge fund manager (aka Alleged Perp) has been released from a Connecticut jail to seek therapy and evaluation in New York. Will he return? Here's the update.

T-Shirt and Shorts? You Must Be Really Rich

In Thorstein Veblen's day, the rich were so insecure they dressed in finery most uncomfortable. How else to show that they weren't manual laborers?

In today's Wealth Report (subscription), Robert Frank observes that the tables have turned:

As one Palm Beach banker who serves the rich told me recently: "The wealthy wear T-shirts and shorts every day, because they've earned that right. We work for them, so we wear suits."

What's Next? Wal-Mart Wealth Management?

In today's Washington Post, Robert Samuelson reports on a quiet revolution:

It's one of those vast social upheavals that everyone understands but that hardly anyone notices, because it seems too ordinary: The long-predicted "cashless society" has quietly arrived, or nearly so; currency, coins and checks are receding as ways of doing everyday business; we've become Plastic Nation.

The beauty of Plastic Nation, as reported in today's New York Times, is that you don't have to be a bank to be a bank. You can be Wal-Mart.

Wal-Mart money centers already cash checks, sell money orders and offer Discover cards. Now they'll take "demand deposits" via prepaid debit cards.

Possibly coming soon: home loans, car loans, etc.

Wal-Mart's debit card is targeted at the low end of the financial market — folks without bank accounts. But the company is known to seek more upscale customers for its clothing and housewares. Don't be surprised if Wal-Mart's money centers expand to include sellers of insurance and investment products.

Trust services may take a little longer.

The Secret of Perpetual Wealth

Rich families seldom stay rich: "Shirtsleeves to shirtsleeves in three generations." Taxes, ill-advised speculations, spendthrift heirs — all take their toll. What's more, Oliver Wendell Holmes pointed out back in 1860, "it is in the nature of large fortunes to diminish rapidly when subdivided and distributed .

 . . . "[A great fortune] splits into four handsome properties; each of these into four good inheritances; these, again, into scanty competences for four ancient maidens . . . ." 

 Holmes acknowledges one exception: a group whose fortunes seemed never to diminish. A "harmless, inoffensive, untitled aristocracy" he calls them: The Boston Brahmins. But although Holmes babbles on about good breeding and such, he never discloses their secret. What "special means" did these Brahmin families employ to remain permanently in the upper crust? Surely there was more to it than going to Harvard. 

 There was. The "secret" was so open it became embedded in New England folklore, remembered (though seldom practiced) well into the 20th century. 

 Ready to learn the secret of perpetual wealth? Return with us now to those golden days of yesteryear. Boston, before the Civil War. Out from Harvard Yard strides a brand new graduate . . . . 

 Meet Waldo 

Waldo, the new grad, has only one regret. His mother did not live to see him get his diploma. With her untimely death Waldo has become beneficiary of a family trust fund. He recently received his first year's income, $3,000. (Perhaps $80,000 or more in today's dollars.) What's Waldo going to do with all that money? What any right-thinking new college grad would do: Spend it! 

 Off goes Waldo on a grand tour of Europe: London, Edinburgh, Paris, Rome . . . . We catch up with him in Florence. Ah, Firenze!

Strolling from the Ponte Vecchio toward the Pitti Palace, Waldo is startled to see a familiar figure advancing toward him — his aunt Josepha, with a teenage girl in tow.

 "Land sakes!" his aunt exclaims. "Look, Emily, it's my favorite nephew. "Waldo, you remember my goddaughter, don't you?" 

 Waldo doesn't. But he will never forget her. Emily is the comeliest, sunniest, most enchanting creature Waldo has ever laid eyes upon.

 

* * *

Waldo returns to Boston determined to get serious. He rents cheap lodgings near Beacon Hill, finds a job and resolves to woo and one day wed the enchanting Emily. 

 Waldo lives on his scant earnings. His trust income he saves. All of it! No income tax in those days. In a few years, interest on the accumulating income payments augments Waldo's earnings sufficiently for him to start wooing Emily in earnest. 

 We're happy to report that Waldo does get the girl. But here we'll leave his personal life to focus on his finances: Waldo continues to bank his trust income checks, year after year. By the time he attends his 25th Harvard reunion, his accumulated trust income has grown into a personal fortune equal to his trust principal. You could say he has cloned his wealth. So now you know the secret of perpetual wealth. The Boston Brahmins, it was said, were so frugal they lived on the income from their income.

* * *

They sure don't make Trust Fund Babies like they used to.

Retail Giant Will Remake U.S. Trust

Can a mass-market bank known for service via 800- numbers move its services to the wealthy up-market? Today's NY Times discusses the challenge faced by Bank of America with its acquisition of U.S. Trust.

The new "U.S. Trust, Bank of America Private Wealth Management" will be introduced in the fall with an ad campaign crafted by Hill Holliday.

The United States Trust Company in 1890,
when trust companies aimed to be perpetual.

One of the lesser ads Merrill Anderson produced
for U.S. Trust in the 1960s.

Circa 1960, the young turks at Merrill Anderson lobbied in favor of creating a short, modern logo for our most prized client: just US Trust.

It took quite a few years, and probably a few changes of ad agencies, before the client finally broke down and agreed to such informality.

How the Crown Rewrote Diana's Will

From a story in the U.K.'s Telegraph:

In her original will, drawn up in 1993, the princess [Diana] had stipulated that both princes would be entitled to their entire share of the capital on reaching 25.

But details of the will were changed by a variation order granted by the High Court on Dec 19 1997 - three months after her premature death in a Paris car crash. In a highly unusual move, the executors made both her original will and the new one public.

The key changes, which were designed to protect the young princes, included a clause that raised the age at which they could ask for the capital in full to 30.

The changes also ensured that the princes were only allowed small amounts of the income - the interest accrued - at the discretion of the trustees before their 25th birthdays. But, on reaching 25, both could receive the full amount of income without any restraint from the trustees.

Custody Accounts

The other day an American Banker headline proclaimed that venerable Bryn Mawr Trust obtained a third of its revenue from wealth management and hoped for even more.

Judging from Bryn Mawr Trust's attractive web site, custody accounts for investors receive marketing emphasis. A well-crafted sales pitch appears in the latest issue of their trust newsletter available online. You can view it here.

"In short," the article concludes, "Bryn Mawr Trust’s Custody Division serves the need for a security guard, financial secretary, bookkeeper, stockbroker, and general housekeeper, with faithful adherence to investor directives and with timely and accurate processing of all transactions."

Nicely said.

Question is, do today's High Net Worth Individuals worry about timely crediting of dividends? Do they fear their brokers will go bust, forcing them to battle with the SIPC to get their assets back?

In short, are custody accounts still a viable product in the 21st century?

Keeping a Business in the Family

The odds are stacked against the family that wants to keep a business going for a second or third generation. Death taxes, rising real-estate prices, disinclined heirs, sibling squabbles . . . the obstacles are many and varied.

How delightful, then, to learn that Brandman's, the paint store we patronized when I was a kid, is celebrating its centennial in Norwalk, Connecticut.

Is it just coincidence that one of the last remaining real (that is, non-tourist) businesses in Portsmouth, New Hampshire is also a paint store?

F. A. Gray's somewhat dated web site boasts that the business is 102 years old. The date of founding, however, is listed as 1902, which makes Gray's 105.

Questions for trust officers:

What's the oldest family business is your marketing area?

What's the oldest family business with which your fiduciary team has been involved as executor or trustee?

(Extra credit if said business smells of turpentine.)