I think the problem with fiduciaries comes down to the assets under management fee system. It is loaded with conflicts. Honest people can work within such systems, but they cannot make the conflicts go away.
I would think "advice only" could make many of the conflicts go away. In theory a bank could provide asset management for a low flat fee that depended on the complexity of what the trust needed. If all it needed was a balanced portfolio of stocks and bonds, then it should be very low. It could then charge for the time of the administrative officers, if they had to do something, which most of the time they don't. It could charge for the tax return, if it did the return. It could charge for monthly distributions, with the fee likely being very low if they were set up to be automated. Right now I have set up automatic transfers from the trust account to or on behalf of the beneficiary. There is no charge, but there is also no human role in the distributions.
Kind of like the way lawyers and accounts bill for what they do, and don't expect to get paid anything when there is nothing for them to do. That model makes it a lot easier for them to avoid conflicts of interest.
But just as it is hard for financial advisors to make a living doing advice only, it might be difficult or impossible for a trust department to break even operating like this. So- conflicts.
What is included? Gill or bsteiner would have much more perspective on this that I do, but here is what I found:
Most of the companies were quite clear on what the basic fee covered and what it did not. For example, for some it included preparation and filing of the trust tax return. For others it did not. I did not ask how much they charged for the return because I assumed the amount would be too small to matter, at least for a trust with simple investments. If the assets were very complicated and the trustee had to coordinate with the beneficiary's tax situation then it would probably be important to have the CPAs at the bank do the taxes.
For a simple return where everything was marketable securities the return itself would be simple. I could do the return myself but I have an enrolled agent do it just to have someone else's eyes on things.
Some banks said that the fee included a small number of monthly distributions. Others would charge per transaction. I did not get a clear idea of what the charges would be, but I assumed they would be small.
I did not get a sense that what was included had anything to do with the basic AUM fee. Some places charged on the lower end of fees and included the tax return and some distributions. Others charged higher fees and would bill for each transaction.
I got the impression it had more to do with where on the size of trusts the bank had decided to be.
Gill mentioned that the large places where he worked would not accept trusts below $5M. My trust is smaller than that. Some places simply said they were not interested. Some would be if they thought it would lead to more business down the line, for example if my spouse and I wanted to use them. Some places had "small trusts" divisions that would deal with my trust.
I am still considering a corporate trustee as my backup. My particular concerns are if my life gets to the point that the small amount of work involved is too much, my health declines and I cannot do it anymore, I die, or the needs of the beneficiary get so demanding that I want someone else to take over. One of my major concerns is ending up at a place that would insist on actively managing the portfolio. Vanguard would not. Some of the Schwab advisors would not, but I worry about having to turn over responsibility to two entities. Sounds complicated.
At the moment there are no complicated investments in the trust or held by the beneficiary, so there would be no need for CFAs balancing the risk profile.
I should probably mention another difference between, I imagine, the typical Vanguard trust and what I assume goes on with large trusts at big banks. If there were $20M+ in the trust and the beneficiary had plenty of money outside of it, then I probably would not care nearly so much about what the bank charged. I would be sure there would be plenty of money for the beneficiary, come what may. I would be happily free of worrying about the trust, the markets, how much to distribute, how much to keep in reserve and similar questions. I would be more interested in the sorts of services Gill mentioned, perhaps whether the trust should be partly in illiquid investments, and managing for the next generation. I would not be worried that an extra $20,000-$40,000 was going to deprive the beneficiary of independence or a decent life.
As it is, this trust is not nearly that big, it is all the beneficiary has to live on, and it has to keep a good amount available to cover a long term care facility. The beneficiary is not there yet, but it seems likely it will come to that in a few years. The difference between 1-2% of trust assets and 0.55% of trust assets is therefore a highly meaningful amount of money for the beneficiary. If I, in my capacity as trustee, were going to spend that much of the trust money on something, I would feel obligated to make sure that whatever the trust was buying was worth the cost.
Given my typical bogleheads skepticism about the utility of active management, I could not imagine willingly paying a team of CFAs to create a portfolio of individual stocks. I would have been happy to review any evidence the banks may have had that their investment team produced better risk adjusted returns than a simple portfolio of 2-4 index funds. But as I said, no one was prepared to offer any evidence. I was to take it on faith that they were smart people, so of course they would beat the market.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either |
We assume that markets are efficient, that prices are right |