Trusts and "managed" accounts

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rlaggren
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Joined: Wed Mar 07, 2018 12:46 pm

Trusts and "managed" accounts

Post by rlaggren » Sun Apr 15, 2018 2:07 pm

I'm working on creating trusts for our estate. Besides the language and directives of the trust, or perhaps even more important, the trustee(s) is critical. These are irrevocable trusts we're looking at. Trusteeship is a serious job - it comes with fiduciary responsibility and that comes with significant personal liability. Thus any sensible person undertaking a trusteeship has to look at properly dealing with their liability exposure.

A trustee might reduce their personal liability by "subbing out" duties which the trustee could be accused of being incompetent in. Such as managing a securities portfolio. From a trustee's pov a fully managed portfolio walls of the investment liability and they need only to review reports timely, probably quarterly, and respond to gross discrepancies. There will be discussion about this situation with the lawyer, but seems doubtful the basic will change.

Now, as regards maintaining a reasonably priced passive portfolio w/minimal trading, I don't see many obvious choices out there in way of management packages. Maybe Vanguard; I have to reread a bunch of stuff, and talk with the lawyer. The words "passive" and "managed" seem to be mutually exclusive in so far as brokers are concerned. Perhaps I'm looking in the wrong places or using the wrong key words, but so far I haven't really found any type of contract in wide use (multiple sources for that certain type service) that would reduce a trustee's perceived liability at a reasonable cost based on very minimal monitoring and, perhaps, yearly "re-balancing". Full cost full service broker contracts (the "full service" part of which is entirely unneeded) are dime a dozen but basic care packages are like hens teeth. Part of the problem is that "programs" that might be found in various brokerages are not at all standardized and thus it is not easy to find alternatives w/out some serious understanding of the basic investment strategy and very careful reading of the different management contracts.

IOW, the service I'm looking for doesn't seem to be offered much. That's not a problem for myself, but it probably would be for a trustee who for some reason needed to change brokers.

So, I'm looking for:
1) A way to define the type of contract desired and perhaps some of the key provisions which would frame that sort of contract.
2) Leads to a broker offering a contract which would "manage" a very simple (5 fund holdings or less) portfolio for a fixed annual fee; or maybe for less than 25bp. Something like that. Anybody know of any basic management contracts or possibly places to look for them?

Thanks for any thoughts,
Rufus

afan
Posts: 3881
Joined: Sun Jul 25, 2010 4:01 pm

Re: Trusts and "managed" accounts

Post by afan » Sun Apr 15, 2018 2:38 pm

Have you discussed this with your lawyer? It seems that you are reinventing the wheel, and encountering roadblocks as a result.

The most straightforward solution would be to hire a corporate trustee that accepts the liability as a cost of doing business. This corporate trustee could include managing the investments, or it could be a directed trustee that does the administrative work with another entity handling the investments.

Vanguard as trustee would give you an all index fund portfolio for a competitive price.
Vanguard also has a Personal Advisory Service that charges a lower fee, since they are not serving as trustee. You could have a corporate trustee do everything else and let Vanguard manage the investments. I doubt Vanguard would sign a contract saying that it will ONLY use index funds, but in practice that seems to be how they invest.

LPL financial will serve as directed trustee and you could find an independent investment advisor who will do an all index portfolio for a low flat fee. There are many other banks and trust companies who will serve as directed trustee. I would let your lawyer help you find good candidates.

I would NOT try to draw up your own contract describing the investment relationship. Even if you are an attorney who routinely writes contracts, your challenge would be getting an investment advisor to sign it. Obviously, if you are not an expert in writing contracts, then YOU should not sign it, even if your investment manager would agree to.

Anyone with whom you would want to deal will have a standard contract for their services. Just use that.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

rlaggren
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Joined: Wed Mar 07, 2018 12:46 pm

Re: Trusts and "managed" accounts

Post by rlaggren » Sun Apr 15, 2018 4:05 pm

@afan

Appreciate your thoughts. I am looking at Vanguards offerings. There is no question of drawing up my own contract - just trying to think over and identify important points or clauses that I should see in the contracts that I look at. The lawyer is definitely in the loop here; however, he has made clear that he does not give investment advice and I took that to mean that he does not maintain any familiarity with investment service offerings. What he will do is look at contracts and say to what extent they cover the trustee. I'm hoping to pre-filter the paper we ask him to look at.

Corporate trustees are turn key, pay the fees and everything disappears behind a suit and a professional smile. And very costly. We have people who may be good trustees. One is familiar with finance and wants to cover his ass and others have little expertise and don't know what they don't know - but they're responsible and familiar with the family and are willing to do the work. In both cases a layer of management may make sense. But paying $15k+ a year to a financial name to hold three funds and issue a report of earnings doesn't look attractive.

Rufus

bsteiner
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Location: NYC/NJ/FL

Re: Trusts and "managed" accounts

Post by bsteiner » Sun Apr 15, 2018 5:31 pm

It's up to the trustees to decide (though if you're creating the trust now, you can retain the power to remove and replace the trustees, provided the replacement trustee is not a close relative or subordinate employee).

If the trustees don't want to handle the investments, they can hire Vanguard for 0.3% (less for amounts over $5 million). Or they can hire a bank or broker or other investment advisor at a higher cost.

afan
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Joined: Sun Jul 25, 2010 4:01 pm

Re: Trusts and "managed" accounts

Post by afan » Sun Apr 15, 2018 7:55 pm

You can find some investment managers who will handle an all index portfolio for a flat fee of a few thousand dollars.
Assuming you have an individual who will serve as trustee for free, or at least a lot less than a bank, you could get the cost down very low.
But if you think there will be more than hypothetical concern about liability, that may be a reason to use a corporate trustee.
It may depend on what investments the trust holds, whether there are contentious issues with the beneficiaries...

You could also set up a corporate trustee to be responsible for managing investments, doing administrative duties, and following the terms of the trust. you could also have an individual co trustee who knows the family. I don't know how the liability issues would work. I assume the corporate trustee would have expert opinion on their side to keep them out of trouble. If the individual trustee followed the bank's lead, then they could also be safe.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

LarryAllen
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Re: Trusts and "managed" accounts

Post by LarryAllen » Sun Apr 15, 2018 8:16 pm

Just pick a trustworthy trustee, give them discretion, and don't micromanage. That's my advice.

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