No one wants to confront their own mortality. That's why so many Americans die without a will, which is the worst possible estate planning. For those who act responsibly and retain the services of an estate planning lawyer, a hidden danger lurks.
The standard estate planning advice is geared (as it should be) around minimizing estate taxes and avoiding probate, where appropriate. That's all well and good. However, a critical area of concern is ignored by every estate planner I have encountered: the management of your assets after death.
Estate planning lawyers receive referrals from major brokerage firms and traditional institutional trustees. The best way to keep these referrals flowing is to refer business back to the source. It all sounds innocuous enough until you understand the devastating consequences of this common practice.
The real money in trust administration is not in the administration fees. It's in the advisory fees generated by the arm of the trustee that manages the assets in the trust. Well in excess of 90% of institutional trustees also manage trust assets. Not only does this create a conflict of interest (how carefully is one division of the trust administrator really going to review the conduct of another division?), but it practically insures under performance of trust assets.
Notwithstanding the overwhelming evidence demonstrating the superiority of passive management, I know of no trust administrator who follows this Nobel Prize winning investment strategy. Instead, they increase the costs to the trust by engaging in active management, in a usually futile attempt to "beat the markets." It's sad that investors who, during their lives, take such care to invest prudently, fall into this trap by following the standard advice of their estate planners.
There is a way to avoid having your assets mismanaged after your death, but don't expect your estate planner to tell you about it.
Insist that your trust be managed by a "directed trustee." These are professional trust administrators who only administer trusts. They do not manage money. The leading directed trustees are Advisory Trust of Delaware, Santa Fe Trust and Wealth Advisors Trust Company.
You will need to give your directed trustee guidance about the kind of financial adviser it should appoint. Here's language I inserted in my trust:
"The Investment Manager shall be guided by the basic principle known as Modern Portfolio Theory. The Investment Manager should make no effort to "beat the markets."
The Investment Manager shall focus on the asset allocation of the portfolio. The portfolio shall be globally diversified, using low cost stock and bond index funds, exchange traded funds or passively managed funds. The investment manager shall be guided by the principles set forth in The Intelligent Asset Allocator, by William Bernstein, A Random Walk Down Wall Street, by Burton Malkiel., The Little Book of Common Sense Investing, by John Bogle and The Smartest Investment Book You'll Ever Read, by Daniel R. Solin."
With the appointment of a directed trustee and the insertion of this (or similar) language in your trust document, you have now protected your assets from being plundered after your death. Based on historical data, the returns of your trust assets could be as much as 300% higher than the historical returns of the average equity investor over the past twenty years.
Of course, you should be following the same investment advice while you are alive. Why should your heirs be the only beneficiaries of Smart Investing?
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
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As an example, in 2007 one of my retired clients diverisified half of her large portfolio of bank stock into 3 seperarate EIA's. The three EIA's have annualized a return of nearly 7% in the last 3 years, while the bank stock she decided to keep has lost nearly 66% of its value.
As Warren Buffet says the two rules to investing is: 1) don't lose, and 2) don't forget rule #1.
If an advisor tells you that you are better off investing directly into the market, ask him if he will guarantee that your account won't lose value?
slcg.com/pdf/workingpapers/EIA White Paper.pdf
Most complaints with EIA regard someone that is unsuitable acquiring them or someone placing all of their disposable income in one.
However, in my experience, I have had more problems with elderly folks losing their retirement assets because of market decline than anything else. Brokers don't like EIA's because they lose the ability to churn the client's account to earn more commissions...
The one client I have that owns 10,000 shares of bank stock would be in a real predicament if they had to sale their stock to produce the cash flow to pay their bills. Imagine the loss ("surrender charge") of 10,000 shares of stock sold at half its market value from just 3 years ago? Another client who set up a CRUT used a local chain brokerage firm to manage the account. Instead of using assets that are secure from market decline, he used "A" share mutual funds. In 2009, 20% of the mutual funds were sold for some unknown reason at a loss of nearly $100,000. This kind of activity is the problems I see that wouldn't happen if the assets couldn't lose value.
Do you guarantee that your client's assets won't lose value?
http://bit.ly/afxlCA
Your advice is always interesting and always contains some truths.
However, you never tell the whole story. You recommend individuals only use index funds, which is perfectly good advice.
You then talk about advisors, such as yourself, helping these clients, and you and others charge a fee for the advice.
The problem is all the research you site goes out the door when you add additional fees to index funds. Your clients, as well as the clients of active mutual fund mangers, will underperform the index.
So, your advice is much like the salespeople advice you critcize, self serving.
In my books, I tell investors precisely how to put together a portfolio of low cost index funds without using any broker or advisor.
Clients who use the services of the firm with which I am affiliated, Index Funds Advisors, ifa.com., invest in a globally diversified portfolio of passively managed funds. The fund family that manages these funds is Dimensional Fund Advisors., dfaus.com. You can find long term returns for our portfolios on our web page. When you review them, you will learn that historically our portfolios have outperformed the indexes, net of all fees.
Incidentally, there are a number of methods by which active managers can be evaluated to determine if they are lucky or smart. The mathematics involved is complex and the answers derived are inthe form of probabilities, not simple performance numbers. Additionally, there is academic evidence that this skill, which results in alpha, can persist,
The press feeds on pablum about passive funds because its simple argument is far easier for journalists to understand than the alternative.