Blog: Bearmoor Notes

Thursday, December 25, 2008

Annual Revenue Loss of $10 Billion - New Credit Card Regulations Will Have an Impact on the Asset Management and Fiduciary Business - Are You Prepared?

According to a study by the law firm of Morrison & Foerster the new credit card regulations could cost the banking industry more than $10 billion annually. The interest and fees associated with credit cards have created enormous revenue flows for the banking industry – this will all cease in 2010. New regulations issued today will prohibit the following:

  • Placing unfair time constraints on payments. A payment could not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay.
  • Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account.
  • Unfairly computing balances in a computing tactic known as double-cycle billing.
  • Unfairly adding security deposits and fees for issuing credit or making it available.
  • Making deceptive offers of credit.

How will this loss of annual revenue be made up? Will your Asset Management and Fiduciary activities step up and assist in generating optimum risk adjusted revenue? Several revenue opportunities exist within your existing portfolio of accounts. The time for action is now.

The IRS as Your Favorite Secret Santa - Extension on the Required Deductibility of Bundled Fee

An early Holiday gift was delivered to fiduciaries by the IRS. The agency has stated that it is extending for 12 months the requirement for the bifurcation of bundled fees. This is analogous with those gift cards you receive; the benefit must be used within a year. IRS Notice 2008-116 extends to taxable years that begin before January 1, 2009 the interim guidance provided in Notice 2008-32 on the treatment of investment advisory costs and other costs subject to the 2-percent floor that are integrated as part of one commission or fee paid to the trustee or executor (“Bundled Fiduciary Fee”) and are incurred by a trust other than a grantor trust or an estate.

As you all know, on January 16, 2008, the Supreme Court of the United States issued its decision in Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner, holding that costs paid to an investment advisor by a nongrantor trust or estate generally are subject to the 2-percent floor for miscellaneous itemized deductions under § 67(a). The IRS and the Treasury Department expect to issue regulations under § 1.67-4 of the Income Tax Regulations consistent with the Supreme Court’s holding in Knight. The regulations also will address the issue raised when a nongrantor trust or estate pays a Bundled Fiduciary Fee for costs incurred in-house by the fiduciary, some of which are subject to the 2-percent floor and some of which are fully deductible without regard to the 2-percent floor.

Due to the time requirements for regulations, Notice 2008-32 was issued to provide interim guidance that specifically addresses the treatment of a Bundled Fiduciary Fee. In short, Notice 2008-32 provided that taxpayers will not be required to determine the portion of a Bundled Fiduciary Fee that is subject to the 2-percent floor under § 67 for any taxable year beginning before January 1, 2008.

The time requirement addressed in Notice 2008-32 has now been extended. Taxpayers will not be required to determine the portion of a Bundled Fiduciary Fee that is subject to the 2-percent floor under § 67 for any taxable year beginning before January 1, 2009. Instead, for each such taxable year, taxpayers may deduct the full amount of the Bundled Fiduciary Fee without regard to the 2-percent floor. Payments by the fiduciary to third parties for expenses subject to the 2-percent floor are readily identifiable and must be treated separately from the otherwise Bundled Fiduciary Fee.

Is the Grinch Lurking Within Your Wealth Management Business? Asset Management Firms Announce Layoffs.

The financial environment in which we currently operate has been turbulent to say the least. Reactions to this wild ride have varied and we may not know the results of the decisions until some time has passed. While the act of making a decision is better that not making one; laying off quality individuals within the Wealth Management business may not always be the best long term solution. In the December 15, 2008 edition of FundFire there is discussion on the recent layoff announcements at UBS, Bank of America and several firms.

Perhaps additional focus should be placed on top-line revenue as well. The Bearmoor process continues to identify and implement top-line revenue opportunities that generate annual revenue lifts in excess of 15% (excluding market appreciation/depreciation). In addition, a recent report outlined in Fiduciary Earnings & Expense (FEE), a publication of TRN, indicated that the revenue gap between bank trust divisions and independent trust companies is widening.

Friday, December 12, 2008

Will Your New Year’s Resolution Focus on Your Reg R Requirements?

Patience is a virtue, and now we are finally rewarded with the long awaited arrival of the “push-out” provisions of the Graham-Leach-Bliley Act. They have now arrived and are effective the first day of the fiscal year commencing after September 30, 2008. For some of you – that time is now. Reg R addresses the four bank broker exceptions:

Trust and Fiduciary Activities;
Safekeeping and Custody Activities;
Sweep Accounts; and
Third Party Brokerage Arrangements

In order to qualify for these exceptions however, certain requirements need to be met and supported. Yes, there are special factors that must be achieved in order for your institution to qualify for the exception.

The Trust Exception limits the types compensation that a banking organization may obtain for effecting securities transactions in its “fiduciary capacity” to a specific list of fees and requires that the banking organization be “chiefly compensated” for these services on the basis of the permissible fees. The “chiefly compensated” requirement can be met using one of two alternative methods.

Account-by-Account Basis: Using this method, the requirement will be met if the bank’s relationship compensation is greater than 50 percent of its entire compensation from the account on a two-year rolling average comparison.
Bank-wide Basis: Using this method, the requirement will be met if the bank’s relationship compensation is more than 70 percent of its entire compensation.

Basically, in order to qualify for the Trust Exception you now need to know where your revenue is coming from. For those organizations that have an appropriate Trust accounting and fee system, this should not be a problem. For those that do not, additional work and effort will be needed to comply with Reg R.

The Custody Exception allows a bank to accept securities orders from certain persons, including employee benefit plans, IRAs and other similar accounts. Also, banking organization may accept securities orders from its custody customers on an accommodation basis, with certain additional conditions.

The Sweep Exception allows banks to effect transactions in securities as part of a sweep program the invests in a no-load mutual fund. Also, banks will be permitted to sweep customer funds into mutual funds that assess higher fees than no-load funds; however additional requirements must be met.

Bearmoor continues to have conversations with the banking regulators and through our discussions we have determined that examiner training on Reg R is currently taking place. This will be an area of increased importance over the next year. If you have not yet begun to think about how your organization will comply with the exceptions of Reg R, perhaps this should be a New Year’s resolution.

Automated Account Reviews – Yet another request for Santa!

We all understand the importance of quality information in the decision-making process, and yet we all seem to have limited time to gather adequate and timely information. Both these elements, information and time, are key ingredients in the account review process. Failure to perform an account review violates many areas, but none more important than a violation of your fiduciary duty. The proper use of automated investment reviews can assist greatly in achieving your fiduciary duty. Too often however these automated reviews have limitations or are not properly utilized. If your organization is using an automated account review process here are some areas to consider:

Ensure that account investment objectives are current and appropriate, and that investments are consistent with those objectives.

Ensure that the investment review provides for an annual assessment of the portfolio in its entirety. This is particularly important when unique assets make up a portion of the account.

Include exception tracking that identifies and provides for follow up and resolution of exceptions such as securities not included on “approved” or “retention” lists, assets posing potential conflicts of interest, or asset concentrations.

Include performance measurements and a process for handling performance outliers.
Ensure that each asset is valued using an appropriate valuation process.

Identifies and reports on noncompliance with internal policies and procedures.

In addition:

A wholly automated screening process may not provide for the independent perspective customarily provided by an effective committee review process.

Automated systems may not address whether an account’s investment objectives have, or need to be, changed over time.

If account administrators are not included in the automated investment review process, key information such as account objectives, cash needs, grantor intent, and beneficiary requests may not be properly considered.

Vendor systems may only identify exceptions to a limited number of pre-set parameters.

Through our engagements with various organizations we have seen various applications of the automated review process – each having positive and negative attributes. We would be glad to share this information with you should you have the interest.

A Silver Lining Does Exist – Declining Home Values Present a QPRT Opportunity

The value you bring to many of your clients is in your knowledge and innovation. You assist your clients achieve their financial and life goals by outlining for them unique opportunities. Lately you may have had to deal with some of your client’s frustration or even anger regarding the volatility within the marketplace. Perhaps for some of your clients you can use this volatility to assist them. Plunging real estate values have made it an opportune time for elder homeowners to give property to their children, while realizing big savings on gift and estate taxes. They can do this by moving the home out of their estate with a so-called qualified personal residence trust, or QPRT, which allows homeowners to live in the property for many years before passing it on to their heirs. Though these trusts have been around for many years, many estate planners say now could be a good time to set one up since real-estate values have fallen dramatically in many markets.

As a fiduciary with knowledge in this area you could be found to be liable if you did not consider all aspects of the estate plan. Why not turn a potential negative into a positive and further solidify your organization as a quality provider of financial and life planning advice.