Expense Reduction - The Sequel

In a previous posting we questioned the industry’s focus on expense reduction.  It appears some in the industry are looking at top-line revenue.   The American Banker reported that community banks are taking a serious look at the affluent.  The article states that as revenue growth has diminished, more community banks are looking to expand their wealth management and trust operations – now that is encouraging. 

I have included a link to the story should you wish to read it.  Community Banks Take a Serious Look at the Affluent -

I would encourage all of you to begin to look at your existing portfolio for the optimization of risk-adjusted revenue.  Contact Bearmoor if you would like an analysis done on the results for your institution.

Expense Reduction – An Exercise in Insanity

We all recall Albert Einstein’s definition of insanity - "Insanity is doing the same thing over and over again and expecting a different result."   

In April  Bearmoor had both the honor and pleasure of speaking at an industry trust conference, some of you were in attendance.  One item that we discussed is the level of attention being given to the area of expense reduction and/or management within banking organizations.  We continue to be amazed and after reading a story in the American Banker, we are even more baffled by the lack of attention given to the top-line revenue optimization.   The American Banker article titled - Bankers Swinging a BiggerAxe to Cut Expenses, discusses how smaller banks are struggling to keep efficiency ratios down, forcing many executives to look harder at closing branches and laying off employees.  The continued focus on expense reduction is analogous to the war on drugs here in the US – spending a tremendous amount of money to control the problem has only made it worse.  Perhaps it is time we try something different.  How about looking towards the optimization of top-line revenue within your fiduciary activities?

Below are a couple of graphs depicting the industry results  for income and expense associated with fiduciary activities.  The first graph shows the dollar amount of trust activity expenses trend line for the past eleven years – in 2011 the expenses associate with fiduciary activities reached a historical high, increasing 25% over year-end 2010.  The second graph compares income growth rates to expense growth rates for the same eleven year period.  You will see that expense outpaced income for six of the last nine years, and three of the last three.  I am not sure the focus on expense reduction is working here. 

Graph 1

Graph 2

I would enjoy hearing your thoughts on topic.

2011 Planning and Budgeting Opportunities

As the summer vacation season winds down and the “the back to school” ritual commences, your opportunity during the 2011 planning and budgeting process is just around the corner. The components of non-interest income will continue to take center stage as the lending activities and net interest margins continue to be volatile. It appears as though one of the major contributors to non-interest income, overdraft fees, has taken yet another hit. The August 12, 2010 issue of the American Banker highlighted this in one of their articles:

Beyond Opt-In: Fresh Attacks on Overdraft Fees – Outdoing Fed, FDIC Targets Checks, ACH Overdrafts: The Federal Deposit Insurance Corp. ramped up pressure Wednesday on the banking industry to curb overdraft fees, releasing proposed guidelines that would go beyond recent Federal Reserve Board rules.

Outlined below is a graph showing the non-interest income component (year-end 2001 thru year-end 2009) for all institutions reporting fiduciary income on either the Call Report or the Thrift Financial Report (TFR). You can clearly see the sharp decline over the past few years.

Now, more than ever the Wealth Management arena, specifically income from fiduciary activities will be viewed as an area where optimum risk-adjusted revenue will need to be achieved. Bearmoor has assisted several organizations realize increased revenue lifts from their asset management and fiduciary operations. As you prepare for 2011 perhaps exploring the benefits of a Bearmoor Profit Enhancement process is in order.

No Good Revenue Opportunity Goes Unpunished - SEC Proposal

On July 21, 2010 the Securities and Exchange Commission voted unanimously to propose measures aimed to improve the regulation of mutual fund distribution fees and provide better disclosure for investors. The marketing and selling costs involved with running a mutual fund are commonly referred to as a fund's distribution costs. To cover these costs, the companies that run mutual funds are permitted to charge fees known as 12b-1 fees. These fees are deducted from a mutual fund to compensate securities professionals for sales efforts and services provided to the fund's investors. 12b-1 fees were developed in the late 1970s when funds were losing investor assets faster than they were attracting new assets, and self-distributed funds were emerging in search of ways to pay for necessary marketing expenses. These fees amounted to an aggregate of just a few million dollars in 1980 when they were first permitted, but that total has ballooned as the use of 12b-1 fees has evolved. These fees amounted to $9.5 billion in 2009.

The SEC's proposal would:

• Protect Investors by Limiting Fund Sales Charges

• Improve Transparency of Fees for Investors

• Encourage Retail Price Competition

• Revise Fund Directors Oversight Rules

The SEC proposal will provide a transition period for the new rules.

With Additional Regulation Comes Increased Enforcement Actions

One of the results of the global financial crisis has been an increase in both new regulation as well as a closer look at existing regulation. The compliance and risk management functions of financial institutions are operating at full throttle in an effort to address the additional interest being shown by all regulatory agencies. While the efforts of these risk mitigation divisions within the financial institutions is to be commended, the volume of regulation and the interest of the regulatory agencies requires a greater effort to ensure that both the spirit and intent of the regulation is being complied with.

Based upon the number of public enforcement actions issued by federal regulators since the start of 2008; it appears as though additional attention is needed in the area of compliance and risk management. Nearly 1,200 banks have been hit with an enforcement action, and that number is expected to climb at an accelerated rate. Enforcement actions are on pace to increase 64% this year, making bankers increasingly wary of further obstacles to their recovery.

One of the many challenges in developing a strong risk mitigation program is finding qualified and experienced individuals. The current situation provides for a “free agency” environment among the compliance and risk management profession. Some organizations have the ability to attract and retain qualified individuals, while others struggle to maintain the necessary talent. The use of third party providers is no longer scene as a luxury, it is almost a necessity.

The “up and to the right” trend in enforcement actions is a trend you should make every effort to avoid. Enforcement actions can limit an institutions ability to succeed and achieve both quantitative and qualitative goals.

I.R.A. Custodian Responsibilities - A Refresher

The old adage of “follow the money” appears to be the case for many individual retirement account (I.R.A.) owners; especially when a Ponzi scheme is involved. Events over the past twelve months have shined a brighter light on the responsibilities of I.R.A. custodians. These events include recent lawsuits against custodians, the Madoff scandal, and increased media attention. I.R.A. owners are interested in getting some, if not all of their monies returned to them and they are looking at entities that have the deep pockets to share this responsibility.

The types of assets held within I.R.A. accounts vary greatly. Many of the unique assets within an I.R.A. can be complex and difficult to price. Even though regulation exists that requires fair value pricing to be obtained on all I.R.A. assets, the practice of doing so may not always be adequately implemented. Recent lawsuits claim that I.R.A. custodians failed to perform both their contractual and fiduciary duties, and as a result failed to protect the account. The claims further state that I.R.A. custodians aided and abetted the breach of fiduciary duty.

The establishment and administration of I.R.A. accounts is governed by the Internal Revenue Code and accompanying Treasury regulations. The custodian has responsibility for several areas regarding I.R.A. accounts. One area that is being scrutinized and reviewed is asset pricing. The regulation states the following: The custodian will determine the value of the assets held by it in trust at least once in each calendar year and no more than 18 months after the preceding valuation. The assets will be valued at their fair market value.

In light of recent events, now might be an opportune time to review your asset pricing policies and practices pertaining to I.R.A. accounts. Custodians should pay special attention to those assets that are hard to value. In addition, I.R.A. account acceptance standards should be reviewed to determine if some of the risk can be mitigated prior to acceptance for new accounts. The fee for providing custodian services should also be reviewed to determine if optimum risk adjusted revenue is being obtained.

Regulatory Focus - The Changing of the Guard

The financial services industry is one of the most highly regulated industries in America. Therefore; it is of little surprise that the regulatory agencies overseeing the activities of the financial institutions have come under increased scrutiny from Congress. On March 18, 2009 several of the agencies testified before the Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing, and Urban Affairs. The primary purpose of this testimony was to outline what has been learned from the most recent financial crisis as well as what action that the agencies will take to strengthen their supervision and examination processes in the area of risk management activities.

The OCC was one of the agencies that provided testimony to the Subcommittee. Senior Deputy Comptroller Timothy Long presented the OCC’s view on the industry and outlined the role of risk management for within banks. SDC Long’s comments provide insight into the focus and temperature of the regulatory agencies attention to effective risk mitigation functions at financial institutions. Below is an excerpt of SDC Long’s testimony.

The first step in risk-based supervision is to identify the most significant risks and then to determine whether a bank has systems and controls to identify and manage those risks. Next, we assess the integrity and effectiveness of risk management systems, with appropriate validation through transaction testing. This is accomplished through our supervisory process which involves a combination of ongoing monitoring and targeted examinations. The purpose of our targeted examinations is to validate that risk management systems and processes are functioning as expected and do not present any significant supervisory concerns. Our supervisory conclusions, including any risk management deficiencies, are communicated directly to bank senior management. Thus, not only is there ongoing evaluation, but there is also a process for timely and effective corrective action when needed. To the extent we identify concerns; we “drill down” to test additional transactions.

These concerns are then highlighted for management and the Board as “Matters Requiring Attention” (“MRAs”) in supervisory communications. Often these MRAs are line of business specific, and can be corrected relatively easily in the normal course of business. However, a few MRAs address more global concerns such as enterprise risk management or company-wide information security. We also have a consolidated electronic system to monitor and report outstanding MRAs. Each MRA is assigned a due date and is followed-up by on-site staff at each bank. If these concerns are not appropriately addressed within a reasonable period, we have a variety of tools with which to respond, ranging from informal supervisory actions directing corrective measures, to formal enforcement actions, to referrals to other regulators or law enforcement.

Our supervision program includes targeted and on-going analysis of corporate governance at our national banks. This area encompasses a wide variety of supervisory activities including:

· Analysis and critique of materials presented to directors;

· Review of board activities and organization;

· Risk management and audit structures within the organization, including the independence of these structures;

· Reviews of the charters, structure and minutes of significant decision making committees in the bank;

· Review of the vetting process for new and complex products and the robustness of new product controls; and

· Analysis of the appropriateness and adequacy of management information packages used to measure and control risk.

It is not uncommon to find weaknesses in structure, organization, or management information, which we address through MRAs and other supervisory processes described above. But more significantly, at some of our institutions what appeared to be an appropriate governance structure was made less effective by a weak corporate culture, which discouraged credible challenge from risk managers and did not hold lines of business accountable for inappropriate actions.

We all can agree that effective risk mitigation functions within banks will provide for a strong and stable financial system. Therefore the current process needs to be strengthened and improved. It appears as though the regulatory agencies will be increasing their efforts to ensure that such improvements are developed and implemented across each business line. Organizations the fail to do so will be identified and given “special” supervisory oversight.

For the complete testimony of SDC Long please visit: http://www.occ.gov/ftp/release/2009-23b.pdf

Is Your Insurance Policy a Toxic Asset?

There are worse things in life than death. Have you ever spent an evening with an insurance salesman? While this comment made by Woody Allen does provide a chuckle it might not be that far from the truth when it comes to administering Irrevocable Life Insurance Trusts (ILITs). It is becoming quite apparent why trustees of insurance trusts can’t just sit on the sidelines. There is a need to proactively review the ILIT insurance assets.

ILITs continue to provide an excellent financial planning vehicle and are a key safety net for many. The current volatility in the markets and with investment portfolios down substantially over the past year, the insurance assets may be even more vital. While there are unique risks associated with the administration of ILITs, there are also considerable opportunities.

Let’s first deal with some of the risks. During the next year, you will encounter two important risks associated with your life insurance assets:

1. Policy Lapses – this will definitely be an issue for variable life policies that have been negatively impacted by the market decline.

2. Insurance Company Impairment or Failures – insurance company rating downgrades are occurring with increasing frequency and federal government bailout assistance may not be adequate.

Based upon our experience and knowledge, we believe that substantial increases in ILIT monitoring and administration efforts will be needed. This is much easier said than done when the current environment requires expense control and head count reductions are the norm in the risk mitigations area. However, at the very least the following steps should be taken.

• Evaluate more frequently – especially your variable life insurance policies.
• Re-test the policies – obtain current “in-force illustrations” at the very least.
• Obtain actuarial support – expertise is needed to comply with your fiduciary duty.
• Review premium adequacy – determine the ability to afford increased premiums.
• Monitor ratings of insurance companies - understand the limitations of the ratings.
• Understand account objective(s) – verify that the ILIT is still appropriate and discuss alternatives.

In addition, recent regulatory guidance provides additional information. OCC Banking Bulletin 2008-10 highlights the need to ensure that all assets receive an annual review. The Bulletin states:

In addition to being a regulatory requirement, annual investment reviews are among the most useful tools bank fiduciaries have to ensure they meet their fiduciary responsibilities and properly administer their customers’ accounts. An annual investment review is a point-in-time evaluation of both account assets and objectives. Regardless of the tools employed by a particular institution, management supervision, information systems, and follow-up are all critical to an effective investment review process. An effective investment review process should be based upon policies and procedures that provide clear standards for scope, documentation, and exception reporting and tracking. The process should:

· 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.

Unique or hard-to-value assets should be included as part of the annual investment review. The review of these assets should:

· Be sufficiently detailed to document the bank’s determination that the asset is appropriate for the investment objectives of the account and should be retained.

· Include a careful review of Asset Retention letters because these investment directions can require a bank to hold assets that may be inconsistent with the bank’s investment strategies. A bank should accept Asset Retention letters only from authorized parties.

· Provide updated asset valuations appropriate for the type of asset and nature of account.

As a fiduciary the items listed above are your responsibility. Failure to properly address these areas in policies, procedures, and practice subjects your organization to increased risk potential. However; when properly implemented you have created a differentiator for your service and thus created the environment for increased opportunity. Opportunities include:

• Increase revenue potential – proper priced ILIT administration.
• Increase knowledge and awareness – better understanding of the product.
• Increase business opportunities – relationships with estate planners and other COIs (Centers of Influence).
• Decrease risk and litigation – consistent application of an effective process.

Should you like additional information or detail on any of the items discussed above, please contact us.

What We Can Learn From Recent Scandals or Back To The Basics

The use of the term “Ponzi scheme” is appearing quite regularly in the financial press these days. While several such alleged schemes have received their fair share of the headlines, what hasn’t been as evident are the warning signs that should have been heeded. Fiduciaries have a duty to control and mitigate the risks associated with all investments. While much focus has been placed on the alternative investment arena, the re-enforcement of some basic risk mitigation policies will provide confidence for your clients and prospects. Perhaps the horse has already left the barn so to speak, but here are some basic “red flags” to consider when making investment decisions:

· Lack of segregated custody

· Use of an affiliated broker dealer

· Use of a small, unknown auditing firm not registered with PCAOB

· Lack of access to Portfolio Managers

· Lack of transparency

· Secretive or unexplainable investment strategy

Nothing in the above list is unique or worthy of a lengthy dissertation, but rather the simplicity of it makes it all the more amazing that approximately $60 billion has been put at risk because due diligence on the above was not adequately addressed.

Earnings Remains a Good Source of Capital - Just Ask the Analysts

Recent reports indicate that bank analysts, along with many other interested parties, will be watching closely the ability of banks to generate sources of fresh capital in 2009. It is understood that due to the large provisions made to the loan loss reserve in the fourth quarter of 2008 that capital ratios will be understandably lower. Analysts have indicated that they will now be watching these ratios to see which organizations will be able to increase capital, and more importantly what is the source of the capital increase. Basically they will be looking to see which organizations have the ability to generate sustainable sources of capital increases.

Retained earnings continues to be a great source of capital; therefore many organizations will once again begin looking to all lines of business for both increases in top-line and bottom-line revenue. Until the credit and liquidity issues are addressed, non-interest income generators will be called upon to assist in delivering increased revenue results. As with any business venture, various risks must be undertaken to produce results. As a professional within the financial services industry, you must ask the following question: Are we generating optimal risk adjusted revenue for the service we provide?

Interesting Conundrum - Increased Regulation and Expense Reductions

As the turbulence continues within the financial services industry, compliance challenges are being created.

• Federal and state regulatory agencies are looking to increase their regulatory influence and the examination process is expected to become more onerous.
• Financial organizations are closely watching their expenses, especially in areas that are not revenue producing (i.e., operations).
  

These opposing views will definitely create some unique challenges for both the regulators and the financial industry. The goal is to create a solution that restores confidence, credibility, and growth within the industry.

• Regulatory red flags will be generated when financial institutions decrease compliance budgets; eliminate staff; reduce training; decrease technology usage, etc.
• Shareholder and analysts concerns will be brought to light when budgets are missed; revenue expectations are adjusted downward; increased losses; etc.

Currently there is plenty of finger pointing regarding the state of the industry. Both sides will need to work together to provide proper regulatory oversight that allows for renewed growth.

401(k) Investments Changing the Retirement Market

According to the U.S. Census Bureau, nearly 8,000 Americans are turning 65 each day, and therefore adding to the number of individuals that need to rely upon retirement savings plans for their source of funds. For years investment professionals have assisted in providing vehicles to save for retirement, one such vehicle being the defined contribution plan, predominately the 401(k). Over the past twelve months, a large percentage of these self-directed plans have experienced a significant decline in value – thus creating a very uncertain time for many of those approaching or contemplating retirement. Uncertainty creates opportunity and in this case insurance companies are rushing to offer annuities for the 401(k) channel.

While the amounts and numbers entering the 401(k) annuity market are unknown, this does seem to be an opportune time for the insurance companies to re-introduce the annuity product to plan sponsors. While there remain some shortcomings to this product, including the fact that not all plan participants would benefit from such a product, interest is growing and therefore will become another option for plan sponsors and participants. To offer a proactive solution to your plan sponsor clients, you should be aware of these annuity offerings and their impact on the business.

If you would like to read more on this subject visit the following link: http://www.iimagazine.com/Article.aspx?ArticleID=2044853&LS=EMS233897

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.

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.