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“Sunlight is said to be the best of disinfectants”

-Louis D. Brandeis

Although Justice Brandeis wasn’t addressing investment fees, his observation is relevant to the topic.

Over the past few months I have discussed Trustee and Investment Management services with a number of families. Many of the conversations were with prospective clients who felt compelled to explore their advisor options. A common thread to these discussions is revealing; until recently forced to do so by the Department of Labor (“DOL”) “Fiduciary Rule”, many financial advisors have not clearly discussed their fees with clients. Prompted by the new rule, many fee discussions haven’t been well-received. They’ve brought to light practices which might have been “suitable”, for clients, but not necessarily “in their best interest”. Corporate trustees have worked within (and often beyond) the disclosure rules for years, but the rule now covers many advisors without prior fiduciary experience.

The DOL rule (which requires a much broader group of advisors to act as fiduciaries) faces an uncertain future. Although implementation became effective on June 9, 2017, the rule remains under review pursuant to a February memorandum from President Trump. But unless the DOL says otherwise, full compliance will be required on January 1, 2018.

Naturally risk-averse (at least in compliance-related matters), the advisor community has already adopted a new fiduciary paradigm, leading to the new client conversations around fees and services.

To be fair, advisors and clients often avoid fee discussions. Discussions about a money exchange are often awkward and stressful, so avoidance is natural.

Big picture, these discussions are bringing a greater awareness to pricing practices in financial services. The lesson is; make darn sure you know how your advisor gets paid. Be wary of ANY service provider who is hesitant in that discussion. Simple tends to be good. Hidden is almost always bad. Conflicts of interest (being wedded to a single fund family, for instance) rarely benefit the client. And for heaven’s sake, run away quickly if you hear some variation of “I have to feed my family too”, from an advisor (No kidding - I’ve heard stories of this sort).

Ask your advisor (or prospective advisor) whether they have experience acting in a fiduciary capacity, and whether they will be acting in that capacity on your behalf. If not, pay particular attention to how they are compensated.

Long story short, if your current advisor hasn’t already clearly outlined how they get paid (not to mention any potential conflicts of interest), now is a good time to ask. Bottom line; your advisor should be able to clearly articulate how you pay for their services. It is the very least you deserve, and in many cases to which you are legally entitled. The lowest cost option may not always be the best for a given client, but if an advisor isn’t able to defend the cost of a recommended strategy, you shouldn’t blindly accept it. Let the sunlight in.

Matthew M. Black, JD

mblack@ttcna.com

(No, not THAT talk...)

“I don’t understand why Dad didn’t trust me”

One of the sadder statements I’ve heard uttered by a client. And completely off the mark. My client was surprised by her father’s trust provisions, which were quite restrictive with her inheritance. She misunderstood her father’s intentions, which had nothing to do with lack of trust in his daughter. Rather, he abhorred the concept of estate tax, and created an estate plan which prioritized tax savings at the expense of practicality and flexibility. The worst part? There was no way for the daughter to reconcile these feelings with her father, as a result of his death.

Some of the more unfortunate family circumstances I’ve witnessed through 18 years in the Trust business have involved surprises in the Estate Plan. The “Reading of the Will” scene in movies/television is a common bit because there is always a dramatic surprise – and it’s never a happy surprise. Although “The Reading of the Will” event is something of a fiction, there are kernels of truth underlying. Surprises cause hurt feelings.

Hurt feelings due to misunderstandings. Unintended, and with no ability to make it right since one of the parties to the relationship is deceased.

Worse yet, these surprises, misunderstandings and hard feelings often lead to litigation (and nothing is more wasteful of family assets).

Surprises may cause problems even if there are no hard feelings about the estate plan (an unexpected windfall, for instance). Many inheritors don’t know how to handle their newfound wealth, and like lottery winners, often squander the prosperity for which they were unprepared.

Conversely, some of the more successful families I’ve worked with have been very open about estate planning across generations. Especially the goals and values which are important to the family (and which typically have very little to do with dollar amounts). Where a family business is involved, estate planning discussions are almost unavoidable if the family prudently addresses succession in the business. Estate planning is a natural extension of the business discussion - more of an ongoing process, as opposed to an event.

But you don’t have to be a business owner, or a Rockefeller, to discuss family legacy. On the contrary, I suggest almost everyone should discuss their plans with their children.

The topic is easy to put on the backburner – death isn’t pleasant to discuss, and inheritance is something of a cultural taboo – it often simply is not spoken of.

I am certainly not suggesting the conversation is appropriate for young children, or those without the capacity or maturity to appreciate the discussion. It also may not be appropriate to discuss dollar amounts (at least at first). Rather, discuss the philosophical legacy or values of the family, as well as the structure of the plan. Will assets stay in trust? Will there be unequal distributions, and why? Ask your children what they would like to know – you might be surprised at their concerns.

Your children are also likely to be uncomfortable with the discussion, so don’t ambush them. Set a date, and consider whether to include an objective advisor such as your attorney. They can keep the discussion on track, and also address technical questions.

The topic is especially important if there are unequal distributions in the plan. Address the matter directly to alleviate any misunderstandings. This is also a good time to talk about who will administer the plan post-death. Again, misunderstandings and conflict can appear if one child is involved and another is not. Similarly, explain why a corporate trustee is involved, if appropriate.

A great fear of our clients’ is their heirs will be unproductive or irresponsible as a result of an expected inheritance. Thus they may avoid the topic altogether. Ironically, they miss the opportunity to disabuse the notion of being unproductive, by discussing their intentions, motives and values.

Ask yourself; what do you want to accomplish for your family with the wealth you’ve accumulated? There’s a greater likelihood of success if your heirs are in on the plan.

(By the way, it is also imperative to discuss your plan with executors, guardians, etc., ahead of time. More on that here.)

Matthew Black

mblack@ttcna.com

Shining a Light on Advisor Fees

Have "The Talk" With Your Children