Saturday, September 17, 2016

When Beneficiary Designations and Powers of Attorney Don't Play Well Together

When a person dies, property passes to the heirs in one of three ways. The first way is through joint ownership with a right of survivorship. This most often happens when real property is owned by husband wife. The second way is by beneficiary designations. Beneficiary designations control life insurance, most annuities and most individual retirement plans. The third way is the will of the decedent. Anything that doesn't pass to heirs through joint ownership or beneficiary designation, passes according to the terms of the will (or probate-avoidance trust). In a coherent estate plan, all three ways work together to carry out the wishes of the deceased.

More and more, I see people putting beneficiary designations at the center of their estate plan. In these estate plans, all the major assets pass through survivorship or beneficiary designations. Some people like the simplicity of it. Others are encouraged by bankers or brokers to use beneficiary designations because it "avoids probate".

Most people, in addition to an estate plan, have a power of attorney. The power of attorney is a document that anticipates disability rather than death, and a power of attorney becomes scrap paper the moment the person who created it dies. Death and disability are closely related, however, and people tend to plan for them both at the same time.

Powers of attorney and beneficiary designations do not always play well together.

A beneficiary designation is designed to determine who gets your money when you die. A power of attorney is designed to allow an agent to help you with money management while you are alive. The power of attorney I write for my clients does not allow the agent to change beneficiary designations. My reasoning is twofold: (1) I have a hard time seeing how a change in who gets money when you die protects you while you are alive; and (2) changing beneficiary designations by use of a power of attorney invites litigation.

Not everybody agrees with me about using a power of attorney to change beneficiary designations. I got a call one day from a brokerage who had used my opinion on the issue, as expressed somewhere in this blog, as reason not to allow a change in beneficiary designation by the agent named in a power of attorney. My opinion, however, is more of a good idea than a statement of law and that case proceeded to litigation.

When an estate plan is relying heavily on beneficiary designation, an agent under a power of attorney can significantly change the plan without changing the beneficiary designation.

It works like this. Uncle Scrooge has his money with the Imprudential Fund and a personal investment advisor is managing the money by investing it in the investments that bring the advisor the largest commissions. The beneficiary designation on file at the Imprudential Fund names Scrooge's favorite nephew, Huey, to receive the money when he dies. Louie is named as Scrooge's agent in a power of attorney, and Uncle Scrooge's will leaves everything to Huey, Louie, and Dewey in equal shares.

Louie doesn't like seeing Uncle pay all those broker commissions, so when Uncle becomes incapacitated, Louie moves the money in the Imprudential Fund to the Walletguard Fund, a broadly based index fund. No beneficiary designation is made for the Walletguard fund. This means that at Uncle's death the money will pass by will to all three nephews.

When Scrooge dies, Huey, Uncle’s favorite, sues Louie for changing the investment subject to beneficiary designation to one that was not subject to the same designation. Louie defends with the fact that he was only doing what was best for Uncle Scrooge while he was alive, and the benefit to  Louie and Dewey was incidental to protecting Scrooge.  

This problem can arise in a variety of fact patterns. What if, instead of moving Scrooge's accounts, Louie has simply paid for all of Scrooge's long term care needs from that account (rather than from other accounts) so that when Scrooge died, there was nothing left. Could Louie still be sued because he did not pay the long term care costs from Scrooge's assets in approximate proportion to the heirs expectancy interest in the eventual estate? It can get complicated.

We often say in the law biz, that the agent steps into the shoes of the principal, and can do whatever principal could do. Uncle Scrooge certainly could have moved his accounts or paid all of his long term care from a single account without regard to how it affected any of his nephews. So why can't his agent do the same? Well, because the agent risks being sued and losing. It seems that the agent cannot safely change the principal's estate plan nor be indifferent to it.

The question for the litigation-averse agent in a power of attorney is whether he must refrain from moving an account subject to a beneficiary designation, even it is in the principal's best interest while he is alive. And if he does, can he put a similar beneficiary designation on the new account without getting in trouble with the people who take under the will. Can he combine two accounts if they have different beneficiaries. Must he consider the expectancy interest of the beneficiaries when paying care costs or paying for a trip for old Scrooge to Disneyland. These are all unresolved questions and resolving them -- through litigation -- is going to be expensive for somebody.

I have changed my own power of attorney to authorize my agent to engage in transactions without regard to the effect it may have on those who are in line to receive my money when I am dead. This clause, combined with a prohibition on changing any beneficiary designations I have, seems to honor my estate plan while encouraging my agent to think more about my well being than that of the people who will benefit from my death.

Friday, September 9, 2016

Why Oregon conservators should be using fee-only financial advisers.

I have gotten some pushback from professional fiduciaries about my advocacy of index funds when investing money belonging to the disabled. The complaint is that the professional fiduciaries have too much to do already. They can't be expected to understand the intricacies of investment, diversification, risk, and the prudent investor rule. Thus, they should be allowed to contract out that aspect of the job to experts.

It is a good point, but not a great point. I don't think the job is that difficult these days if one was a rudimentary understanding of money and math, but I am a nerd and it may be unfair to expect others to share my interests.

However, professional fiduciaries who hire financial advisers to help manage the money of the disabled are required each year to disclose the amount paid to these advisers. No professional fiduciary wants to have that disclosure be an embarrassment.

Disclosing how much is paid to most commission-based financial adviser is not easy. The fee is not listed anywhere in those thick quarterly statements that many brokerages send their clients. In dealing with one national brokerage I have had to write a separate form for the agent to fill in  the amount of his firm's fees. I was always shocked by how high it was.

I think the solution to both the disclosure problem and the excessive fee problem lies in Oregon conservators hiring "fee only" financial advisers who charge either by the hour or the project. (Avoid paying a percentage of the assets managed unless this works out to rate under $200 per hour). These guys and gals get paid directly by the person who is hiring them. The money comes from the client, not from the manager of the product they recommend. They are not influenced by the commission associated with the product because there is no commission. Because the fiduciary will be writing the check for the fee, it will be easy to make that disclosure at the end of the year. And in most cases, the fee itself is going to be lower than the fee paid to commissioned agents.

Fee only financial advisers often advertise at the Fee Only Network website. Portland fee only advisers can be found here.
By selecting a fee only adviser, Oregon conservators can assure that their clients investments are not being skewered by the commission associated with the investment and that they will have a comprehensible statement of fees to present to the court.

Now, I happen to think that a fee only adviser will often suggest the safety and predictability of index funds for disabled clients. If, however, I am wrong and the independent adviser suggests a fund with a three percent cost ratio, at the very least the conservator has the safety of being able to tell the court that the investment advice was not influenced the commission the adviser got from the sale.

Thursday, July 21, 2016

Using Index Funds to Save Costs: Some Suggestions for Oregon Conservators

If you are an Oregon court appointed fiduciary the writing is on the wall. The days of hiring stock brokers to manage money for the disabled are coming to an end. The Department of Labor has proposed a fiduciary standard for investment advisors dealing with retirement funds. Elizabeth Warren is tweeting, and a new law in Oregon requires court appointed conservators to disclose every year the full fees paid for asset managment. Paying full-service commissioned financial advisors from the funds of the helpless may not yet be unethical, but the day is not far off when it will be.

Index funds--funds invested across a market and managed by a computer--have the potential to do to retail stock brokers what the internet did to travel agencies. The only question for an Oregon fiduciary is whether she will dive into index funds or be dragged in. This post if for those who would rather make the move voluntarily.

(For my post on index funds and conservatorships generally, go here.)

An Oregon trustee or conservator is bound by the Prudent Investor Rule. The rule is common sense. It requires the fiduciary to match the risk in the investment to the risk tolerance of the beneficiary and potential heirs. At its very basic this means diversification. Mutual funds by their nature are diversified and an investment account containing different kinds of mutual funds is doubly so. Index funds are a type of mutual fund in which the money is invested across a market and managed by a computer instead of individuals. The management fees for index funds are smaller than those charged by actively managed funds. The biggest vendor of index funds is Vanguard. I will use the company in this post, but index funds from other vendors work equally well.

Let's say a conservator has an eighty-six year old disabled male with care costs of $2,000 a month more than his monthly income. He has $150,000 to manage, and a life expectancy of 5.7 years. If he dies on schedule he will need nearly every penny he has to pay care costs and related expenses. He has little if any tolerance for risk.

So Google a conservative index investment at Vanguard. Let's say you like the Wellesley Income Fund. It is safe and diversified (mostly bonds, some stocks). It tends to produce 2.62%, and the charge for management is 0.23% of the principal.  On $150,000 that is $3,930 a year of income for $345 in fees. Even more conservative is the Vanguard Intermediate-Term Government Bond Index which collects government bonds. It has an estimated return of 1.33% and an expense of .1%. The income it $1,843 on expenses of $151. (You can check these at the FINRA Fund Analyzer).

Of course a fiduciary could park the money in a Wells Fargo Money Market account at .03% and make a whopping $45.  Or the fiduciary could send the money to Fidelity Advisor Asset Manager® 20% Fund Class A (FTAWX), a randomly chosen managed fund with a ten year history of return at 3.8% and a front end load. The fiduciary would have fees and sales charges of $6,484 for a first year loss of $1,006. You can go to the FINRA site and do the math.

Even with no-load funds, the costs of management don't pan out. A Thrivent Conservative Asset Allocation Fund (TCAIX) with no load and a return of 3% has charges of $1062 (.7%) while the Vanguard Wellesley fund has Charges of $395 (.23%). Over the short life of our example, that is a $5,000 difference, just from management costs. Thrivent advertises on television that its funds are not managed by robots. I wonder if they also manually add up large numbers because they just can't trust those new fangled calculators.

The investment choices, even in mutual funds, are daunting, and can scare a fiduciary into simply paying the freight and having a commissioned money manager make the choices for him. The person who suffers from this timidity, however, it the disabled beneficiary. The professional management comes at such a hefty cost that it wipes out the benefit of the expertise.  Additionally, there are online tools at Vanguard and other places that make the process fairly easy. Simply plug in the factors that contribute to risk tolerance and let the computers do the work. If you want online help with selecting index funds you can look at Betterment or Wealthfront, although neither are really necessary.

Another hurdle to using index funds is having to actually open an account without a hand-holding and socially skilled financial adviser to do it for you. For a Vanguard account, the process starts with this form. The form is largely self explanatory, but I can offer these tips.
  • On page one, check the box indicating that the application is by a guardian.
  • On page 4 enter the information for the protected person using the address of the conservator.
  • On page 5 enter the information for the conservator. You do have to enter the conservator's tax ID number. This is for identification only and transactions will not affect the personal finances of the conservator.
  • When sending the paperwork include a certified copy of the letters of conservatorship that are less than 90 days old and a  letter explaining that Oregon courts (like California and other states) do not use a raised seal.
The form has areas to fill in the index funds you want to buy and instructions for funding the account from an existing bank account. This will probably be the conservatorship account.

If the protected person's money is already at with a commissioned adviser and invested heavily in managed funds, you may be able to get the broker to sell and reinvest in index funds. If the broker balks at this, as she probably will, you can move the securities from the existing broker to a Vanguard brokerage using this form. Once the form is filled out, your signature must be guaranteed with a Medallion Stamp. I have written about Medallion Stamps here. Once moved, it is a simple matter to sell the managed funds and replace them with appropriate index funds using the Vanguard web page.

Index funds chosen after consideration of the risk tolerance of the protected person (almost always very low) provide as close to a safe haven for a conservator as one could find. The investments are diversified because they are mutual funds. Unless the conservator made a huge mistake in evaluating risk tolerance, the investments will easily meet the requirements of the prudent investor rule. The protected person is protected and the professional conservator who has to report all management fees will not have to wince when he or she reports to the court how much of the protected person's money went to the brokerage house.

Wednesday, July 20, 2016

A Guide to Medallion Guarantees for Transfers of Stock by Oregon Conservators and Executors

Oregon fiduciaries--conservators and executors, and even agents under a power of attorney--often have stocks that must be sold to pay the needs of a protected person or to close an estate. When trying to sell or transfer stock the fiduciary will be faced with having to get a Medallion stamp on the form that requests the stock transfer. This post is my attempt to explain what is going on with stock transfers and Medallion Guarantees.

Let's assume that the protected person or decedent owned stock in Big Farma, Inc. Big Farma is too busy with its big farms to keep track of the millions of people who hold its stock so it has hired a transfer agent to keep track of them. The transfer agent issues and cancels stock certificates to reflect changes in ownership. The transfer agent may also pay out dividends, handle lost certificates, and do other things related to helping stockholders maintain their accounts. Most transfer agents are also banks, brokerages, or trust companies.

Transfer agents are are allowed to (and generally do) demand a guarantee that a person requesting a change of ownership has the authority to do so. Signature guarantees are covered by the Uniform Commercial Code. (UCC 8-306 if you want to read it) When a bank for other financial institution guarantees a signature on an instruction to transfer stock the bank making the guarantee is guaranteeing that (1) the signature is genuine; (2) the person making the signature has the authority to issue the instruction; and (3) the person has capacity to sign. If the bank making the guarantee is wrong about one of these things, and the transfer agent suffers a loss because of it, the bank that made the guarantee is liable for the loss.

(A notary, on the other hand, certifies only that the signer signed the document voluntarily, signed the document in the presence of the notary and provided proof of identity.  There is no agreement to pay damages to anyone who relies on the notary stamp.)

Banks guarantee signatures to the satisfaction of transfer agents by associating with the Securities Transfer Agents Medallion Program, Inc., (STAMP, Inc) a not-for-profit corporation. STAMP, Inc. uses a company called Kenmark Financial Services to administer the Medallion Guarantee program. The bank or brokerage house that wants to issue Medallion Guarantees must meet certain financial standards and purchase a bond to cover liability for any mistakes. The amount of the bond determines the liability limit of the bank, and banks will not guarantee a signature if the transaction has a value that exceeds the amount of its bond.

Once the bank has qualified to make Medallion Guarantees it can offer the guarantees as a service to its customers. It is not required to provide the service and you cannot force a bank to do so. Therefore, the first step for an Oregon conservator or personal representative in search of a Medallion Guarantee is to find a friendly banker. Most banks limit the service to their customers.

Of the three things that a Medallion Guarantee guarantees, the first two are easy. The bank must guarantee that the signature is not a forgery. Personally appearing with good identification usually covers this hurdle. The second it that the signer has the capacity to sign. This means that the signer is over eighteen years of age and is not obviously crazy or demented. This, again, is seldom difficult.

The third element of the guarantee is that the signer is the appropriate person to sign the transfer instruction. When the signer is a fiduciary--a conservator, personal representative, or an agent pursuant to a power of attorney--the signer must prove his or her authority to engage in the proposed transaction.

For a personal representative or conservator, proof of authority is normally in the form of certified copies of the letters testamentary or letters of conservatorship. Many banks will require that the letters be less than sixty days old. If the conservator has old letters, she might consider getting a new set prior to approaching the bank. If the person seeking the Medallion Guarantee is the personal representative of an estate the bank will also want to see a certified copy of the death certificate. Every bank has its own internal procedures and requirements. You can read sample procedures promulgated by the American Banking Association here.

The tricky case is where the fiduciary seeking a Medallion Guarantee is an agent under a power of attorney. The banker is required to read and interpret the power of attorney to determine if the power of attorney permits the transaction that the agent wants to complete. Thus, if the agent wanted to transfer the stock to himself, the banker might search the power of attorney for the power to make gifts. In this situation, obtaining of a Medallion Guarantee depends on the ability of a retail banker to interpret a power of attorney. This sort of interpretation is difficult enough for experienced elder law lawyers. Your results in a bank are guaranteed to vary.

Transfer agents are form-driven bureaucracies and the forms are not always the easiest to understand.. When you, as a fiduciary, need to make stock transfers, get the forms from the transfer agent. Make sure that the forms show the value of the transaction (so the Medallion stamp holder knows whether it is within his or her authorization). Then cross your fingers and go to the bank for the for a Medallion Guarantee

Computershare is one of the big transfer agents in the U.S. It's forms are as confusing as any and it is not unusual to get odd decisions out of them. Recently I submitted a transfer request--with a Medallion stamp--and Computershare responded with a statement that the company believed my client to be dead. Proving through documentary evidence that someone is alive is fairly difficult. I invented a "life certificate" to do this, but I suspect Computershare came around when I pointed out that the Medallion stamp guarantees capacity. One of the elements of capacity is life. Computershare bought the argument and allowed the transfer. In most cases, getting the Medallion Stamp is only an annoying hassle. In that case, the Medallion Guarantee actually helped the fiduciary.

Tuesday, March 1, 2016

The Problem of Joint Accounts Owned by a Married Couple when a Professional Fiduciary Gets Involved

Often one member of an older couple develops dementia, and the spouse, although not incapacitated, is not capable of caring for the the disabled one. Sometimes a child steps up to become guardian and or conservator for the incapacitated member of the couple. Other times a professional fiduciary steps in.

Two common situations result in a professional becoming involved.

Situation 1: This is where the couple have children from previous marriages who may not get along with each other and who may be looking to protect their respective inheritances. A child goes to an Oregon elder law lawyer and the lawyer, anticipating trouble among the siblings and step-siblings, suggests that the worried client nominate a professional to be guardian and conservator for the disabled parent.

Situation 2: This is where there is trouble in the home of the elder couple and Adult Protective Services (APS) is called. The APS social worker determines that the couple has money--not eligible for government services--and calls his or her favorite elder law lawyer. The lawyers in my field all have their preferred professional fiduciaries. The lawyer then calls his or her favorite and the fiduciary petitions to be appointed both guardian of the disabled spouse and conservator of the disabled spouse's money.

This second situation happens a lot. I do it when my favorite APS worker calls me. It is good for my business and good for the business of my favorite professional fiduciaries. Some of the elder law lawyers in Oregon do a lot of this.

It is rather unseemly for a professional fiduciary with no connection to the family to petition to be guardian or conservator when no one in the family has asked them to do it, but it is allowed. The courts don't seem to like the idea, but they will put up with fiduciaries and their lawyers making a little money in return for assuring that elders are safe from abuse.

I call the task of finding an appropriate professional fiduciary for a case, "fishing for fiduciaries". It is not an easy job. Fiduciaries, like lawyers, are also businessmen. They have to make money to stay in business. When fishing for fiduciaries, the amount of money to be made is the lure. Fiduciaries want conservatorships rather than guardianships because that is where the money is. When fishing for fiduciaries, I get a fiduciary to sign on for the hard work of being a guardian by coupling the the job to the task of managing the elder's money. The fish always wants to know how much money there is and who will be managing it. If the fiduciary is managing the money, he or she knows that they will get paid.

When a conservator is appointed to manage the money of a married disabled person, the big question becomes, 'what rights does the spouse have?'. As guardian, the professional makes medical and placement decisions. As conservator the fiduciary is to take possession of the property of the disabled spouse. But what exactly is that property?

There has been an informal practice in which the fiduciary declares that the disabled spouse has a right to one half of the couple's joint accounts and thereafter goes to the bank and takes half the money out of those accounts to be held and managed by the fiduciary. Unfortunately, there is no legal authority for a fiduciary to do this. Fiduciaries have been able to do it because the non-disabled spouse is often not willing to lawyer up and object.

The theory used by fiduciaries, although not openly stated, seems to be that if the parties were divorced each spouse would receive fifty percent of the marital assets. Thus, the practice got called by the more cynical in the profession, "divorce by conservatorship." However, the rights of a spouse to fifty percent of the marital assets only accrue when a divorce is filed. Similarly, I may have a right to inherit from my aging father, but the right becomes operative only when he dies. I can't walk in and start taking money out of his account because he has the flu.

Often, the last thing in the world the elder couple wants is a divorce, yet the fiduciary treats the incapacity of one as ground to divide the assets according the principles applied in divorce cases. If one spouse abandoned the other and refused to use marital assets for care, a fiduciary might be able to convince a court to allow him or her to file for divorce on behalf of the disabled spouse, but that brings us into very unsettled law.

More often than not, the joint accounts held by the married couple have a right of survivorship. This means when the first of the couple dies, the other gets the entire account without judicial supervision or oversight. Most couples use survivorship provisions as an essential part of their estate plan. I certainly do. I own my house, my cars and most of my accounts jointly with my wife. Thus when I kick the bucket, she owns all that stuff without undue fuss. While we are both alive, either of us can take as much as we want out of our joint accounts without regard to which of us put the money in the account.

In the past, fiduciaries have taken the position that the fiduciary has the same right as the account owner and can remove assets from the jointly held accounts with the same freedom that the disabled elder could. This, however, is not the law. An Oregon case has held that the right of a conservator to withdraw funds from a survivorship account is limited to those funds immediately necessary for the disabled person's care. The conservator is not allowed to simply grab half of the couple's joint accounts.

A second hurdle stands in the way of a fiduciary who wants to take possession of jointly held accounts. ORS 708A.465 provides as follows:

708A.465 Ownership of multiple-party accounts. (1) A joint account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent.

This provision seldom affects married couples because if they have a dispute they settle it in divorce court. However, if one of the people with an interest in the account is a fiduciary, it should apply. The fiduciary should only have rights to money in the account to the extent that the disabled person put the money in there. Having to prove who put money in a jointly held account is not easy.

I am not sure what the moral of the story is, but a lesson should be that the spouse of a person subject to a conservatorship does not lose his or her rights in jointly held accounts simply because the fiduciary says so. The fiduciary can access funds to provide for the physical well being of the disabled spouse, but beyond that they may not extract funds to protect the funds themselves. The disabled spouse opened the joint account and created the survivorship provisions when he or she was capable. A fiduciary does not by his or her appointment alone, have the right to change that arrangement.

Monday, November 23, 2015

A useful tool for Oregon conservators, executors and personal representatives

A court appointed conservator for a disabled person or personal representative (executor) in an estate faces a lot of bookkeeping. All income and expenses have to be reported to the court with supporting documentation. In Multnomah County and some other counties, court appointed fiduciaries are required to take a class from Guardian Partners in order to get them started on the right path with the court requirements.

A fiduciary reporting to the court is required to report income and expenses on separate charts. The court rule refers to income as "receipts" and expenses as "disbursements," and I will do the same in this post. A fiduciary must provide the court with a chart of receipts and disbursements for every account owned by the estate or the protected person.  The accounts have to be reconciled in a particular manner. The "ending balance" on the disbursements page must match the ending balance on the corresponding bank statement and the total from the receipts sheet must equal the total on the disbursements sheet.

The accounting method required by the court is neither intuitive nor is it what people are used to. Regular folks use a check register style of accounting in which deposits and payments are recorded on the same document with a running balance kept on the far right of the register.

I have made an attempt at bridging the two styles by creating spreadsheets that have a check register as the first page, a court-style receipts account on the second sheet and a court-style disbursements sheet on the third. With my documents, the fiduciary can keep a check register for each account and, when it is time to report to the court, quickly move the information from the register to the court approved forms.

Unfortunately, spreadsheet programs do not always play well together and people tend to be very loyal to their favorite office software. So let me start with the best.

If you have signed up for Gmail or Google apps, you can use Google Sheets. Using a function available in Google sheets, I have developed a spreadsheet that populates the forms required by the court as you enter numbers in the check register. This means that the charts of receipts and disbursements are ready to submit at any time. (Of course the ending balance must match the bank statement, but the spreadsheet itself is always ready for submission). You can copy this template to your computer (or Google Drive folder) here. Once you have it, fill in the case and account information at the top of the sheet and you are ready to start entering numbers. As you do so, the numbers will be automatically be entered on the receipts and disbursements charts.

If you are not a Google user things will not be quite as easy. In the spreadsheet programs of OpenOffice and Microsoft Office I cannot get the receipts and disbursements sheets to populate with data as the check register is filled out, but I can make it easy to transfer numbers from one to the other. I use OpenOffice in my practice because the word processor connects painlessly to the database. My OpenOffice spreadsheet is here. You need to download it to an appropriate place on your computer and use it as a template for your case. You fill out the case and account information and then enter your receipts and disbursements in the check register. (OpenOffice is free and if you want to try using it.). When it is time to report to the court, you will have to cut, paste, and sort the information from the check register onto the receipts and disbursement sheets. It is not automatic, but it eliminates the need to manually transfer individual entries from one form to another.

Many people use Microsoft Office's Excel. The Excel check register works exactly as in OpenOffice. You will need to cut, paste and sort when you want to submit to the court. The Excel version is here. You need to download, copy, rename, and use it for as many accounts as you want.

No matter which one you choose to use, you will need to make a separate sheet for each account held by the estate or conservatorship, enter the account name and number, and thereafter enter deposits and payments in the check register as they occur. In Google, the form required by the court will be ready at any time. In OpenOffice and Microsoft Office, you or your lawyer will need to do some cutting and pasting, but the creation of the court approved form should take no more than a few minutes.

Sunday, August 30, 2015

The New Disclosure Requirements for Oregon Conservators and Why they should be Putting the Money they Manage in Index Funds

The Oregon legislature recently changed what professional fiduciaries must disclose when they ask to be appointed conservator for an incapacitated adult, and what they must include in the annual accounts to the court. Once the law goes into effect, professional fiduciaries, in addition to the long list of disclosures already required, must disclose details about their money management skills, their fees, and the fees of those they will hire to manage the money of the protected person. In annual accounts they will have to disclose the fees paid from conservatorship funds to brokers and money managers. The new law focuses on the murky relationship between conservators, money managers, the prudent investment rule, and appropriateness of paying brokers to manage money for protected persons.

For a long time informed retail investors have known that actively managed funds do not and probably cannot outperform investments managed by a computer. Investment managers are not worth what they get paid and their fees can easily turn profitable investments into money losers. The new law forces professional fiduciaries to ask themselves why they are giving professional money managers a cut of the protected person's money.

The New Rule

Under the new rule a proposed conservator must now disclose the following:
  • The professional experience, investment credentials and licensing under ORS Chapter 59 of the fiduciary or person acting on behalf of the professional fiduciary. 
  • Any revenue sharing agreement between the fiduciary and another person and the manner in which those fees will be computed 
  • An acknowledgment that the fiduciary will invest money of the protected person according to the prudent investor rule (which is in the trust code
The new law then requires that conservators, in their annual accountings, disclose to the court any fees taken from the funds of the protected person by brokers or money managers. That means conservators are going to have to ferret out and reveal how much Edward Jones is charging the protected person for its sage advice and include that amount in the accounting. This has not always been done in the past and is not easy to do.

What problem does this new law solve?

The more cynical in Oregon’s elder law community see the new law as an effort by Allan Trust, our biggest home-grown trust company, to squeeze the competition. Businesses that have done the legwork and put together the capital to become trust companies (or banks) can serve as trustees of trusts without court appointment and can serve as conservators for incapacitated people without posting a bond. Non-trust company fiduciaries (I have written about them here and here and here) can only serve as trustees if they are court appointed and must post a bond in conservatorship cases.

Most non-trust company professional fiduciaries are social workers at heart who manage the protected person’s money as a sideline. Under the new law these social worker types will have to disclose their lack of experience in money management and tell who they intend to use for that purpose. I have never heard of fee-sharing between a non-trust company conservator and a brokerage house, but if it is going on it is going to have to be disclosed. Compliance with the new disclosure requirements will not be difficult and I don’t think it will have much effect. The new disclosures will be buried in the pages of disclosures a professional fiduciary must already make. I doubt that many clients considering a professional fiduciary have been fooled into thinking that their chosen fiduciary with a masters in social work it also a hedge fund manager.

In addition to disclosing their experience in investing, professional fiduciaries will be required to swear allegiance to the prudent investor rule. The rule comes from the trust code and conservators have always had an obligation to follow it. They now must swear under penalty of perjury that they will. The prudent investor rule has been around for a long time and simply requires that trustees invest prudently, diversify, and consider a variety of economic factors when investing. It is a commonsense rule that guides most reasonable investors whether or not they are professional fiduciaries. You can read it here.

Finally, conservators will have to disclose in their annual accounts the money taken from the funds of the protected person to pay brokers and money managers. This could be a problem for a lot of conservators and brokers, but requiring it is a good thing.

I have looked at a lot of brokerage statements when writing final accounts for a protected person. There is no line on these multi-page forms where the brokerage tells you how much it received for managing the funds. I survived college, law school, and a fair amount of post-doctoral work. I have practiced law for decades. Even with all this education, the statements sent to me by most brokerages are incomprehensible. I know from the practicing law that simplicity of expression requires intelligence and hard work. I could therefore conclude that the complexity of brokerage statements is because stock brokers are both dumb and lazy. I really don’t think that is the case. I think there is an intentional effort to disguise what is going on and how much is being charged. With the new requirement that has to change.

I have often listed the opening and closing balances of a brokerage statement and then passed on brokerage the statement to the court. The annual accounts I have submitted like this have been approved. That is fine for the dead and disabled, but when it comes to my own money, I have no intention of paying the high fees for active money management. I let computers do the work.

The Prudent Investor Rule, Conservatorship Funds, and Actively Managed Funds

The prudent investor rule comes from the trust code and requires that a trustee invest funds using a set of common sense guidelines. I apply these same guidelines to my own investments. Being that I don’t want to pay brokerage fees, I could take the time buy stocks and bonds on my own based upon my risk tolerance and my financial goals. But I don't. Managing money is boring to me compared to the practice of law. I don’t want to do it and don’t want to pay high prices to have it done for me. So I invest in index funds.

Index funds are computer managed and track a market. The biggest provider of index is Vanguard. I bring it up by name only because it is the largest of the index fund providers. I have one fund that tracks the Standard and Poors 500. When the market goes up I make money. When the market goes down, I lose. I have other funds in a fund that mixes income, asset growth, and risk avoidance so that I can retire at a target date. The fee for having my funds managed is less than half a percent of the amount invested. There is no load (fee) for putting money into the fund and I do not incur capital gains because some bozo is buying and selling stocks in my account trying to beat the market. With little effort and little expense I meet my personal needs and, incidentally, the requirements of the prudent investment rule.

It has been a poorly kept secret for decades that money managers cannot outperform the market. There are two reasons to believe that professional money management cannot be worth its cost. One is empirical: the other is logical.

  • The Empirical Argument: Professionally managed funds available to retail investors have never beaten the market as a whole over any significant period of time. 
  • The Logical Argument: If the market is efficient, the price of an asset in the marketplace is its value. Thus, if your brilliant broker can buy an asset at a price below its value and sell at a price above its value, then either the market or the broker is corrupt. 
The proponents of managed funds depend upon tall tales and superstition. With millions of fund managers playing the market it is impossible that some of them will not beat the market for a period of time before returning to the mean. These stories of success are always trotted out to distract potential customers from things like math. Someone wins the lottery too. We do not, however, pay past lottery winners to pick our numbers for future lotteries.

The empirical evidence and economic theory are consistent. If the market is fair it will reflect the true value of an asset. If a stock picker can produce returns better than the market, it is either because the market is flawed or the picker has the kind of inside information that should put him in jail. When a decent return on investment in the market is three percent, the stock picker charging two percent for his efforts is taking almost all the return for himself. Managed money for average people in the modern world of big data is an elaborate scam.

The downside of managed money can be seen here. The web page is run by the Financial Industry Regulatory Authority (FINRA). Sign in and find the fund that your broker recommends and look up the costs. Then take a look at returns. Look up the Vanguard funds, or other index funds. Managed funds are simply not worth the money. Conservator’s have used and kept retail brokerage accounts for years because it was accepted and brokers advertise on television. We used to get our plane tickets from travel agents. It is time to change. With conservators now required to report and justify the high money management costs, perhaps the time to change is now.

Complying with the Prudent Investor Rule with Index Funds

In a nutshell the prudent investor rule requires the conservator to maximize net income while minimizing risk. Individual situations may require different balances of income and capital appreciation. Some conservatorships may have particular financial goals, and conservators will always struggle when they have come into possession of unusual assets. Many times, however, a conservator obtains possession of existing investments held by the protected person and is charged only with making sure that the funds are invested pursuant to the rule so that adequate resources are available for the protected person’s long term care.

Within a short time after being appointed, a conservator will be able to estimate the life expectancy of the protected person and care costs. If funds will exceed the cost of care, the conservator will have to consider the protected person’s estate plan and the interests of heirs. Other income, tax status, other assets and special goals will play a part in the investment decisions, but even non-trust company fiduciaries are familiar with balancing these factors.

With the considerations in hand, the conservator can browse the various funds at a company like Vanguard that offers a smorgasbord of funds with asset mixes designed to meet particular needs. As I mentioned, my own asset mix is aimed at retirement. The asset mix for a particular protected person might be quite different from mine, but with a reasonable amount of attention the conservator could quickly have an investment mix that meets the rule.


The new Oregon disclosure statute may be a blessing, but not for the reasons the legislature had in mind. The disclosures themselves will be buried among the long list of disclosures professional fiduciaries must already make. I doubt anyone will be choosing their professional fiduciary based upon the fiduciary's commitment to the prudent investor rule. However, if fiduciaries start to take their obligations seriously and begin seriously looking at index funds as a way to satisfy the rule and reduce costs to the protected person, everyone in the system--with the exception of stock brokers--is likely to benefit.