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.

Wednesday, August 26, 2015

Mediation, Mediators and Mediation Styles in Multnomah County Probate Mediation

The parties to disputes in Multnomah County protective proceedings (guardianships and conservatorships), estate administrations and trust cases are required to go through mediation before they can proceed to a court hearing. The requirement has been in effect for a couple of years now and Multnomah County’s probate judge assures me that it has been a success. A previous post on the Multnomah County mediation program can be found here.

I am approved as a probate mediator by the Multnomah County probate court. I took a forty hour course in mediation at Portland State. I took the shorter course in probate mediation and I did nearly two years of twice-a-month supervised mediation in the Multnomah County small claims department. These credentials qualify me to be on the list of approved probate mediators. I maintain my educational requirement by going to the annual two-day conference of the Oregon Mediation Association. I mediate cases and I represent clients who are having cases mediated by others. Thus, I offer you, dear reader, a brief guide to mediators and mediation styles in Multnomah County probate cases.

The lawyer who is a part time mediator.

This is me. I pay my mortgage being a probate lawyer and do mediation on the side. A lot of lawyers want someone like me to do mediation because, as a lawyer, I understand the law and the requirements of the local courts. If possible, I will move the parties quickly toward an agreement that can easily be turned into a court order.

I was trained in facilitative mediation. In that arm of mediation the mediator is to be non-directive and is there to assist the parties to the mediation in negotiating effectively. In a perfect mediation world, the parties will resolve their differences and leave the room hand in hand to live happily ever after. In this type of mediation, the parties are in the same room and face each other across the table. It is intense and difficult. Most part time lawyer-mediators quickly give up on it and move to the easier separate room/settlement conference style of mediation often used by judges. (More on that below.)

Several Multnomah County probate lawyers have taken the forty hour course and the shorter probate course in order to get work as a mediator. Not so many of them have done the supervised practice required for inclusion on the list of mediators approved by the court, but it is not required that you be on the list to be selected as a mediator. The parties to the dispute can choose any mediator they want. If the person making the choice is a Multnomah County probate lawyer, he or she is likely to prefer someone familiar. That will be another Multnomah County probate lawyer. In my cases, I am more often selected to mediate a case because of who I know rather than what I know.

The knock on lawyer/part-time-mediators is that they can’t take the pressure of same room mediation, all they care about is getting an enforceable judgment, and they manipulate rather than facilitate. For this reason they are mostly absent when the Oregon Mediation has its meetings and probably never finished the regimen of supervised mediation required for inclusion on the approved list of Multnomah County probate mediators. The advantage of having one of these mediators is that the mediation process will be shorter, less stressful, and more likely to result in a solution that is pleasing to the lawyers.

Retired Judges (and lawyers who thought they should have been judges)

In many courts today the parties to the case are required to go to a settlement conference as a condition of going to trial. The settlement conference is conducted by a judge. The lawyers go into chambers and a judge listens to the evidence that may be presented at trial and opines thereafter about what he thinks the outcome will be. With this input, the lawyers are encouraged to have their clients settle the case along the lines of what the judge thinks the ultimate outcome will be. Many judges like this process and, when retired, offer themselves up to help settle case just the way they did it when they were settlement judges. Sometimes, they are not judges, but experienced litigators who have given up the courtroom. In either case the experience is the same.

These mediators do evaluative mediation. They evaluate the strength of each side’s case using their own expertise and advise the parties on a settlement that approximates what might happen in court. They almost always separate the parties into different rooms and move back and forth between rooms nudging the litigants toward an acceptable settlement.

The personality characteristic that make a person want to be a judge, almost completely foreclose that person from doing facilitative mediation. Judge’s want to judge and direct because they believe they know, in the final analysis, the best outcome. These mediators, whether judges or litigators, never belong to the Oregon Mediation Association. They are most comfortable around lawyers and they advertise in the Oregon State Bar Journal. Lawyers like these kinds of mediators because they do something familiar.

The knock on the retired judge is that he is expensive and overly directive. You pay a premium price for the experience the judge brings to the mediation. And like the lawyer/part time mediator, a judge tends to see the solution as a court order that everyone can live with. It is a low bar with a high cost. If you are involved in a high emotion family dispute, you are allowed to set your goals a little higher than this.

Real Mediators

I call them “real mediators” because these folks mediate full time and make their livelihood doing it. They do not do it part time while their real income is from practicing law. They do not do it part time while collecting retirement pay from their career as a judge or a litigator. They mediate and only mediate. They are active in the Oregon Mediation Association and they spend a lot of time on the touchy-feely aspects of mediation. They go to courses on mindfulness.

These are the real facilitative mediators. They do not direct the parties or predict what the outcome may be in court. Instead, they facilitate the litigants in a search for a solution that works for them. It is tough and stressful business in which of the parties to the dispute face each other, say what they have to say, and hear what need to be heard. The theory is that the disputing parties then approach a solution that will be one of their own making and not one based upon a legal framework that has been imposed upon them.

These mediators are idealistic and hopeful. They don’t think much of lawyers and at the OMA conferences tend to belittle the very mindset of lawyers. Those who have practiced law in the past are inclined to introduce themselves as “recovering lawyers.” In mediation they put the parties to the dispute in the same room and expect the lawyers to keep quiet. The lawyers’ job, as they see it, comes at the end and consists of translating the settlement into a form acceptable to the court.

The knock on real mediators is that they fail too often. I don’t mean they fail to get a settlement agreement. Through tenacity alone they tend to get more agreements than the other types of mediators.  Often, however, those agreements are not truly facilitated agreements, but rather the same one you might have gotten from a retired judge or a practicing lawyer. Facilitative mediation can be long and stressful. It is simply not worth it if the result is no better than one could have gotten at a judicial settlement conference.

There are a whole lot of good things about having a real mediator. Being a hopeful guy, I am usually willing to go for the gold. In mediation that means a solution designed by the parties with little, if any, attention paid to the law, lawyers and judges. Mediators are cheap. They charge a lot less than either lawyers or judges and tend to bring far greater mediation skills to the table. Unless, you have a good reason not to, I suggest going with the real thing.


If you are involved in a Multnomah County probate dispute, the chances are you are going to mediation. In my experience, the local lawyers are still not all that comfortable with the requirement. They try to get it waived and if forced to mediate would rather hire a buddy to do the mediation than spend the time finding the best mediator for the case. My suggestion is to give it some serious thought and quiz your lawyer as to what considerations are going into the choice of mediator. If the lawyer is recommending against a “real” full-time mediator, make sure the reasons are clear and that the lawyer is not simply choosing the path that is easiest for the lawyer.

Wednesday, June 24, 2015

Types of Professional Fiduciaries in Oregon Guardianship and Conservatorship Cases

Family battles over inheritances are the stuff of great novels. In the courts, however, the family battles over the appointment of a guardian or conservator can be as contentious and difficult as any will contest. The cases arise because there is an elder who is alleged to need help in managing care or money. Sometimes the battle arises because the elder has lawyered up and opposes the appointment of anyone to take charge of his or her affairs. More commonly, however, these conflicts end up in the courtroom because the children of the elder are battling each other for position and control within the family. Whenever squabbling siblings are at the center of the dispute someone will propose that a professional fiduciary be appointed. (A fiduciary is someone who works for the benefit of another, and I use the term here to mean the person nominated to serve as a guardian or conservator.) Court visitors are fond of this option, and judges—who often want quiet as much as they want justice—often prefer appointing a professional to sorting out the conflicting accusations of the elder’s children.

Professional fiduciaries come in a variety of shapes and sizes. At one end of the spectrum are the trust departments of large financial institutions. Most bank and investment houses have a trust department that will serve as fiduciary for grandma if the money is right. The banks are neither uniform nor transparent about how much they charge for these services, but you should not expect a financial institution to accept your case unless grandma has at least half a million. Each year, these fiduciaries charge a percentage of the amount being managed. A common charge is two percent of the value of the trust per year. Thus, if you put in the minimum amount of $500,000, the bank will charge at least $10,000 for managing grandma’s money. They may charge additional fees for financial management and investment advice. Bank trust departments and dedicated trust companies claim great skill in managing money and bringing in large returns. These claims had more weight prior to the recent recession. In any case, they employ professional money managers and produce long incomprehensible quarterly statements of profit and loss.

There is some question these days whether actively managed investments can ever return more than computer managed index funds, particularly when the manager is scraping off at least two percent every year for his efforts, but that is a subject for another post.

Banks have special exemption that allows them to be serve as a trustee of trusts without a court order or court oversight. Thus, the banks and investment houses occupy the world of large trusts, more so than the world of guardians and conservators.

The next candidates for the job of professional fiduciary are fiduciary firms. These are small businesses, usually partnerships or sole proprietorships, made up of social workers with a head for bookkeeping. They can serve as guardian, conservator, or both. The firms consist of one or more certified professional fiduciaries and a staff of case workers, bookkeepers, and office professionals. These folks are always appointed by a court, and specialize in attempting to both protect the elder and stabilize the battling family. They manage money by stopping the bleed out to greedy relatives and attempting not to lose it thereafter. They are more likely to leave the elder’s money with the people who are currently managing it than to take up active management of investments. What they do well is protect the elder’s physical well being and make sure the elder’s money does not disappear.

This group of professional fiduciaries gets paid by the hour rather than by commission. The partners tend to charge about a hundred dollars an hour with case workers and office staff charging substantially less. Their charges must be court approved.

The last rung on the ladder of professional fiduciaries consist of sole practitioners. These folks are certified professional fiduciaries who practice out of their homes or out of small offices. They may contract with case workers and even have a small office staff, but when you get one of these you are depending on the skill of the person appointed to serve, not on a functioning bureaucracy. They are not money managers and don’t pretend to be. They are social workers willing to protect the elder's money. These people are the most “hands on” of the bunch and are likely to have the most interaction with the families. This intimacy is good if you get along with the fiduciary and not so good if the relationship goes sour.

Every professional fiduciary comes with a lawyer. Professional fiduciaries develop relationships among elder law lawyers and use the same two or three lawyers whenever the can. They refer work to their favorite lawyers and those lawyers refer work to them. Lawyers and law firms have personalities. Some firms are grumpy; some are friendly; some are humble; and some are pompous. If you are considering inviting a professional fiduciary into your family, it is worthwhile inquiring who will be doing the legal work.

Professional fiduciaries also have reputations for being good at certain kinds of cases. Some work hard to bring fighting families together; others are known for being tough and whipping misbehaving families into line. Some are great at forensic accounting, and others are good at locating publicly funded social services. It can be hard to tell what kind you are getting. Online reviews are useless, because no matter how skilled and compassionate the fiduciary is, at least half of his or her clients are going to hate her. The haters write the online reviews. The best bet is to have an elder law lawyer you trust recommend someone. Your lawyer is likely to recommend someone he or she likes, but because the lawyer knows several different fiduciaries, this biased recommendation is better than none at all.

Once a professional fiduciary has come into your family, you might as well accept that the fiduciary will be there until the elder dies. Courts who find a family so dysfunctional that a professional is warranted almost never turn around and rule that the professional is no longer needed. If you truly need to get rid of a professional, consult the article I wrote on the subject here.

Another concern about professional fiduciaries is that they tend to favor the party that selected them. When I am trying to recruit a professional fiduciary for a case, I sell my case in the same way that clients sell their cases to me. I explain how this is an easy case with plenty of assets to pay their fees. If the fiduciary likes the case, and thinks I may well bring more just like it in the future, the fiduciary is going to make close call decisions that favor my side. That is a fact of life. The fiduciary is going to answer my calls a lot faster than the calls from the lawyer who opposed his or her appointment. If you have a choice, it is better to be from the side of the family that supported the appointment of the fiduciary than from the side that opposed it.

Having a professional fiduciary managing the care of grandma can be a blessing or a curse. I have seen a relationship between a mother and children destroyed because the children were put in charge of her money, and then repaired when the children turned the job over to a professional. On the other side, I have seen fiduciaries trample family feelings and run roughshod over existing family systems in pursuit of some mythical “best interests” of the elder. There is a saying the social service world that a “barely adequate” family member produces better results when it comes to care taking than does a well trained professional outsider. Professionalism has its advantages and its dark side. When considering a professional fiduciary a family must balance risk and reward; not an easy thing to do when enmeshed in the high emotions of a protective proceedings.