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.