Industry Challenges

1. Industry Challenges TUG XXXIV

2. Industry Challenges • This session will discuss how various trends including: perpetual trusts, trust protectors, directed/delegated trustees, total return trust conversions, to name a few, will alter the landscape of the business as we know it. We will also discuss the impact of some of the recent regulatory initiatives (including unique and hard-to-value assets, vendor management, investment reviews, to name a few). This session is also timed to allow questions from the participants on any of these topics or others of interest to the participants

3. Industry AnalysisGross Fiduciary Income

4. Industry AnalysisExpenses

5. Industry AnalysisIncome and Expense Comparison

6. Industry AnalysisGrowth Rates: Income and Expense

7. Industry AnalysisActual Net Losses

8. Industry AnalysisNet Losses as a % of Gross Fiduciary Income

9. Industry AnalysisNet Operating Income

10. Industry AnalysisNet Operating Income Growth Rates

11. Industry AnalysisProfit Margin

12. Industry AnalysisIntracompany Credits

13. Industry AnalysisProfit Margin with Intracompany Credits

14. Industry AnalysisTotal Non-Interest Income

15. Industry AnalysisFiduciary Income as a % of Non-Interest Income

16. Industry AnalysisDiscretionary Assets

17. Industry AnalysisDiscretionary Accounts

18. Industry AnalysisAverage Account Size: Managed

19. Industry AnalysisReturn on Fiduciary Assets: Managed

20. Industry AnalysisNon-Discretionary Assets

21. Industry AnalysisNon-Discretionary Accounts

22. Industry AnalysisAverage Account Size: Non-Managed

23. Industry AnalysisReturn on Fiduciary Assets: Non-Managed

24. Industry AnalysisReturn on Assets Under Administration

25. The Trust & Investment Industry: A Historical Perspective 1977-2013

26. A Historical Perspective • Then • 6,000 Providers • Full Service Banks • Banks Dominate • CTF’s were Prevalent • Numerous Mid-size • Limited Certifications • Law Against Perpetuity • Principal & Income • Prudent Person • Numerous System Vendors • Now • 2,400 Providers • Ltd-Purpose Trust Co. • Brokers, Insurance, etc. • Mutual Funds Replace • Barbell: Small & Large • Numerous Certifications • Dynasty Trusts Prevalent • Total Return • Prudent Expert • Consolidated to a Few System Vendors

27. A Historical Perspective • Then • Savings Banks Excluded • Wills • Audit/Exam: Transaction • Compliance: Secondary • Estate Tax Rate: 70% • Estates Over: $120K • Qualified Gift: $3,000 • Gift Tax Rate: 70% • Income Tax Rate: 70% • IRA Contribution: $1,500 • 401(k) Deferral: $0 • Now • Savings Banks Power’s • Living Trusts • Audit/Exam: Risk • Compliance: Primary • Estate Tax Rate: 40% • Estates Over: $5.25MM • Qualified Gift: 14,000 • Gift Tax Rate: 40% • Income Tax Rate: 39.6% • IRA Contribution: $5,500 • 401(k) Deferral: $17,500

28. A Historical Perspective • Then • Uniform Laws • P&I 1962 • N/A • Unclaimed Property ’54 • N/A • MIFA ’72 • Reg. 9 • Annual Reviews <15 months apart • 36-month vault asset verification • Numerous Precedence & Opinions • Now • Uniform Laws: • P&I Act 1997 & 2000 • PIA 1994 • Unclaimed Property ‘95 • MPERSA ‘97 • PMIFA ’96 • Reg. 9 • Annual Reviews • Rescinded • Most rescinded

29. A Historical Perspective • Then • I was slimmer and more handsome. • Teaching in Cannon’s FIRM II as a part-time faculty member • Now • See for yourself & I’m a Grandfather (2X) • Teaching in Cannon’s FIRM I & II as well as other programs and now full-time faculty

30. Economic Data • Unemployment • 10.4% • Gold • $148 • Oil • 17.50 • Bank Failures • 262 • T-Bill • 5.98% • DJIA • 831 • CPI • 6.5% • Unemployment • 7.4% • Gold • $1,361 • Oil • $105.00 • Bank Failures • 108 • T-Bill • 0.055% • DJIA: • 15,019 • CPI • 1.7%

31. Inflation • How Much things cost in 1977 • New house $49,300 • Income: $15,000 • Monthly Rent: $240 • Gallon of Gas: $0.59 • US Postage Stamp $0.13 • Dozen Eggs $0.65 • How Much things cost in 2013 • New house $232,880 • Income:$39,423 • Monthly Rent: $675 • Gallon of Gas: $3.62 • US Postage Stamp $0.46 • Dozen Eggs $1.93

32. Trustee Duties • Discretionary Trustee • Delegated Trustee • Directed Trustee • Trust Protector

33. Trust Protector • The powers vested in the protector vary both according to the proper law of the trust and the terms of the trust instrument. The powers may include: • power to remove and appoint trustees; • power to approve a change of proper law; • power to approve the addition or removal of beneficiaries; • power to approve proposed trust distributions; • power to approve the appointment of an agent or adviser either generally or in relation to specific matters; • power to approve investment recommendations; • power to appoint replacement protectors; and • power to terminate the trust or approve the termination of the trust.

34. Jurisdiction Shopping • Perpetual Trusts • Crummey Trustee Duty Limitations • Trust Decanting Powers • Directed Trustee Protection • Power to Convert • Power to Adjust

35. South Dakota Crummey Language • Unless otherwise directed by the terms of the trust instrument or court order, no trustee of an irrevocable trust, with respect to acquiring, retaining, or disposing of a contract of insurance or holding one or more insurance contracts upon the life of the settlor, or the lives of the settlor and the settlor’s spouse, has the following duties: • To determine whether any such contract is or remains a proper investment; • To investigate the financial strength or changes in the financial strength of the life insurance company; • To make a determination of whether to exercise any policy options available under any such contract;

36. South Dakota Crummey Language • To make a determination of whether to diversify any such contract relative to one another or to other assets, if any, administered by the trustee; or • To inquire about changes in the health or financial condition of the insured or insured’s relative to any such contract.

37. South Dakota Crummey Language • A trustee is not liable to the beneficiaries of the trust or to any other party for any loss arising from the absence of those duties upon the trustee. • The trustee of a trust described under subsection (a) of this section which was established prior to the effective date of this section, shall notify the settlor in writing that, unless the settlor provides written notice to the contrary to the trustee within sixty days of the trustee’s notice, the provisions of subsection (a) of this section shall apply to the trust. Subsection (a) of this section does not apply if, within sixty days of the trustee’s notice, the settlor notifies the trustee that subsection (a) does not apply.

38. Directed Trust Company • Finally, each of the six states’ laws protects a disempowered directed fiduciary from liability for following the directions of the empowered party, except to the extent that the directed fiduciary, negligently or in bad faith, fails to execute the directions. • Most of them satisfy this third and most critical requirement by defining a directed trustee as an “excluded fiduciary” with no duties to: • (1) question whether the empowered party is acting within the scope of that party's authority, • (2) intervene to prevent or redress a breach, or • (3) warn the beneficiaries that any given direction exceeds the empowered party’s authority or otherwise constitutes a breach.

39. New Regulatory Guidance • Investment Reviews • OCC Bulletin 2008-10 • Unique & Hard-to-Value Assets • OCC Handbook-Unique & Hard-to-Value Assets (9/12) • Vendor Management • OCC 2001-47 • Model Risk • FRB SR 11-7 • OCC 2011-12

40. Small Changes-Big Rewards • Pre-acceptance Review (12 CFR 9.6(a)) • Place Portfolio • Paper Current • People Future • Performance Pricing • Processing Profitability • Purpose • Asset Concentrations • Account Risk-Ranking & Administrative Reviews