Issue 10
Feb 4, 2008
Hi :
In this issue:
Estate Planning Symposium
2008 MOKAN Trust Conference
ITA Annual Conference
ISBA 2008 Probate/Trust Law Section Legislative Proposals
Ballasting Stormy Waters of the Financial Markets
Consider ETFs
Grow Your Trust Business by Leveraging Your Brokerage Relationship
Web Resources That Can Help - At No Cost to You!
Trust Department Policy Manual
ITA Newsletter Subscription
Estate Planning Symposium The opening keynote speaker will be Thomas Hoenig. Hoenig is a native of Fort Madison earning a M.A. and Ph.D. in economics from Iowa State University. He is the President and CEO of the Federal Reserve Bank of Kansas City. The conference will also feature Jim Stovall author of the best selling book, "The Ultimate Gift" which was also made into a major motion picture. Jim Stoval will teach you how to change your life by changing your mind; turn your dreams into reality; be the best you can be; take action starting today, and find and fulfill your destiny regardless of your circumstances. Some other favorites will be ABA's Sally Miller with a Washington Update, Skip Fox with Recent Developments in Estate Planning, and Charles Lockwood with an Employee Benefit Update. The theme of this year's conference, "In the Winner's Circle", will have a Kentucky Derby theme that will be carried out throughout the conference. As always, there will be lots of time to network with over 40 national vendors and over 200 fellow trust officers in addition to enjoying all that Kansas City has to offer. Don't be left in the dust! Join me In the Winner's Circle at MOKAN. For more information see the Gain the knowledge you need to remain a leader in the trust profession. With changing regulations, an unsure economy and the increasing need to stay current, the Iowa Trust Association is proud to offer the 2008 Annual Conference. Look for more information coming later this summer. Reflecting on the financial markets of 2007 we all have seen the articles, press releases and news stories about the enormous volatility in global equity and fixed income markets. This 12-month storm has continued into 2008 fueled by economic factors like the melt down of sub-prime mortgages, the drop in housing prices, falling consumer sentiment, rising energy costs and a weakening US dollar. For some of us, 2007 reinforced what we already knew - active risk management is crucial to successfully navigating the complex investment waters. Successful investing means a dynamic balancing act between risk and reward. There are several types of risk that impact investment markets as shown below. Two of the best risk management tools include asset allocation and diversification. Asset allocation is determining the right mix of asset classes, while diversification is finding the right mix of individual investments within those asset classes. We focused on asset allocation in the November article entitled Strategic Asset Allocation. The diagram below provides a good summary of the impact of asset allocation. There are three portfolios provided with actual market data from 1970-2006. If we compare the first two portfolios (fixed income and lower risk) we can see performance was the same but the second portfolio with greater asset allocation did so with significantly less risk. We can also compare the first and third portfolios (fixed income vs. higher return portfolio). The two portfolios have the same levels of risk but through effective asset allocation the portfolio on the right experienced significantly better returns. Diversification at its simplest is spreading your money across different investments. In other words "don't put all your eggs in one basket". You want to avoid situations where the success of your investment portfolio is determined or driven by 1-2 stocks. Multiple securities, especially those with negative correlation (securities whose price movements are not in sync with one another), smooth out the volatility of price movements and reduce variability of returns. To effectively minimize risk through diversification a portfolio should typically have 30-40 individual securities. Alone, both asset allocation and diversification are excellent risk management strategies. By carefully selecting the right mix of asset classes and then diversifying within those classes with the right mix of individual investments, investors can control volatility and effectively manage risk and returns within their expectations. Exchange traded funds are the broad name given to these securities. Many of us know them by their brand names such as SPDRs, iShares, PowerShares, and VIPERS, to name a few. Just as Vanguard and Fidelity do not represent all mutual funds, iShares and SPDRs do not represent all ETFs. Financial institutions continue to develop their own branded instruments. Like mutual funds, ETFs are available in different styles and strategies. Originally, ETFs were issued based upon broad indexes such as the Standard and Poor's 500 (SPY) or the NASDAQ (QQQQ). Their first metamorphosis was to further subdivide the S&P 500 into its ten economic sectors and into other asset classes such as the Russell 2000 Small Cap Index. We have recently seen them develop even further into fundamentally weighted instruments based on indexes, such as the 50 highest dividend yielding stocks within the S&P 500. There is no doubt that as I write this, new strategies, styles, and asset classes are being developed and delivered as ETFs. Are ETF's competing for mutual fund dollars? Yes, but in reality they can both co-exist very nicely and are often found together in a portfolio. The one thing that we know about no-load mutual funds is that there is no cost to buy or sell them. In fact in our 401(K) accounts, we know that every two weeks purchases will be made into these funds at no cost. ETFs on the other hand trade like stocks and have a commission associated with purchases and sales. Even at an institutional trading rate we might be tempted to never consider ETFs because of the commission associated with transactions. The one component that we would be short sighted in not considering is the ongoing management fee associated with mutual funds versus ETFs. As a general rule, mutual funds have a higher on-going expense ratio as compared to ETFs. Consider the largest mutual fund, the Vanguard 500 Index with an expense ratio of 0.18%. This seems high in comparison to the ETF traded with the highest volume, SPDRS Standard & Poor's 500, with an expense ratio of 0.08%. For accounts where transactions might be effected over time, such as a 401K, no-load mutual funds will continue to be the financial instrument of choice. For investors who take a buy and hold approach, ETFs can offer considerable cost savings. While there will be a transaction cost for the purchase and sale, the lower expense ratio year-in and year-out will eventually outweigh these costs and mutual funds' higher expenses. Tax efficiency, which is often overlooked, is a primary benefit of ETFs. This might not seem important as you read this, but I'm sure you have grumbled at the 1099 that you receive from a mutual fund company knowing that you did not sell any of its fund within the same taxable year. While you might not have sold your shares of that mutual fund, the portfolio manager has been selling and buying throughout the year. With every sale, mainly due to redemptions, a possible taxable event occurs for those current mutual fund share owners. ETF's tax efficiency is due to a regulatory loophole. ETFs are considered to be created by trading equivalent certificates in what is called an in-kind trade. This exchange of essentially identical items does not trigger capital gains, according to the IRS. Traditional mutual fund managers must go into the open market and exchange cash for stocks and vice versa, which triggers realization of gains. The ETF structure allows an investor to pay most of his or her capital gains upon final sale, delaying it until the very end. Delaying it is valuable because the amount that would have been paid for taxes can continue to accumulate. Overall, ETFs are similar to tax managed index mutual funds, slightly more efficient than standard mutual funds, and significantly more efficient than actively managed mutual funds. Probably the most significant benefit that ETFs have created is that they help investors focus on what is most important to the performance of their overall account: choice of asset classes. ETFs provide investors with the opportunity to easily create diversified exposure. The importance of asset allocation, or deciding what percentage of a portfolio to devote to various asset classes, cannot be overstated. Investors spend enormous amounts of time and money choosing individual stocks or mutual funds, while they spend relatively little time deciding what asset classes meet their goals and investment objectives. It should be the opposite. Investors should spend most of their time on overall asset selection. Repeated studies have shown that over 90% of an account's performance, for better or worse, can be explained by its selection of asset classes. ETFs are the ideal tool for the investor who is focused on asset allocation. They represent just about every asset class available and are inexpensive, liquid, and tax efficient. When you next review your own portfolio or a client's, consider ETFs as an important financial instrument in portfolio construction. MainStreet Advisors is committed to providing investment advisory services to enable trust departments to meet their fiduciary responsibilities, while helping clients work towards their investment objectives. The firm provides portfolio management, investment research, and marketing support services. Unlike sub-advisory relationships, your relationship with a brokerage firm can offer you the autonomy to continue to advise your clients while having a source for research, operational support, and trade execution. While working with a brokerage firm, the relationship between your client and your trust department can be preserved- all documents can still be directed to the bank and, in turn, you can continue to make reports to and directly service your client. Leveraging your relationship with a brokerage firm is an important service solution for many banks with equity oriented accounts and trust departments focused on growing and acquiring new customer assets. Many trust departments have their client's mutual fund positions divided among a wide variety of fund companies. We can help you by consolidating those positions into brokerage accounts to simplify your trust department's accounting and operational process or, if you prefer to maintain mutual funds shares directly at the fund companies, we offer free access to a portal that provides access to most mutual fund companies. This portal allows you to invoke information by client social security number and view all positions for each client as well as view daily activity and broader positions from each fund family. This portal is updated daily and can be accessed by you and your broker simultaneously. Utilizing this portal, we can assist you with basic transactions, such as redemptions and exchanges. It is important that the brokerage firm that you choose is experienced in dealing with banks, is able to offer references to support claims of experience, and is familiar with banking laws applicable to you. Your broker should be able to customize the service that they offer to support your trust department's growth initiatives and unique needs. Not every brokerage firm offers the same services, so it is wise to determine what aspects of the relationship are most important to you. For example, consider the following questions: Are you purely driven by the price of execution? Is it important to you that your brokerage relationship offers technology to support your operations and accounting? Will your account(s) be subject to annual fees? Will you have access to Morningstar, research, and quotes? Will you have support from and access to a dedicated representative? Do you need the assistance of your brokerage firm as a custodian? Leveraging a relationship with a brokerage firm could be a critical aspect of your trust department's ability to retrain and attract client assets. We think it is vitally important that the services your brokerage firm offers are flexible, responsive, and tailored to fit your need and goals to ensure that you can maximize the relationship and generate growth. Trust Department Policy Manual Table of Contents
The Estate Planning Society of Kansas City is holding the 27th Annual Estate Planning Symposium on May 1-2 at the Overland Park Convention Center.The symposium includes sessions on succession planning, charitable planning, trust litigation, ethics, buy/sell agreements, current tax developments in real estate, choice of entity, gift taxes and more. CLE credit hours for the event are pending. For more information on the symposium and registration materials see the KC Estate Planning Society website.
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2008 MOKAN Trust Conference
by Steven J. McLaughlin, Vice President & Senior Trust Officer, First National Bank, Ames
2008 MOKAN Trust Conference
Be sure to mark your calendar for the 2008 MOKAN Trust Conference that will be held May 7-9, 2008. The conference will be held at the Sheraton Overland Park Hotel in Kansas City.
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ITA Annual Conference
Mark your calendar now for the ITA Annual Conference. This year's event will be October 9-10 at the West Des Moines Marriott. This year's event will be two days and will feature sessions on top trust issues. Exhibitors will also be on hand to display and discuss their products and services for trust departments.
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ISBA 2008 Probate/Trust Law Section Legislative Proposals
The following items are proposals approved by the Iowa State Bar Probate and Trust Section for inclusion in the 2008 ISBA Legislative Agenda. For the full documentation on each item please see the following link.
A. Conservatorship Bonds
§633.175 - Waiver of bond by court shall be amended:
B. Surviving Spouse Elections
§633.241 - Time for election to receive life estate in homestead shall be amended:
§633.374 - Allowance to surviving spouse shall be amended:
C. Trust Ownership of Real Estate
§614.14 - Real estate interested transferred by trustee shall be amended:
D. Revocable Trust Contests
§633A.3108 - Limitation on contest of revocable trust shall be amended:
E. Charitable Trusts - Donor Standing
§633A.5104 - Interested persons - proceedings shall be amended:
§633A.5106 - Settlor may enforce charitable trust; designation of person by settlor. [New Section]
F. Repeal Iowa Estate Tax [Iowa Code Chapter 451]
G. Pretermitted Heirs
§633.267 - Children born or adopted after execution of will shall be amended:
§633A.3106 - Children born or adopted after execution of a revocable trust shall be amended:
H. Creditor's Rights, Spendthrift Trusts, and Discretionary Trusts
§633A.2301 - Rights of beneficiary, creditor, assignee. [Replace existing §2301]
§633A.2302 - Spendthrift protection recognized. [Replace existing §2302]
§633A.2303 - Spendthrift trusts for the benefit of settlor. [Replace existing §2303]
§633A.2304 - Amount reachable by creditors or transferees of settlor. [New section]
§633A.2305 - Discretionary Trusts; effect of standard. [New section]
§633A.2306 - Court prohibited from exercising trustee's discretion. [New section]
§633A.2307 - Overdue distribution. [New section]
I. Small Estates Amend sections 1, 2, and 5 of Chapter 635:
§635.1 - When Applicable shall be amended:
§635.2 - Petition Requirements shall be amended:
§635.5 - Closing by Sworn Statement subsections 2 and 5 shall be amended:
J. Total Return Unitrusts Under Principal & Income Act:
§637.609 - Unitrust amount shall be repealed in its entirety.
K. Real Estate Interest Transferred By Trustee
Amend Code Section 614.14
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Ballasting Stormy Waters of the Financial Markets
By Brian Rolland, Vice President Institutional Investments, WB Capital Management Inc.
An investment's risk is measured by its volatility. Volatility is defined by the frequency and range of price swings that a security or a portfolio experiences over a period of time. As an investor, it is important to understand how volatility works and how it affects portfolio returns.
Brian Rolland is a member of the sales, marketing and client services team at WB Capital Management Inc. He may be reached at (800) 343-7084 or
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Consider ETFs
by Richard J. Milton, CFA, Managing Director, MainStreet Advisors
In our acronym-filled world of banking, an ETF should not be confused with an EFT (electronic funds transfer). Exchange traded funds, or ETFs, are financial instruments that state legal right of ownership over a basket of assets. Most investors think of them as mutual funds that trade throughout the day like common stocks.
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Grow Your Trust Business by Leveraging Your Brokerage Relationship
by Kate Juelfs 
It is increasingly challenging to stop the flow of cash heading out of your bank as clients shop for higher rates of return found in investment products offered outside of traditional bank settings. Leveraging a relationship with a full service brokerage firm can help your trust department better service your clients by offering a full menu of investment products without taking your clients out of their trusted community bank. Benefits of working with a brokerage firm for your trust department include support in year-end reporting, consolidation of positions, greater trading agility, and the ability to offer full service to equity oriented clients.
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Web Resources That Can Help - At No Cost to You!
Walter B. Lotspeich, Relationship Manager, ProxytrustAs the Internet has become a useful source of information for many trust professionals, we thought it might be helpful to share some of our favorite websites. We like these sites because they are free and they frequently provide the securities processing information trust professionals need:
EDGAR (Electronic, Data Gathering, Analysis and Retrieval system) - performs automated collection, validation, indexing, acceptance and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange Commission (SEC). Its primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency. On the EDGAR site you can find Annual Reports, Proxy Statements and additional information about companies traded on US securities markets.
www.sec.gov/edgar/searchedgar/webusers.htm
SEDAR (Canadian equivalent of EDGAR) - the System for Electronic Document Analysis and Retrieval (SEDAR) was developed in Canada for the Canadian Securities Administrators (CSA) to: (a) facilitate the electronic filing of securities information as required by the securities regulatory agencies in Canada; (b) allow for the public dissemination of Canadian securities information collected in the securities filing process; and (c) provide electronic communication between electronic filers, agents and the Canadian securities regulatory agencies. This website contains similar information as found on EDGAR for Canadian companies. All filings are in PDF Format so be sure to have Adobe Acrobat installed on your computer.
www.sedar.com/issuers/issuers_en.htm
American Depository Receipts (ADR) - the first website listed is sponsored by JPMorgan Chase, a major depository agent, and contains comprehensive information on their ADR clients, including ticker, exchange, CUSIPs etc. The second website listed is sponsored by another transfer agent, Bank of New York Mellon, and covers all publicly-traded ADRs.
www.adr.com
www.adrbny.com/dr_directory.jsp
Morningstar (Mutual Fund and other information) - this is a compreshensive database with information about mutual funds, ETFs and common stocks. This website has been consistently voted one of the top financial destinations on the Internet.
www.morningstar.com/hp.html
Committee on Uniform Security Identification Procedures (CUSIP) -
activequote.fidelity.com/mmnet/SymLookup.phtml
United States Postal Service - for researching and/or verifying addresses and zip codes.
zip4.usps.com/zip4/welcome.jsp
As distributors of investor communications to you and your valued trust clients, we want to make you aware of these useful resources. We hope that you find these resources helpful!
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Trust Department Policy Manual
One of the products the Iowa Trust Association has available is a Trust Department Policy Manual. The manual is a source of guidelines and approaches to basic functions of a trust departments. Broad in nature it is suitable for any bank needing a policy guidelines for their trust department. The ITA Trust Department Policy Manual has been reviewed and recommended by regulators and a valuable reference tool. Below is the policy manual table on contents as a sample of what is included. The manual is available from the ITA by calling 800-800-2353 or e-mailing ITA's Darcy Burnett. The cost is $499 for members and $625 for nonmembers.
Business Development
Advertisements
Products & Services
Profitability, Fee Schedule & Statements
Operations and Administration
Trust Department and Personnel
Trust Officer's Duties
Trust Officer's Powers
Code of Ethical Conduct
Conflicts of Interest & Self-Dealing
Voting of Own Holding Company Stock
Confidentiality of Reports & Records
Safeguarding Assets in the Residence of a Decedent
Administration of Accounts
Investments
Termination of Account
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ITA Newsletter Subscription
If this message was forwarded to you and you would like to receive the ITA Newsletter, click here to subscribe. iba_ednews_subscribe@iowabankers.com
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