Review and Outlook
October 23, 2009
To my Clients, Friends & Observers:
Recently President Obama proposed sending $250 checks to 50 million Americans who will not be receiving Social Security Cost Of Living Adjustments (COLA’s) this year. Last year the Consumer Price Index (CPI) declined so there will be no adjustment increase. There will be no decrease either. With trillion dollar deficits an additional $12 ½ billion is hardly noticed.
It is an unfortunate reminder that for many senior citizens Social Security is not a supplemental safety net – as it was originally intended – but a life line. COLA’s were not created by Congress until 1975. The CPI increased 52% from 1966 to 1974. This, combined with a devaluing dollar, destroyed a retiree’s ability to sustain the same standard of living from a fixed income. In 1973 it took $120 to buy an ounce of gold. By 1975 it took $200. It took over $700 in 1979. It takes $1,060 today.
CPI inflation from 1974 through 1980 was 82%. If you retired with a $10,000 annual pension in 1973, it could only buy $1,800 worth of goods in 1981. You couldn’t call your former employer to ask for an increase in your pension. But you could call your congressman.
Inflation, rising prices, would be harmless if the value of the dollar rose at the same rate; purchasing power would remain the same. But the value of the dollar is falling, and for the same reasons today as in the 1970’s: the “Guns and Butter Economy.” The federal government is pursuing an off-budget war while vastly expanding the social welfare agenda. For years the Federal Reserve has been creating too much currency, money not supported by hard assets. And more recently, to prevent a total economic collapse, the Fed has had to provide liquidity from the public sector that has dried up in the private sector. So it’s déjà vu all over again but worse. America in 2009 has a “Guns and Butter and Banks” economy.
If you ever considered borrowing on the equity in your house and then saw your equity evaporate, and if you consider that every deficient federal expenditure is funded with borrowed money, you may quickly conclude that this cannot go on forever. Money is not being given the respect it deserves. It is being abused. The purchasing power of another generation of retirees is about to be wiped out.
Don’t be one of them. Call for an appointment to review your portfolio and my investment management system. It may protect you from outliving your income, from having to rely on Social Security.
The trouble with trusts
Not long ago, after a round of golf at beautiful Mountain Lake in Florida, I sat at lunch with a gentleman who directed the legal compliance of a large trust company in New England. When conversation turned to business I took the opportunity to get his inside view of trust company operations. It was illuminating
Trust companies have grown refractory over the years for the clients they are supposed to serve. They are increasingly reluctant to enroll any clients with less than a million dollars of investable funds. Service is slow and minimal. What used to be a personal, familiar and caring relationship between trustee and beneficiary has too often evolved into a cold, impersonal, calculated exercise in time and money management. Should the settlor desire or require any changes, including a change of corporate trustee, it will likely require litigation at the trust’s expense. The process can take years as it will only move at the pace of the trust company and the court system. And all this is billable time.
The common experience is that fees are high and investment performance is poor, leaving the beneficiary with dwindling assets and no recourse without spending trust funds for lawyers.
Trust companies, my friend explained, are dreadfully unprofitable operations. They are people- intensive, high contact environments. Anything other than regular fixed disbursement of funds requires the special handling of an officer who is intimately knowledgeable of the trust. There are regular reviews of each trust by a committee of officers. Any changes require the committee’s consensus. On top of the day to day mechanics there are layers of legal compliance reporting and documentation which are often - and necessarily - redundant. These records and documents require frequent handling. Bottom line, trust company operations are sticky, cumbersome and expensive. The reason large commercial trust companies treat their clients like numbers and files and fee-generators is simple: it’s because they have to.
Fortunately, there are better alternatives. If you are presently using or planning a trust and would like to discuss optimal custody for trust assets call me.
Dennis M. O’Connor