| ’ Investment of : Trust Fands Mog - by Trust Companies eee Se oe Spee ME )™% « § y \ Mi ‘clad Investment of Trust Funds by Trust Companies. 4 paper read before the Trust Company Section of the American Bankers Association, August 24, 1898, by Frederick Vierling, Trust Officer of the Mississippi Valley Trust Company, St. Louis COMPLIMENTS OF MISSISSIPPI VALLEY TRUST COMPANY SAINT LOUIS Investment of Trust Funds by Trust Companies. Trust CompaANy has no duties more impor- tant and more exacting than those incident to the proper investment of trust funds. The company stands as an institution which makes a profession of managing estates. It invites the public to believe that it has superior facilities for finding investments, for acquainting itself with the facts underlying them, for judging of their value, for keep- ing constantly advised as to changes that affect them, for maintaining custody of them, for keeping proper records concerning them, and, when occasion requires, for disposing of them. ‘That trust companies have become recognized as the most effective agency in the management of trust funds is attested by their strength and growth in every large city in America, Official records in Pennsylvania show that trust funds in charge of trust companies in Philadelphia alone exceed in value $390,000, 000. REQUIREMENTS OF LAW. The law relating to the investment of trust funds is set out elaborately in the various text books. They call for the exercise of intelligence, diligence, pru- dence and good faith. It may be interesting to re-state some of the leading general principles, as they are the articles of faith of every conscientious officer of a trust company. The first duty of the company is to reduce the property of the trust to possession ; after that, to examine the security of investments received. It must take such steps as a prudent person would in his own behalf. ‘The trustee should promptly invest trust funds:as received, so as to earn a reasonable income. Where investments are made upon real estate security the trustee must exercise high diligence in ascertain- ing the value, situation, title, condition and produc- tiveness of the security. AS -TO TRUSTEES The trustee gets its authority to make invest- ments either from the general laws governing trustees, from the instrument creating the trust, or, from the statute. If the instrument indicates the time, man- ner and kind of investments, the trustee must strictly follow the directions given. When the directions are so general that they do not point out any particular classes of investments, then the trustee must invest in securities that will be approved by courts. If a mis- take is made by’ reason of' ignorance of ‘the law it is not excused, and if the mistake is made, even in good faith, by reason of wrong information or otherwise, the burden is upon the trustee to show diligence and prudence. ‘The trustee has no right to invest in speculative securities. If it makes an investment not authorized it must account to the estate for all profit arising therefrom and in the event of loss must bear the loss itself. AS TO GUARDIANS, ETC The foregoing general rules are also applicable where a trust company acts as guardian or curator of the estate of a minor or conservator of the estate of a person of unsound mind; with the exception, however, that the trust company must in most States make investments that are indicated by statutes, which the law as to guardians rather closely restricts, and the company has not the same extensive powers and discretion. In many States the guardian has no right to invest without order of court, and in most States investments must be approved by the courts, even where authorized to be made without order. ‘There is little, if any, difference between the laws governing investments by guardians of minors and those govern- ing investments for persons of unsound mind. AS TO EXECUTORS, ETC Guardians and trustees are held to a stricter account in relation to making prompt investments than executors and administrators, for trustees and guard- ians generally take an estate ready to be invested ; whereas executors and administrators take charge of estates of decedents without knowing what the liabili- ties may be or what encumbrances must be lifted, and therefore may not be able to determine promptly what, if any, money will be available for investment. In the course of time the administrator will be in a position to know what money will not shortly be needed for pay- ment of debts, expenses or legacies, and heshould then apply to the court for authority to invest such surplus. In some of the States statutory provisions regarding investments are made, and even in the absence of such provision, it is the duty of an administrator having funds which are payable after the expiration of some considerable time to make them productive by invest- ing on safe security. Administrators should not invest funds in lands, as from the nature of the trust the assets will in time be needed for payment of debts or for distribution, and as land is not as readily converti- ble as loans or bonds it would be bad policy to so tie up the funds in lands that they could not be recalled without delay and loss. CLASSES OF INVESTMENTS PERMITTED. In what class or classes of securities are trustees, guardians and administrators permitted to invest? In many of the States the courts upon application are authorized to direct fiduciaries, but no special classes of investments are pointed out, and in these States it depends largely upon the policies of the courts as to what investments are proper; again, in other States, there are no special statutes providing for applications to courts for advice regarding investments. It has been held that government bonds and real estate securities are the only safe investments recognized by courts, and in those States where no special provisions for investments are made and the courts there have not indicated a different policy, it is well to bear this rule in mind. In some States the law defines what investments may be made by a guardian but does not direct what investments may be made by an adminis- trator or trustee, or vice versa, yet in such case the policy of the legislature as to the class of investments is plain and it will be safe to assume that investments authorized for one class of fiduciaries will be approved when made by another. A rule of universal application as to investments is that trustees are not authorized to invest trust funds on personal security, except in minor instances where the fund is small, when the investment on personal security is permitted by special statute. Lord Kenyon said: ‘‘No rule was better established than that a trustee could not lend on mere personal security, and it ought to be rung in the ears of everyone who acted in the character of trustee.’?’ The power to invest on personal security will be construed strictly and the trustee will not be justified in exceeding the terms of his authority. in trade or speculation or in a manufacturing estab- lishnient. It is also unquestionably clear that a trustee has no power permanently to convert the nature of trust property by laying out the money in the purchase of real estate, except where special authority for so doing is conferred by the instrument of trust or by statute ; and then, the trustee should take the title in trust and not in its own name merely. Even where authorized to lay out trust money in the purchase of real estate, it has no right to go beyond the limits of the State within which such purchase is specially permitted, for if it go to a foreign State it places the property beyond the jurisdiction of the court having control over the trustee. ADVANTAGES OF A TRUST COMPANY. The laws relating to investments of trust funds being the same for the trust company as for the indi- vidual, it is interesting to inquire into the advantages that have led to the great popularity of the corporate agency. ATTRACTS INVESTMENTS It being a matter of public knowledge that the trust company has under its control large amounts of trust funds, has a great aggregate of time and inactive deposits against which it must carry investments, and A trustee has no right to employ trust funds te ee } ee eee has many customers for whom it makes investments, those having investments to offer are naturally attracted to the company. Having a convenient place of busi- ness, usually in the financial center where securities are dealt in, having a staff of officers some one of whom is always accessible and ready for business during busi- ness hours, the company has offered to it large lines of investments from which it can choose. HAS FACILITIES TO INVESTIGATE SECURITIES In all large issues of bonds, one of the purposes of dividing the debt into bonds is to facilitate scattering the bonds among many holders. Recognizing that it is impracticable for each of these small holders to incur the expense of an independent investigation into the regularity of the issue and the character of the secur- ity, itis now the custom for those who issue bonds or those who will have them for sale to have the trust company select some disinterested expert who will investigate and make to it a report that can be used by all investors. In the issue of bonds following, the trust company is usually the trustee and stands in a position where it is its duty to protect the interests of the bondholders. ‘This practice gives the trust com- pany the earliest and most reliable information as to investments, with unsurpassed opportunities for com- paring the merits of the securities and for securing control of the most desirable on the most favorable terms. Representing the bondholders in so many cases, and having the interest and principal of many issues of municipal and other bonds payable at its office, it becomes acquainted with the holders of bonds and from time to time knows where certain securities can be found when it requires investments for its trust funds. Having always a large line of securities among its own investments, it is in position to make speedy 4 investments ; but if the trust company sells its own securities to one of the trusts in its charge, it should remember that it is held to a much stricter accounta- ' bility as to the merits of the security than if it had been bought from some one outside. In effect, the company stands almost as guaranteeing all such securities. : CAN READILY SELL INVESTMENTS. Having in its charge extensive trust investments, from time to time the affairs of some estate require that some of its investments be sold. The trust com- pany is in position to buy them for some other estate and thereby save a brokerage for both estates. AIMS TO INVEST PROMPTLY = With these advantages, the high aim to which a properly managed trust company should work, is to never let a trust fund that ought to be invested go over night without interest. The aggregate of trust funds on hand, invested and uninvested, should be shown in a daily statement, and a statement of the uninvested funds subject to be invested should be daily before the trust officer of the company. If anyone’s funds are to go without interest, let it be the trust company’s, not the trust estate’s. This, of course, does not apply to certain classes of uninvested funds that are not subject to investment ; for example, those soon to be distributed in administrations ; those needed for early payment of debts; those awaiting special investment. HAS ITS INVESTMENTS APPROVED BY INVESTMENT COMMITTEE The company also has exceptional facilities for acquainting itself with the facts underlying securities. It is not only in its relation as trustee and as making investigations through experts that the company has exceptional facilities for becoming informed as to the facts about different securities. Every well managed trust company has all its investments passed on by its board of directors, or an executive or investment com- inittee, which is composed of leading business men who have earned success in their several lines. They are men of affairs, familiar with conditions about them, and to whom all reasonable avenues of investigation are open. It is the business of this board or committee to meet regularly and pass on the investments offered. Its members discuss these investments and have reports on them from officers and others connected with the company. From the varied and frequent dealings in the different and changing classes of securities, this committee becomes acquainted not only with the legal requirements of an investment, but also with the divers elements that affect their value. The members of this committee are not only in position to properly dis- criminate between investments, and reduce the chance of loss toa minimum, but in their daily contact with affairs in the city they get generally the latest informa- tion that will affect the value of any of the securities held by the company. GETS INVESTMENT NEWS PROMPTLY Moreover, tle company being in daily touch with the brokers and bond buyers, and being known to be interested in various investments, there is usually brought to its notice in some way as soon as it becomes known on the street, every matter of investment news. 3onds are often called for redemption before maturity. The trust company usually gets such information regu larly and promptly, but an individual not in investment circles learns of the call perhaps only by accident or not until he is surprised to find that he cannot collect the next coupon. This may be not only a serious inconvenience to those dependent on the income, but an embarrassment to the individual trustee. The same advantages a trust company has in the purchase of investments apply when disposition of the investment is to be made. PROPERLY KEEPS INVESTMENTS. The responsibility of the trustee does not end when the investment is made. The security should have a safe place for its custody, should be properly designated as a trust fund, and should not be mixed with the trustee’s personal assets. The trust company provides a burglar-proof safe in which to keep its trust securities, It has a rigid system of separating every item of trust assets from its general assets and those of each estate from those of every other estate; it ear- marks the different investments so that they will be always readily identified as the assets of a particular trust. It thus affords certain protection against loss to the estate in event the individual affairs of the company should become involved. In such an event it would be necessary merely to go to the trust safe and take out and deliver to the company’s successor as trustee the assets already therein identified as the property of the particular trust. The individual trustee, as a rule, not having charge of enough trust funds to make a business of handling them, may not have separate safes for his own investments and for those of the few trusts in his charge ; he is more likely to keep all securities in his possession together and may not be so careful to properly ear-mark them. In the event of his death, resignation or removal, his legal representatives might find difficulty in determining to which trust the divers securities belonged. ADOPTS SAFE-GUARDS TO PREVENT SECURITIES BEING MISPLACED. The proper keeping of securities being part of the regular business of the company, and not a mere inci- dent to be attended to at odd times, it adopts safe- guards to protect the securities against the chance of being misplaced or lost. The usual method is to require two officers to be present at the opening of the trust safe, to permit securities to be taken there- from only on requisitions serially numbered, a descrip- tion of the desired security being written therein in ink, and to require the custodian of the vauit at the close of each day’s business to check up the requisi- tions for that day and see that the securities are either returned to the vault or that an entry is made on the proper books, showing what disposition has been made of them. ‘These requisitions should be kept in proper series for reference. HAS COMPLETE RECORDS. Besides separating and ear-marking the trust securities, the company keeps registers and books of maturity, thus having a complete record of all assets and insuring the prompt demand for payment of the interest and principal when due. It employs compe- tent men who are familiar with the law of negotiable instruments and who take every precaution to see that what is to be done is done at the right time. 1S EXAMINED PERIODICALLY An added safety to the care of securities is the fact that the company is examined a number of times during the year by a committee appointed by its direc- tors or officers and by State officials. "Thus a proper check .is maintained and all securities periodically aaeey rey examined. his is not done where an individual is trustee. WATCHES FLUCTUATIONS OF INVESTMENTS Securities are necessarily fluctuating in value and the facilities possessed by a trust company for making investments again come into play when considering what should be done to prevent loss. If investments are prudently made and vigilance employed thereafter, no loss should occur to principal or interest. ‘The more experieticed one is as to investments the more he realizes that few of them are absolutely safe. He of inexperience or he that is warped by personal interest readily gives assurances that the investment he offers is ‘‘ gilt-edged.’’ An experienced investment broker recently said to me: ‘‘In my younger days I did not hesitate to recommend to my friends an investment if I believed it to be Al, but now I must confess that when my customers ask my advice I cannot take that positive stand. The investor cannot, without risk of loss, select any kind of security and put it away and go tosleep. The only way to avoid loss is to be always alert and ready to act promptly. ‘ Eternal vigilance ’ is not only the price of liberty, but as well the price of safety in investments.’’ THE IDEAL TRUSTEE. Such are the advantages of a trust company in the investment of trust funds; but these are accentuated when they are held by an institution that possesses the other varied benefits of a corporate agency., As has been well summarized: ‘‘ The ideal executor, admin istrator, guardian, curator, trustee and receiver must be always well and at home; must never run away and never steal ; must have no exemptions ; must have life everlasting ; must be rich and stay rich ; must have no partialities ; must be subject to no political influences ; must make no mistakes; must never forget ; must do what it is told to do first, last and all the time; must keep a complete record of what it does; must make only reasonable charges, and must have the learning, the experience, the discretion, not only of one man, but of a number of the most successful men in the community. SUCH IS THE TRUST COMPANY.”’ Co WUEVGNC TINS ' i _ é 4 i \ 7 7 4 \