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Here's How Not To Create A Trust Fund Baby

Benjamin Zhang
paris and nikki hilton

REUTERS/Fred Prouser

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Here's One Way To Make Sure You Don't Create A Trust Fund Baby (WealthManagement.com)

The topic of trust fund babies is a constant source of debate amongst trusts and estate planning professionals, writes Patricia Angus, founder and CEO of philanthropy and family governance consulting firm Angus Advisory Group, LLC.  

Citing research from Columbia Business School Professor Sheena Iyengar, Angus writes that choice or "the ability to exercise control over ourselves and our environment," is "inestimably powerful it is in our lives." Angus believes that "the way in which trusts limit choice present a real risk of harming beneficiaries on emotional and physiological levels."

"This may not be the only cause of the [trust fund baby] problem, but it certainly sheds light on one of the reasons it seems to occur with such frequency.  Too often, trust beneficiaries have little choice over some of the most fundamental aspects of their lives.  One can argue that they shouldn’t be ungrateful for the gifts they’ve received.  But that misses the essential reality that trusts take away choice from the people they’re intended to help." Angus argues that creating choice or even some semblance of choice may help ameliorate the problem.

The Riskiest Thing Bond Investors Are Doing Right Now (Business Insider)

With an increasing number of Federal Open Market Committee member willing to raise rates sooner, Business Insider's Mamta Badkar spoke with JP Morgan's Meg McClellan about "the worst case scenarios for the bond market and the riskiest thing bond investors are doing right now."

McClellan cautioned that the industry's "dramatic reach for yield" could be calamitous. " What I don't like to see is for people to reach for yield and think they've got diversification, because they've got high yield munis, because they own high yield credit, because they own high yield preferreds, because they're all going to act a lot like equities," added McClellan.

In addition McClellan believes that it is dangerous for investors to have short time horizon in a low rate and low interest rate risk environment.  "You can't have a short time horizon and you can't be spooked out of the market during times like that, of the things you have conviction in," McClellan told Business Insider.

The European Central Bank's Latest Move To Spur Lending Won't Have A Major Effec t (Vanguard)

David Glocke, Principal at Vanguard Fixed Income Group, says that the ECB's recent move to lower deposit rates to negative 10 basis points is, "trying to encourage banks to go ahead and lend more money." However, "it may be more symbolic than anything else as far as its actual benefit to the overall marketplace," said Glocke. "So we're not expecting a major change to come out of it."  Sarah Hammer, from Vanguard Investment's Strategy Group, advised investors to, "maintain discipline," and "to try to tune out the noise as much as possible."

When asked about the monetary risks that threatened the European Economy in 2011, Glocke says that, " those risks have started to diminish quite a bit." But added that countries like "Greece, Italy, Ireland, Portugal, and Spain are still at risk for default."

Here's Why Return Of Capital On CEFs Is More Art Than Science (Morningstar)

The return of capital on closed-end funds is a controversial topic for investors. Some abhor it, while others see it as a logical move in some instances. Morningstar's closed-end fund strategist Cara Esser writes that, "the truth is somewhere in the middle." 

"It is important to understand why a fund is returning capital as part of a distribution payment," says Esser. " Many fund families believe that investors prefer smooth, predictable distribution payments, meaning the same percentage of net asset value or the same dollar amount each payment period. Because fund firms generally set distribution policies before knowing how much a fund will actually earn in a given period, they make estimates based on a number of criteria, including market forecasts and the fund's underlying strategy."

However, "n ot knowing whether the market was going south for a long time or if this was a short-term blip, many funds resorted to return of capital to make up the shortfall.  And this is where return of capital gets sticky."

"A rule of thumb for CEF's  is to look at the fund’s net asset value over the period of distribution," added Esser. " If a fund’s net asset value rose by more than the amount of the return of capital, the fund is likely relying on unrealized gains to make those payments. In general, this is not bad. Forcing a manager to sell holdings simply to meet distribution payments-even if they believe the asset prices had more room to rise could hurt long-term shareholders."

"On the other side of that coin, if a fund's net asset value fell by more than the amount of the distribution, the fund has no potential gains to back this up." 

Advisors Can Be A Great Resource For Socially Responsible Investors (The Wall Street Journal) 

Although it's wonderful that socially responsible investments (SRI) have become a way to support and encourage responsible corporate behavior, the selection of SRIs have become more subtle and nuanced over the years, writes Dave McCabe, president of Eaton Vance Investment Counsel and Eaton Vance Trust Company in Boston. 

McCabe writes, "a s investment managers continue developing metrics that allow us to measure and compare a company's social impact and value, the more power we have as advisers to help clients make informed and sophisticated decisions about where they invest their money." McCabe believes that clearer and more detailed communication between advisor and client allows the pair to create more defined criteria for investments. 

Even better, "a s advisers, you don't need a huge budget to provide clients with this sophisticated approach to socially responsible fund selection. There are a number of nonprofit organizations that provide a wealth of information on these topics. "



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