In January, the New York State Legislature passed its version of the "prudent-investor rule," which gives fiduciaries more leeway in managing money for their beneficiaries.
The measure is expected to embolden banks' in selling investment services in the state.
Recently, William D. Zabel and Kim E. Baptiste - two trust and estate planning lawyers with Schulte Roth & Zabel, a New York law firm - took time to discuss the new law as well as trends they see in the area of servicing high net worth clients.
Mr. Zabel, who is considered one of New York's finest estate lawyers, counts billionaire investor George Soros and many top banks among his clients.
Q.: Have banks been as aggressive as they should be in targeting high- net-worth and private banking business?
ZABEL: I really can't answer the question about the aggressiveness of banks' marketing efforts. I think they're very diligently trying. They have an incredible market, and they should take advantage of it. It's been estimated that about $6 trillion to $10 trillion is going to pass down from the older generation to the younger generation in the next quarter of the century. And much of those trillions will have to be handled by fiduciaries through estates and trust. Banks have a market of an unprecedented size, and they ought to take advantage of it.
BAPTISTE: Outside of making loans, banks traditionally operated as trust and estate administrators. They are becoming much more sophisticated now. Banks are now making available to high-net-worth individuals a lot of the services that were before available only to their investment banking clients, such as equity swaps and derivatives. And that's going to be a key, now that this prudent-investor rule has passed.
Q.: Can you talk a little about the new law - the prudent-investor rule?
ZABEL: Let's look at the difference between the new rule and the one before it. In New York the old rule was called the prudent-man rule, where every investment was judged on its own merit. You could have 10 investments and if all but one were profitable, the investing fiduciary - the bank - could be liable to a beneficiary for having made that mistake.
The new prudent-investor rule judges the total portfolio performance. The rule looks at whether the investing fiduciary followed the correct procedures, such as judging risk, taking into account inflation, diversifying the assets, balancing the needs of the beneficiaries' income. And if you do all those things, you're probably going to be free from liability, whether the overall account goes up or down.
Banks are particularly well suited to carry out the new role, because that's generally how they operate anyway: They take each client's portfolio and they discuss it with him and analyze it in terms of each of these factors.
Q.: Why was this passed now?
BAPTISTE: It's more of a modern portfolio approach to investing, seeking to bring the investment rules governing trusts and estates into line with what's going on in the investment community. Before, fiduciaries could be unfairly punished for making one bad decision - whereas with the new law, it makes a lot more sense to take a total portfolio approach.
Q.: In what ways is this viewed as a boon to banks?
ZABEL: More and more people are seriously considering using banks as executors and trustees instead of individuals, because banks are seen as more financially responsible and able to protect you if investments go haywire, whereas individuals don't have the wherewithal.
Take the case of Pamela Harriman, the current U.S. ambassador to France. She named three individual trustees, and they kept investing in this Playboy hotel in New Jersey and lost all that money, particularly by borrowing $18 million from Clark Clifford's bank.
If a bank had been a co-trustee with Clifford and the other trustees, it would never have allowed that.
I think that with all this money being passed down in the next 20 years, there is going to be more trust, more and more estates. More and more people who used to have this view that banks are very stodgy, are coming around to the different view: that banks are safer, more reliable, and don't have conflicts of interest - but have the financial wherewithal to really protect you.