When legislation is helpful

In this space on Thursday, we discussed the morality of money, and made reference to the Uniform Prudent Investor Act. Below, you will find more detailed information about this act and my thoughts on the act.

Uniform Prudent Investor Act
(Summary of basic provisions enacted by many states)

A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.

A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall strategy having risk and return objectives reasonably suited to the trust.

Among circumstances that a trustee shall consider in investing and managing trust assets are such of the following as are relevant to the trust or its beneficiaries:

• General economic conditions,
• The possible effect of inflation or deflation,
• The expected tax consequences of investment decisions or strategies,
• The role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property,
• The expected total return from income and the appreciation of capital,
• Other resources of the beneficiaries,
• Need for liquidity, regularity of income, and preservation of appreciation of capital, and
• An asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

A trustee shall make reasonable effort to verify facts relevant to the investment and management of trust assets.

A trustee may invest in any kind of property or type of investment consistent with the standards of this Act.

A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has the duty to use those special skills or expertise.

My comments

This Act has been adopted by most states, and is the legal rule for fiduciary investing. In simple terms, for trusts or situations where investments are being managed on another's behalf, these are the rules. It's important to note that these rules come into play when someone alleges mismanagement. Then, the trustee or other responsible party, must defend their actions against this measure. Like it or not, these are the legal rules.

Personally, I love these laws. The national group that created model legislation (which was them adopted by the different states) used Modern Portfolio science as the basis. This Nobel Prize-winning body of knowledge recognizes the value of broad diversification and asset allocation as the building blocks for long-term investment success. The legal test under these rules isn't absolute investment performance, but whether or not the trustee did the right things. Did they build a portfolio appropriate for the age and circumstance of the beneficiary? How will inflation affect the future buying power of investments? Did the trustee choose investment options that had reasonable expenses and fees? Various other factors are explained in the Act.

The truth is that nobody knows what the short-term future holds, so the best way to prosper with investments is to engage in solid, long-term, diversified, and thoughtful behavior. The Act mandates that approach, and measures success or failure by these rules. Actually, though the Act deals with fiduciary duties, most individuals will prosper under these same rules. It's how we manage our client accounts.

How the stimulus package affects you

Medical Economics magazine, one of the top publications for physicians, named the Family Investment Center to its list of top financial planners for doctors. This is at least in part because of our fee-only structure that is more customer-friendly, and doesn't bias us in favor of any one company or product. Dan was recently asked to write a column for the magazine explaining how the stimulus package affects individuals, his second column for the magazine this year. We've excerpted part of that column below, and linked to the full article on the Medical Economics home page if you'd like to read the entire article. It applies far beyond physicians. Read on below.

When the government starts throwing around billions of dollars, everyone has the same questions: What’s in it for me? How will it affect my family? How do I get some of that fiscal stimulation in my life?

Some provisions of the American Recovery and Reinvestment Act of 2009, signed by President Barack Obama in February, are still a bit sketchy, but there are things that we already know. And though the middle class has been targeted, there’s some good news here for almost every American. Some of the most notable provisions include:

Tax breaks for family spending. There are tax incentives for sending children to college, buying a first home, buying a new car, or upgrading inefficient heating/cooling at your existing home. Many of these are expenses that families encounter as a matter of everyday life, so taking on those expenses now could put dollars back into your pocket.

You’ll get to deduct state and local sales taxes on a new car (priced up to $49,500) through the end of 2009, and first-time home buyers can get an $8,000 tax credit if they, too, buy in 2009. You’ll have to keep the house for three years, however, or give back the $8,000.

Read on here:
http://tinyurl.com/cxu34p