It is worthy to note that the life insurance companies which originally secured trust powers have, with but few exceptions, given up their life insurance business, and that most of the fidelity insurance and surety business is given over to companies which now make a specialty of such risks. In the same way, many title insurance companies transact a banking and trust business, but tend to confine themselves more and more to title insurance. In other words, the fact is being recognized that the assumption of vast risks contingent on future occurrences is not compatible with the absolute security which is essential in the transaction of legitimate trust business.

It is undoubtedly true that some of the earlier companies which combined the business of fire insurance with the trust business failed to get any trust business; but the combination of life insurance or fidelity insurance and trust business was successful so far as the getting of business is concerned, and still is in the few cases where the trust company undertakes the combination, and chooses to build up an organization for that purpose. Among the replies to the questionnaire sent out in 1925, there were twelve trust companies out of 250 which indicated that they handled a life insurance business. In most cases, no doubt, this meant that they acted as an insurance agent for some large life insurance company. It is quite likely that a good percentage of the smaller trust companies do such an insurance agency business.

1

As indicated by the great importance which is being attached to the insurance trust movement, and also by the widespread use of the "combination life insurance and savings plan," the business of life insurance and the trust business is being drawn together again. It sometimes requires

1

1 The Provident Life Insurance and Trust Company of Philadelphia was not only a very large trust company, but it was one of the largest life insurance companies in the country and only in 1922 did it separate into two companies.

Hyde, Nelson C., "A Successful Combination Life Insurance and Saving Plan," Trust Companies, Vol. 36 (May, 1923), pp. 649–50. Savings accounts are easy to sell but hard to build up, and life insurance which is hard to sell but easy to keep up constitute a happy selling combination. .. "The insurance men say that the Club idea is opening new insurance fields and educating persons who never thought about life insurance before. . . ." Also Clarbrou, Elain, "Successful Operation of Insurance Savings Plan," Trust Companies, Vol. 35 (July, 1922), pp. 55–6.

hair-splitting accuracy to detect differences between business done by life insurance companies and certain types of business done by trust companies in the field of personal trust work. Trust companies feel that when an insurance company writes a policy involving the payment of annuities after the death of the insured the insurance company is invading the special field of the trust company. On the other hand, life insurance companies have been doing this for generations, although it has only become of marked importance within the present generation (as trust companies became active competitors for that type of business by means of trusts created by will, etc.). The difference between having an insurance company pay the insurance over a period of years to the beneficiary and having the insurance company pay the insurance over to a trust company to be administered by the trust company is one of degree and not of kind. These services, from the point of view of the layman, are apt to be considered one and the same thing. The real distinction is twofold, however:

1. The legal distinction,-the insurance policy is a contract, whereas the trust agreement is not.

2. The trust is more flexible, both with respect to the use of the principal and with respect to investment, and is likely to yield a higher return on the principal; although out of this, of course, must come the trustee's fee.

So far as the results to the layman are concerned, the contracts made by life insurance companies for the payment of annuities, reversions, etc., are strikingly similar to the services offered by trust companies in connection with the personal trust services under the title of "living trusts," and the insurance companies have the advantage in selling their services because the contract is simpler and more readily explainable (superficially at least) to the average person.

The fundamental distinction between the two types of institutions-life insurance companies and trust companiesis not so much that the one undertakes greater risks; but it

1 Editorial, "Insurance Companies Performing Trust Functions," Trust Companies, Vol. 43 (August, 1926), p. 148.

is that the one is the large-scale producer taking that part of the business which is best adapted to large-scale handling; while the other is the small-scale producer taking that part of the business not adaptable to large-scale handling. On the marginal business they meet as competitors. The life insurance company has an organization built up for the handling of a great volume of business and it is the nature of all insurance business that a large enough volume is required in order to permit to operate the law of averages so that the gains will offset the losses. In connection with its life insurance. business it is able to make contracts for annuities and other types of contractual payments (which is really a form of trust service) also on a large scale. The life insurance company performs these "trust services" at a low cost because it does the business on a large scale and pays little attention to the problems of individual cases once the contract is made. By reason of the fact that the business is handled by contract rather than by a trust agreement introduces a uniformity which makes this possible. It also takes away the element of flexibility. Trust companies, on the other hand, are handling that type of business where more personal care is required. If the trust company tries to expand too greatly its organization becomes unwieldy for the performance of the service which it is primarily expected to perform. Each trust fund must be supervised by an experienced trust officer and a great deal of personal attention is required. That is what the creator of the trust has desired and it was that desire which brought him to the trust company for the service. By the very nature of its service, then, the trust company so far as its personal trust work is concerned must operate on a small scale so far as the number of trust funds is concerned. It is an enterprise which is economically adapted to small-sized organizations, whereas the insurance business of all types is economically adapted to large volume of production. It is this fundamental distinction between the two types of enterprise which has led to the formation of life insurance companies as independent institutions from the trust companies with which they began in this country. A totally different type of organization is required for each, and so independent companies evolved for each type of business.

The distinction between the two types of business with respect to risk is only secondary.

Another type of insurance service offered by some trust companies is that of guaranteeing mortgages or mortgage bond issues. There are only a few trust companies which have the power to do this type of business and even where the trust company has the power it exercises it but rarely. Of the 250 active trust companies replying to the questionnaire of 1925, only three indicated that they performed this service. Such services are useful where an enterprise is being reorganized and in order to carry through the new financing, the trust company guarantees the bond issue. Also it is beneficial where an enterprise has excellent credit so far as it is known, but due to its small size its securities are not widely known and for that reason alone may have to sell at a price somewhat lower than the credit position of the business would warrant. The guaranty of a well-known trust company will bring about the necessary broadening of the market and thereby improve the price of the issue. For the same reason, bond issues of foreign countries or for enterprises located at a great distance from the financial centers will be benefited by this guarantee service.

BANKING AND OTHER FINANCIAL SERVICES PERFORMED BY TRUST COMPANIES

Finally there is a group of services performed by trust companies which are not fiduciary, or at least their fiduciary character is overshadowed by other more predominant characteristics. These are the banking and other financial services, including (1) bond trading services, (2) savings bank services, and (3) commercial banking services. From the point of view of this treatise, these are relatively unimportant because the subject being treated here is the fiduciary functions of the trust company. But from the point of view of the extent of the business of trust companies, the banking services constitute just as important a part of the activities of the institutions known as trust companies as do the fiduciary services. Indeed, as has been indicated elsewhere many institutions called trust companies are merely commercial banks which have been misnamed "trust company." From the

point of view of the profits of the individual institution, moreover, the banking business is the more important in practically every case, even including those trust companies which are known predominantly in the field of fiduciary work. Practically every trust company has a commercial banking department (except in one or two states which do not allow them to do so), and of the 250 active trust companies reporting in the 1925 questionnaire, nearly 150 of them indicated that they had a savings department. A large number of trust companies have bond departments or investment departments as they are sometimes called.

The Bond Trading Services. The bond department of the = trust company has already been under consideration in connection with the agency service performed when a trust company acts as a factor in the marketing of securities, i.e., in the underwriting or syndicate operations which usually are performed by the bond department. While such is an agency function, and was therefore described in the chapter on agencies, it was pointed out that the service is largely in the hands of specially organized institutions and is called "investment banking." Other agency services are performed by the bond departments of trust companies in the giving of investment advice, and in acting as agent for the investment of customer's funds. But it is an anomalous situation because the bond department is primarily a "trader." All this has been discussed before. The nonfiduciary functions performed by the bond department are its services as an alert and active bond trader.2 As such they are competing with each other and customers, as well as with other buyers and sellers of bonds. Their competition with each other to buy bonds as cheaply as possible at the same time maintains the market for the bonds and their competition fixes the price. Each of them 1 Trust Company Questionnaire, op. cit.

2 Westerfield, Ray B., Banking Principles and Practice, pp. 1021–39. Also Kirkbride, Sterrett and Willis, The Modern Trust Company, pp. 9, 137, 286-8, 294. Cf. Martin, Wm. McC., "Modern Banking and Trust Company Methods," Banking Law Journal, Vol. 35, pp. 363, 427; and Blunt, John E., "The Bond Department of a Trust Company,” Trust Companies, Vol. 7 (Sept., 1908), pp. 530-2.