This practice of the trust company is seen to be limited to a very few of them; and this is fortunate, for it is open to very serious objections. The suspicion that such a practice is followed more generally is the foundation for one of the most convincing of the indictments of corporate fiduciaries by their critics: "These trust companies constantly use the funds of estates, assigneeships and receiverships in their own private business and never account for the profits. They escape (from the law) under the plea that they are paying interest on the funds of the estate, and therefore have the right to use them in their business; . . . and this very money on which they pay this low rate of interest, they, during the period they are paying it, usually loan out at a higher rate of interest, which they convert into their own coffers, thereby making a profit out of the funds by loaning them, a thing a court would not tolerate for an instant in an individual." 1 The legal objection to the practice, of course, is that when the trust company deposits trust funds in its own savings department and pays the regular savings deposit rate to the trust fund, it is using trust funds for its own profit. This is illegal when practiced by individuals as trustees (i. e., the using of the trust property for the trustee's own profit) and it is difficult to see why it should not be considered illegal for corporate fiduciaries as well. The trust company thus makes a fee for the handling of the trust fund and also reaps a profit on the investment of the funds through its savings department, presumably at a higher rate than that paid to depositors. The objection to this practice from the point of view of the real nature of the trust company's function as a trustee is even more important because it applies with equal force in those states where savings deposits are made legal for trust funds by special acts. It is clear that the individual himself could very easily perform the act of depositing his funds in the savings account of the bank or trust company and the trust company is not actually contributing any real service to the donor or the beneficiary by doing that for him, other than the service per 1 Montrose, A. K., "Some Defects in Trust Companies," Virginia Law Register, Vol. 16 (1911), pp. 641–7; and Cf. by the same author, "Defects in Trust Companies," Central Law Journal, Vol. 71, pp. 370-3. formed by a savings bank. Furthermore, by the very nature of a trust, the fiduciary is bound to seek, in the supervision of the trust property, to earn profits and maintain the corpus of the trust for the sole benefit of the cestui que trust. This is fundamentally the raison d'être of the trust, and all of the publicity of corporate fiduciaries is calculated to propagate that idea of the trust in the minds of the public. Consequently any action on the part of corporate fiduciaries which is not in accord with this fundamental principle is a departure from the pure concept of the trust, and tends to undermine public confidence in corporate fiduciaries in general. The institutionalizing of financial services is of great benefit from the point of view of the social and economic development of the community as a whole, as has been demonstrated before. This institutionalization of services results in the combination of two or more services into a single one-thus are evolved new and useful economic and social functions and combinations of functions. However, in some cases the combination or mixture of services attempts to coördinate two primary functions which are not homogeneous with each other, and in this case the combination of trust services with savings bank services is one quite incompatible. The fact that the two are competitive within a certain field probably leads to the tendency to combine them. Such combinations suggest the primary weakness in institutionalized financial service. In so far as such institutions combine under one organization a series of financial services it enables the customer to avail himself of a great variety of services of this kind and is thus a great convenience to the public. Many of the services complement or supplement each other, but in some cases the services thus brought together are fundamentally antithetical to each other. One of the basic problems, then, in the formation of the modern financial institution is to iron out the differences between incompatible services which it is desired to combine, or to studiously avoid making combinations of services which are thus incompatible with each other. This is a case where. the latter method should be followed. It may be objected that it is about the only way in which small trust funds can be profitably handled by corporate fiduciaries. This objection is met by the use of the investment trust device as later described. A similar problem is that of combining bond trading services with trust services. Average Diversification of Trust Fund Investments by Corporate Fiduciaries. Table IV is presented to show the average way in which trust fund investments are diversified by corporate fiduciaries, taken in the aggregate and including trust companies and national banks: TABLE IV AVERAGE DIVERSIFICATION IN INVESTMENT BY NATIONAL BANKS AND TRUST COMPANIES *The actual average in each case is weighted by the number of corporate fiduciaries reporting-thus in row 1 of Table II the actual average for government bonds is 31.3%, but the weighted average is as above, 17.3%. The data of this table may be summarized and presented in graphic form to show the relative amount of investment in bonds as compared to stocks. Government bonds, municipal bonds, railroad bonds, industrial bonds and foreign bonds are combined to give the total relative investment in bonds; and railroad stock, industrial stock, bank and insurance stock and investment trust certificates are added together to give the total relative investment in stocks. This gives total relative investment in bonds (exclusive of real estate bonds) of 34.1% in the case of legal trust funds and 31.5% in the case of discretionary trust funds. The total relative investment in stocks is 4.3% in the case of legal trust funds and 5.8% in the case of discretionary trust funds. GRAPH I AVERAGE DIVERSIFICATION IN INVESTMENT BY CORPORATE FIDUCIARIES Legal trust funds. Diversification of Trust Fund Investments Practiced by Certain Corporate Fiduciaries. One large trust company in Ohio reported the diversification of "one big trust representative of the department." This is presented below in Graph II. GRAPH II DIVERSIFICATION IN INVESTMENT OF ONE LARGE TRUST REPRESENTATIVE OF THE TRUST DEPARTMENT OF A LARGE OHIO TRUST COMPANY One of the oldest and largest of the corporate fiduciaries of the United States reported the actual average diversification of all of its trust funds. Table V presents the actual average distribution of investment as practiced by this venerable institution, with comments appended: TABLE V DIVERSIFICATION OF INVESTMENT AS PRACTICED BY ONE OF THE LARGEST AND OLDEST CORPORATE FIDUCIARIES OF THE UNITED STATES (*) Large trusts whose beneficiaries have large incomes have a much higher percentage of municipals, but where tax return does not enter practically none are held. (†) Refers to the particular time that the return was filled out. (1) About 50% of these are guaranteed. Graph III gives further illustration of the diversification as practiced by this company: GRAPH III DIVERSIFICATION OF INVESTMENT AS PRACTICED BY ONE OF THE OLDEST AND LARGEST CORPORATE FIDUCIARIES OF THE UNITED STATES |