would be kept, one for each of the general trust funds. Only these four general records would need to be watched to determine the broad investment policies of the corporate fiduciary Each of the individual trusts would consist of a record showing how it has been distributed among the four general funds and the detail of handling the problems relating to particular trust funds is divorced from the problem of general investment policy. One group of officials particularly fitted will handle the general investment of funds-another group of officials more suited to the other task would take care of the requirements of particular individual trust funds. Indeed, this may be the solution to the problem of expansion outlined in the preceding chapter. It is a method of large-scale production reasonably applied to personal trust business.

It is conceivable, if the corporate fiduciary does not devise some plan to meet this need for purchasing power accountability in preference to dollar accountability, that the investment trust as a new and separate institution will become a menacing competitor of the corporate fiduciary in the field of personal trust service.

Finally, there is the objection that under the method of accounting for trust funds on a purchasing power basis rather than on a dollar basis it would be difficult to determine what part of the fund belongs to income and what part belongs to principal. Theoretically the trustee must be impartial as between the beneficiary and the remainderman. The answer to this objection is that it is not a difficulty created by the new plan the same difficulty exists now and the corporate fiduciary has not yet solved it. The question as to amortization of premium and accumulation of discount where bonds are purchased above or below par respectively creates precisely the same problem. The most general practice by corporate fiduciaries now is to amortize the premium where bonds are purchased above par, thus properly safeguarding the dollar principal; but when it comes to the accumulation of discount few of the corporate fiduciaries do it and there are practical difficulties in the way of doing so.1 This one-sided policy is sanctioned by the

1 Symposium, "Practical Questions Involved in Amortization of Premium and Accumulation of Discounts on Trust Investments," Trust Companies, Vol. 36 (March, 1923), pp. 302-5.

courts, but obviously does not solve the problem. Where bonds are bought at a discount and the discount is not accumulated the remainderman is receiving, at the expense of the life beneficiary, more than he is justly entitled to receive.1

Fundamentally, the difficulties in the way of attaining a perfectly just distribution between the life tenant and the remainderman arise from the fact that the general rate of capitalization fluctuates over a period of time in more or less uneven cycles. The market price of a bond is a function of the general capitalization rate, varying inversely with it—as the rate rises the price of bonds declines, ceteris paribus, and vice versa. Thus a 6% bond bought at a premium when the general capitalization rate is 5% will decline in value below par if the general capitalization rate increases to 62%. On the other hand, a 6% bond bought at a premium when the market rate is 5% may increase in value to a still higher premium when the market rate declines to 42%; and it may happen that the trust terminates at such a time. The only case, therefore, where the careful amortization of premium or accumulation of discount brings about the desired impartiality of treatment of life beneficiary and remainderman is where the termination of the trust corresponds with the maturity dates of the bonds or where the market rate remains stable throughout the period. Now the exact date of termination of most trusts is unpredictable, and even where it is known the policy of buying only bonds with that definite maturity date or thereabout would very seriously limit the field of choice for the investment of the trust funds. He may not be able to wait for the appearance of such bonds in the market. The trustee is unable to choose the time when he will make an investment. He must buy when he has the funds, because the beneficiary needs the income and the courts will not justify the retention of uninvested cash for any great length of time even to obtain a better market; that of course would savor of speculation. He must sell when the trust terminates (or deliver in kind at the market value) whether the general average of prices is high or low. No matter what the investments consist of, therefore, the estate may show an unavoid1 See articles by Frederick Vierling on amortization of premiums and accumulation of discounts, Bibliography, infra, pp. 560-2.

able loss at the end.1 Some trust companies solve the problem by diversifying investment between premium bonds and discount bonds, not attempting to amortize premiums or accumulate discounts.2 This is an admission that the equable treatment of life beneficiary and remainderman cannot be reduced to an exact scientific method, which in the light of the difficulties is probably the most scientific method after all. The following quotation takes a similar view of the situation:

3

If the trustee, then, finds a discount bond, which, in the exercise of his discretion and within the limits of his powers, he believes to be the best bond available from the standpoint of safety and income on a stock rather than a bond basis, he is justified in buying that bond, notwithstanding the possibility or probability of an eventual increase of the corpus of the trust if he should thereafter sell the bond at a profit or collect the face value of it at maturity. . . . If he should attempt to draw the line too fine as between the life tenant and the remainderman, there are many other elements which might have to be taken into consideration, such as the relative value of the dollar at different periods, for one.

Under a régime where purchasing power becomes the unit of accountability for trust funds rather than dollars the premium or discount of bonds becomes of minor significance, but a similar problem is presented in its place. When the general price level rises a proper diversification of investment between stocks and bonds will result in an increasing dollar value of the investment fund, and if all corporations distribute all their earnings as dividends the income on the fund would increase in about the same proportion, or somewhat more. Corporations do not distribute all their earnings, however, and so part of the increase in the principal of the fund would be due to saved earnings and

1 Babcock, J. N., "Income with Safety-Duty of Trustees in Investing Trust Funds," Trust Companies, Vol. 40 (June, 1925), pp. 727–32.

2 A. V. Morton in "Practical Questions Involved in Amortization of Premiums and Accumulation of Discounts on Trust Investments," Trust Companies, Vol. 36 (Mar., 1923), pp. 301-5.

3 Babcock, J. N., "Impracticability of Amortization of Premiums and Accumulation of Discounts on Trust Investments," Trust Companies, Vol. 36 (April, 1923), p. 495.

would properly belong to the life beneficiary. It is no more difficult to arrive theoretically at the proper division between life beneficiary and remainderman than before; but as in the case of amortization of premiums and accumulation of discounts the difficulties arise when the attempt is made to put the theory strictly into practice. Of course this does not mean that the theory is unsound in either case.

There are two possible solutions to the difficulty. The first is to have a statement in the trust agreement which definitely covers the issue. The other possible solution is to make use of a cost of living index as a measure of the change in the purchasing power of the dollar and then

1.-Increase or decrease the dollar income of the life beneficiary in accordance with the cost of living index-if cost of living rises 10%, distribute a 10% larger income to the life beneficiary.

2. Increase or decrease the dollar value of the principal according to the same measure.

3. If there is still left a margin of increase or decrease, to distribute it proportionately between the life beneficiary and the remainderman.

This would no doubt be a nearer approximation to equability as between life beneficiary and remainderman than is now attained.

Of course, to the extent that the fund does not shrink in a period of falling general price level due to a large percentage being held in bonds, the income of the life beneficiary and the principal will not suffer a decrease. However, if it is feared that in periods of rising purchasing power of the dollar the value of the trust funds and the income would decline by a relatively greater amount than the cost of living, it might be adopted as a policy to set up reserves in the general investment funds during periods of rising price level when the value of the fund would always increase more rapidly than the rise in the cost of living due to the growth of business and prosperity of such periods.

CHAPTER XVIII

SELLING CORPORATE FIDUCIARY SERVICES

The questionnaire data to be presented in this chapter on the methods of advertising fiduciary services is largely selfexplanatory and requires little elaboration. The general object of the questions which are discussed was to obtain:

1.—A summary view of the extent to which the investing public has a knowledge of and approves of corporate fiduciaries;

2. What is needed to improve that knowledge and increase approval; and

3.-What forms of advertising have been found most successful in the judgment of trust company officials.

The results of the questions will be presented as briefly as possible and if conclusions are forthcoming they will be left until the end of the chapter.

Individual Investors' Knowledge and Approval of Corporate Fiduciary Services. One of the questions on the personal investment experience and opinions questionnaire was as follows:

Do you recall the substance or name of any financial advertising pamphlets, such as those put out by banks and trust companies? ... If so, please mention one or two which impressed you favorably or unfavorably. . . .

...

Fifteen out of 61 replies stated that some such pamphlet was remembered favorably, while three remembered some favorably-43 answering that they did not recall any in particular. Following are some of the comments made some favorably and others unfavorably:

Trust company pamphlet unfavorably impressed because it told all the awful things that might happen.

Seldom read them.

I recall such as those of Strauss & Company.