APPENDIX A (continued) differential. Annual fees charged by the banks for IPMS range from 3/4 of 1%, with a $160 minimum, of the market value of the securities in the Additions to or withdrawals from IPMS accounts are allowed at any time. The minimum addition is generally $2,000, although one Clearing House bank has set a $1,000 minimum. As of December 31, 1973 the weighted average market value of all IPMS accounts managed by the Clearing House banks was $33, 038 and the total number of portfolios under management was 2, 142. Investment Advisory Services Two Clearing House member banks and one subsidiary of a member bank serve as advisers to publicly held closed end investment companies. Manufacturers Hanover Trust Company advised the Bank Fiduciary Fund of the NYSBA, First National City Bank is adviser to Advance Investors Corporation, and a subsidiary of United States Trust Company of New York is adviser to Excelsior Income Shares, Inc. A bank acting as an investment adviser to a registered investment company. provides services similar to those which banks have traditionally performed as APPENDIX A (Continued) fiduciary, trustee or financial adviser for trust funds, pension funds and other fiduciary accounts. There are nine other publicly held investment companies which, to our knowledge, currently retain banks or bank affiliates as investment advisers. Eight of these nine investment companies are closed end. The ninth, while technically an open end fund under the Investment Company Act because it can redeem shares at any time, has been classified by the Board as a closed end fund for Glass-Steagall Act purposes, since it does not continually offer its shares for sale. These bank advised investment companies have total portfolio assets of less than $750 million, compared with a total of more than $6 billion in portfolio assets held by all closed end investment companies (based on incomplete figures from Weisenberger's Guide to Investment Companies, as of March 31, 1974) and a total of approximately $45 billion in portfolio assets held by all open end investment companies (based on recent ICI figures). Portfolio assets of the investment companies advised by banks thus represent only a small fraction of the total value of investment company assets. Nine of the bank advised investment companies have as their respective objectives the return of high current income, to be achieved primarily through investments in straight debt securities. The remaining two investment companies, Advance Investors and Peachtree Equity Securities (advised by an affiliate of Citizens & Southern), have as their respective objectives long-term appreciation through equity in vestments. APPENDIX A (Continued) The shares of all these companies are publicly held and (except for shares purchased to meet the requirements of Section 14(a)(1) of the Investment Company Act) were sold through initial public offerings underwritten by investment banking institutions wholly independent of the bank adviser. Annual investment advisory fees begin at 1/2% of average net assets with reductions in fee scales related to net assets above specified breakpoints ranging from $50 million to $150 million. Bank advisers to investment companies function similarly to nonbank advisers, except that any selling or promotional role is prohibited as a result of banking laws and regulations. Banks provide advised investment companies with the normal range of investment advisory services generally provided by advisers to closed end companies, including administrative services, record-keeping and similar corporate housekeeping functions. Several bank advised investment companies also retain their adviser or a banking affiliate of the adviser as custodian or agent. Minimum investments on original issue in the shares of bank advised companies range generally from $750 to $1,500, with $1,000 representing the most common minimum. The companies generally state that they will distribute long and short term capital gains, if any, annually to their shareholders. The nine income-oriented companies pay dividends monthly and the two growth-oriented companies pay dividends quarterly. All these companies offer dividend reinvestment plans. These characteristics are not significantly different from investment companies having non-bank advisers. 65-699 - 7624 45 WALL STREET, NEW YORK, N.Y. 10005 APPENDIX B WHAT SHALL WE DO ABOUT THE SMALL ACCOUNT PROBLEM? An Address Delivered By CHARLES W. BUEK United States Trust Company of New York at the Annual Meeting of the Florida Bankers Association Trust Division The profitability of major trust departments has been declining for years. Commissions no longer cover expenses. New York banks are still in the black after credits for deposits, but the dollar figures in 1971 were the smallest in five years, in spite of a 50% increase in commissions earned. At the Trust Company, we have dug deep into our own experience for the cause of this deterioration. Our earnings have declined only once-in 1971--but our margins have been under serious pressure. In telling you of our findings, I may have to disclose facts and trends of which we are far from proud, but there is no less identifiable source of data on industry-wide trust operations in sufficient detail to provide answers to the searching questions of today. Your Furthermore, I am sure that my company is not alone in its struggle with profit margins. Surely this is representative of New York, and I suspect it is true in varying degrees of many other parts of the country. awareness of the difficulty may vary with the breadth of your management information and cost accounting systems. Our readings tell us we have a problem of major proportions. Most of my comments today will concern the profitability of investment management accounts. At the Trust Company they are numerous, and the flow of incoming accounts is strong. It was apparent before our cost studies began that not all such accounts were profitable, and it seemed possible that our marketing accomplishments might in some respects be doing us more harm than good. Nearly five years ago we sampled the profitability of investment management accounts, and found that we lost money on typical accounts of less than $200, 000 market value. We appeared to be breaking even at $300,000. It seemed reassuring to say, "We only lose money on our small accounts, and are comfortably in the black from $300, 000 up. 11. Since 1968 we have computorized this cost calculation so that every one of our accounts can be tested on a basis of actual numbers of postings, remittances, analyses and trades. The new programs confirm our earlier findings, with a vengeance! We do in fact lose money nine times out of ten on accounts of less than $100, 000 market value. Our experience with accounts under $300,000 in 1971 is spotty at best, whenever they receive full individual attention. |