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Open-Architecture Trusts

The basic problem with the trust business is that it is operated almost entirely for the benefit of the banks, rather than for the benefit of the beneficiaries. In 1928, a few years before being appointed to the United States Supreme Court, Benjamin Cardozo articulated the standard that governed fiduciary conduct: “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior [emphasis supplied].”²

But the “morals of the market place” dominate the trust business today. According to the Center for Fiduciary Analysis, litigation against trustees is rising at the astonishing rate of 22 percent per year compounded.³ Just to mention a random example, virtually every institutional trustee invests assets for which it serves as trustee in its own mediocre investment products, rather than in the many superior, less-expensive, best-in-class products readily available everywhere.⁴ What should be an obvious, actionable, and surchargeable breach of fiduciary duty is in fact the everyday reality. Doesn't it seem obvious that a trustee who engages in self-dealing by using only its own investment products should become a guarantor of performance? Dream on.

To understand how what should have been an enterprise entirely devoted to the interests of trust beneficiaries should have deteriorated into such a hopeless, swampy morass, it will be necessary to revisit ...