Death Care Law Blog : Kansas Death Care and Preneed Lawyer & Attorney : Stalter Legal Services Law Firm : Funeral Law, Elder Law : Kansas City

Fiduciary Partners, the corporate fiduciary for the Wisconsin and Illinois master trusts, broke its silence this week with a statement to the Funeral Service Insider. The statement was made in response to criticisms previously reported by FSI, and reflects the receiver and fiduciary working together to get their “message” out and avoid the kind of litigation that has hamstrung the IFDA, its membership and the Illinois funeral industry.

FSI commentators used Fiduciary Partners’ link to the two states to drive home with funeral directors various preneed problems* including the management and investment of preneed funds, and the state of the guaranteed preneed contract and its impact on funeral pricing practices. While the issues need to be incorporated into a national dialog, Fiduciary Partners interpreted the FSI report as encouraging Illinois and Wisconsin funeral directors to assign blame to Fiduciary Partners. Consequently, Fiduciary Partners and the receiver felt compelled to respond.

As reported in a prior post, the WFDA leadership had muzzled Fiduciary Partners with a very strict confidentiality provision through an amendment to the master trust. Accordingly, the statement given to FSI has been made with the receiver’s approval, and could be taken as having the WFDA’s endorsement.

To neutralize litigation over the trustee’s role in administering investments, Fiduciary Partners and the receiver sought to clarify that the company had a very limited role that never included the management of investments. The message goes on to reinforce the need for Fiduciary Partners to continue to provide administrative functions related to individual contract accounting and performance payments. The statement also conveys a tacit acknowledgement of the WFDA’s secrecy, with Fiduciary Partner’s commitment to a new transparency.

It is inevitable that comparisons will be made between Wisconsin and Illinois, and to conclude that litigation may also be inevitable. However, one stark difference exists between the two situations: Illinois funeral directors faced a recalcitrant board that refused to acknowledge and correct its mistakes. That leaves the question whether Wisconsin funeral directors will bring litigation to recover damages. As one FSI commentator points out, damages will be difficult to measure when the association reported inflated numbers (through the guaranteed rate of return). And as the other commentator points out, member funeral directors need to take responsibility for hiring executives and fund managers that are competent and professional. It was their hire of an inexperienced executive that ultimately directed the use of trust funds to establish an insurance company.

The multi-million dollar question to be asked is what if Fiduciary Partners had responsibility for investment oversight? Would the trustee have been able to check Mr. Peterson’s actions? In our next post, we will look at the hold harmless provisions so popular in the preneed trust agreement.

*Reprinted from the Funeral Service Insider – October 29, 2012
**Reprinted from the Funeral Service Insider – November 5, 2012

To obtain a full copy of the Funeral Service Insider, contact  www.funeralserviceinsider.com to subscribe.
 

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In the days that followed the Wisconsin Funeral Directors Association being placed into receivership, some of the WFDA’s sister associations were quick to point out they had ‘checks and balances’ that would protect consumers’ funds from the problems that tripped up the Wisconsin Funeral Trust. As we reported in our last post, a crucial ‘check and balance’ missing from the WFT was investment oversight. The fact that a trust has a corporate trustee does not necessarily mean that fiduciary has responsibility for monitoring the prudence of the investments. Corporate fiduciaries often look to uniform trust codes for the authority to delegate investment responsibilities. If a grantor wishes to use an outside asset manager, general trust laws will accommodate those wishes. The problem with preneed trusts (and cemetery endowment funds) is that there is more than one “grantor” to the preneed trust.

We have previously stated our support for allowing a relationship between preneed seller and a qualified fund manager. However, the fiduciary must provide a ‘check and balance’ to that relationship by maintaining responsibility for the investments. The ‘scandals’ from Missouri, Illinois, California and Wisconsin stem from a lack of investment oversight. Missouri’s regulators responded to NPS with a law that precluded any relationship between the advisor and the seller. Appropriately, the Missouri association obtained revisions to allow an agency relationship between its fund manager and the trustee. However, the Missouri law does not go far enough to require the disclosures we recommended in 2011. Funeral directors and consumers need to know that Missouri preneed fiduciaries ‘have their back’ when it comes to investment oversight.

Investment oversight is also a concern for cemetery regulators. Kansas’ cemetery regulators were dismayed to find that a corporate trustee had turned over the investment reigns to a Hutchinson cemetery operator. The operator hoped to cover declining revenues (and the failure to make trust deposits) with higher investment returns. For months, the operator attempted to hide the ball from the auditor, but eventually it was discovered that those investments had lost hundreds of thousands of dollars.

The investment supervision issue is also a concern for Nebraska regulators. As they prep the death care industry for legislation in 2013, they raise this issue:

Seller’s Power to Direct Investments

A question has arisen regarding the seller’s ability to direct the trustee’s investment decisions. Specifically, should the seller be able to instruct the trustee to deposit or invest funds in securities that do not meet the trustee’s own investment guidelines?

If it is determined that the trustee should be free from the seller’s investment influence, section 12-1107 should be amended to reflect this fact.
 

In what may be a perfectly legal arrangement, Illinois funeral directors have handed off investment oversight to their new fund managers. The master trust instrument carefully outlines the code provisions which authorize the delegation of investment authorities. But the document goes that extra step of exculpating the trustee from responsibilities for investment oversight. Where is the check and balance in that structure? Are the industry’s expectations so high that a trustee will not accept the fund without a hold harmless? If the industry does not establish its own ‘checks and balances’ with regard to investment supervision, the authority to participate in the investment decisions could be taken away.
 

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When news of the Wisconsin receivership was made public, I anticipated some signs of support from other state associations. The strength of a professional relationship can be measured by the support given subsequent to a public indictment. But, when that support comes in the form of hackneyed advice, the accused is left to wonder about the relationship. It should not come as a surprise if the Wisconsin Funeral Directors Association leadership was frustrated or angered with the National Funeral Directors Association or the New York Funeral Directors Association over the ‘advice’ given through trade journals.

When asked by the Funeral Service Insider for a response to the Wisconsin ‘scandal’, the NFDA recommended its model preneed law and referred members to its “Guidelines for Evaluating Preneed Trusts”. How would the model laws have avoided the Wisconsin scandal? Does the NFDA advocate investment standards that would permit diversification and the prudent investor rule? Would those model laws make the Wisconsin program more competitive with insurance companies?

If one were to review the NFDA’s Guidelines for Evaluating Preneed Trusts, you would find a section titled Rate of Return. That section includes questions about whether the preneed program provides guarantees about the rate of return on investments. It would be reasonable for the WFDA leadership to infer from the Guidelines that fixed or guaranteed rates of return are an acceptable method of master trust administration. So, that leadership has to be asking itself why they are facing a securities investigation by including that same guaranteed rate of return in preneed contract forms and consumer marketing materials. The WFDA leadership could have corrected its program and avoided the securities issues if those Guidelines had been revised years ago to recommend market value administration and the limitation, and disclosure, of the association fees charged to the trust.

The NYFDA association advises the funeral industry that state associations are uniquely well-positioned to deliver on preneed safety and security, and argues that competent executive directors and educated volunteer leaders can deliver what no other entity can. The NYFDA goes on to assert that return of principal is more important than return on principal, and that trust programs start to go off the rails when too much authority and oversight is handed over to third parties (that want to make money on the backs of funeral firms and consumers). What is the WFDA preneed committee (or other associations) to make of that advice? Are they to direct the trustee in making investments? Are they to ignore the demands of trust participants for higher returns? Are they to ignore the fact that New York is the only state to have laws that require 100% trusting and that bans insurance funded preneed? The reality is that state association preneed programs are under increasing pressure to improve investment returns. Unfortunately, associations are contributing to that pressure with the fees they are charging the trust.

During the past six years, four state sponsored programs have “crashed” due to fiscal problems and noncompliance. Minnesota, Illinois, California and Wisconsin all seemed to have respected executive directors and educated volunteer leaders. What roles did internal fees and outdated laws play in each situation? Would these associations have lost program participants (and the accompanying sponsorship fees) if they had provided more transparency regarding investments and internal fees?

I agree with Ms. McCullough that association sponsored master trusts are uniquely well-positioned to deliver on preneed safety and security. The problem is that too many have not delivered either safety or security. How many of these programs adhere too closely to Ms. McCullough’s advice? The affidavit that served as the tipping point for the appointment of the Wisconsin receiver paints a picture of a dominant association executive and an active and engaged volunteer board. Where were the compliance attorneys and the corporate fiduciary during the preneed committee meetings? Were they even invited? While there will be more pieces to the Wisconsin puzzle, what is available today suggests that the WFDA should have sought the input of “experts” instead of excluding them.

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