The American Funeral Director recently published Curtis Rostad’s rebuttal letter to a prior story titled “Debunking the Trust Myth”. That same story earned a post on this blog site. While I agree with Mr. Rostad’s views, the sad truth is that many death care trusts do not perform as well as the Indiana Master Trust. It speaks volumes when many Missouri funeral directors prefer insurance funding despite a state law that permits a 20% sales expense to be retained from trust funded contracts. While several reasons exist for the Missouri situation, expense, time demands, poor trust performance, and risk aversion are key factors.
Until a critical mass is reached, death care trusts can be too expensive. Funeral directors are an independent lot, and most want to retain control of their preneed funds. (NPS will serve to reinforce this.) While pooling of preneed trusts would help address this hurdle, some state laws discourage the commingling of accounts because of the industry’s history of poor recordkeeping.
Trusts require a commitment in time that many death care operators are often unwilling to provide. Fiduciaries need input from their death care clients about investment and compliance issues. Funeral directors and cemeterians are care-givers by nature, and many would rather delegate these responsibilities. In the absence of clear instructions, fiduciaries will default to more conservative investments.
It is difficult to provide quality asset management to small trusts. As a consequence, the small trust is often relegated to mutual funds or cash equivalents. Even when the trust has sufficient assets to warrant a diversified portfolio, some operators are risk adverse and park the trust in conservative, but low yielding investments.
Diversification is an important ingredient to improving trust performance. Today’s asset managers use diversification to guard against market risks, and to seek out growth and new sources of income such as dividend producing stocks. To obtain the benefits of diversification, regulators and death care operators need to consider the economies of scale that pooled administration can provide.