Low Fee Income Generating Investments for a Trust

Question

I am looking for a low-cost / low fee investment strategy for a modest ($75K) trust. I am only allowed to distribute the income of the trust to the beneficiary and cannot dip into the trust's corpus (principle).

Therefore, my goal is to maximize the income for the beneficiary and minimize all transactional costs or advisory fees since they must be deducted from the trust's income.

I want to avoid alternative investments, such as REITS, that would have high sales loads and/or be illiquid. Additionally, I would describe myself as a moderately sophisticated investor and put a high value on ease of use as I have a full-time day job.

The trust portfolio will have a moderate-speculative risk profile. I was considering using a rob-advisory services such as Wealthfront.com or Betterment.com for their ease of use, re-balancing, lower fees, tax loss-harvesting, etc.

• Does anyone have experience with the performance with these services on trust accounts?

• What about getting some no-load funds on a discount brokerage platform like (Fidelity or Vanguard)? Not as easy to use but maybe better returns?

Also, I am in the United States and the Trust is in New York State.

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Some background on the trust:

My day job is a lawyer and the trust is for a disabled family member. When the beneficiary dies, the money is distributed to the beneficiary's siblings that are still alive.

I'm comfortable in administering the trust; just not picking the investments. I am willing to take a little extra risk to get a higher return; however, I don't want to stray too far from ETFs, mutual funds, large cap stocks, or other securities because I need liquidity to distribute the funds should my family member pass.

Answer 1

If your primary goal is no / minimized fees, there are 3 general options, as I see it:

• Create a long-term portfolio of specific assets yourself (risky, and also time consuming);
• Put your money in an unmanaged index fund (as risky as the index you put it to - ie: a venture index with small cap companies would be riskier in some ways than an index of large cap companies); and/or
• Invest in a money market fund (low risk, earning interest only).

Based on the fact that you want some risk, interest-only investments would not be great. Consider - 2% interest equals only $1,500 annually, and since the trust can only distribute income, that may be limited.

Based on the fact that you seem to have some hesitation on risk, and also limited personal time able to govern the trust (which is understandable), I would say keep your investment mix simple. By this I mean, creating a specific portfolio may seem desirable, but could also become a headache and, in my opinion, not desirable for a trust executor.

You didn't get into the personal situation, but I assume you have a family / close connection to a young person, and are executor of a trust set up on someone's death. That not be the case for you, but given that you are asking for advice rather than speaking with those involved, I assume it is similar enough for this to be applicable: you don't want to set yourself up to feel emotionally responsible for taking on too much risk, impacting the trustee(s)'s life negatively.

Therefore, investing in a few limited index funds seems to match what you're looking for in terms of risk, reward, and time required.

One final consideration - if you want to maximize annual distributions to the trustee(s)'s, consider that you may be best served by seeking high-dividend paying stock (although again, probably don't do this on a stock-by-stock basis unless you can commit the time to fully manage it). Returns in the form of stock increases are good, but they will not immediately provide income that the trust can distribute. If you also wish to grow the corpus of the trust, then stock growth is okay, but if you want to maximize immediate distributions, you need to focus on returns through income (dividends & interest), rather than returns through value increase.

Answer 2

Consider also the "Boggleheads" approach, the 3 fund portfolio promoted by Vanguard founder John C. Bogle. It balances risk, and can be tuned in risk/reward approach.

If your goal is to throw off cash on a predictable schedule, a dedicated "income oriented" fund could be right. If you want to throw off as much cash as possible long term, you're better off with stocks plus realizing occasional capital gains. The important followup question is: you can't touch the original principal, but can you touch capital gains or realize losses?

Do use a fee-only adviser if you do seek professional advice, otherwise you're going to get sold "products" by a salesperson working on commission.