Why are we here?

Pearson Hall Inc. is a new concept; we started this business in June of 2008 after years working within a large bank system. So, we get a lot of�. just what is it you all do? Given this is the first in a series of commentaries and client up-dates it is probably appropriate to discuss our concept and why we think this is the best way to serve our client and advance our industry. Please consider this our first White Paper.

We are a holistic and independent advisor providing advice and guidance to client, client families and their professional advisors on stewardship, management, sustaining and transitioning wealth. We consult in the areas of family governance, asset management and oversight, trust administration and estate planning, philanthropy and business succession planning.

First, a brief history of the financial services industry, at least from our experience. 30 years ago banks had trust departments. Those trust departments had a very important role to play within those financial institutions (remember, this is before the mega regional banks and super banks that exist today) and that was to provide objective and independent advice, comfort, control and administrative expertise to the bank�s wealthiest and most loyal clients, many of whom were also directors, officers, owners and investors of the bank and its commercial customers. The most basic service was that of estate administration. The traditional concept of the �corporate fiduciary� was to provide stability, permanence and expertise to the client and their families. Now we digress into terminology, but, it�s important. A fiduciary, (adjective), is defined in Webster�s online dictionary as: �of, relating to, or involving a confidence or trust: as a: held or founded in trust or confidence b: holding in trust c: depending on public confidence for value or currency � Simply stated, a fiduciary is one who must separate his or her interests and act in the best interest of someone else. This is not an easy task for a Bank, but accomplished none the less. The Bank as a fiduciary had the benefit of what was referred to as the �Chinese Wall�. This was the ability to keep the trust department separate from the commercial bank, to allow it to operate with a degree of independence and confidentiality. Trust and Estate assets are required to be held separately from Bank assets. Bank trust departments did not share confidential information with the commercial side of the Bank to guard and protect trust client families from those other �interests� of the Bank. Consequently, trust department functions may have had an air of mystery to the rest of the Bank. Bank trust departments have their own set of regulations and experience periodic regulatory examinations to determine their compliance to those regulations.

Notice that we have not mentioned investment management in these traditional institutions. Those old time Trust officers managing these very traditional departments were in the business of asset management. Asset management is, to our thinking, a broader term to investment management which has narrower connotations and refers to the modern concept of money assets like stocks, mutual funds and bonds. In the broader sense, an asset does not have to be an investment. This is where this gets interesting because the client presents all manner of assets, from closely held business interests to farm animals to race cars and everything in between, even on occasion, stocks, bonds and mutual funds. With those assets come all manner of disposition, we have all read about the multimillion dollar trusts created for the dogs of Leona Helmsley.

Now we incorporate the historical to the actual. All of us recognize the dramatic changes that have taken place in the financial services industry during this 30 plus year period. Just the advances in technology affecting productivity in the workplace is staggering; computer and computer systems take over the pencil and ledger for accounting dividend income. Remember the first fax machines, the paper that curled up and changed color if it got too much light? In the area of investment management, much changed with the advent of “model investing”.

Model investing is an investment strategy that is based on the modern portfolio theory of the importance of asset allocation. A �model investor� will believe that the preponderance of the return in a portfolio will be derived from the proper allocation of investment resources to the appropriate investment sector. This will not only accomplish return but also help deal with the risk tolerances of the investor. For example, a balanced portfolio may have an allocation of 35% to 60% in equities, 25% to 40% in fixed income, maybe a 5% allocation to commodities and the rest will be in cash. Only after the allocation decision is made will the investor begin to look at specific investments within the sector. This will be where the investor will decide whether Coke or Pepsi is the better stock.

With the �model investor� came the concept of the �manager of managers� idea. This is where the investment manager begins to take the allocations discussed above and hire out the work. This time the manager would not try to pick the specific investment but go to a mutual fund or private equity firm and hire them to do the heavy lifting on the question of is Coke or Pepsi the better stock. This is where the large scale asset manager would introduce the concepts of hedges and all of the more sophisticated stuff where the typical individual investor may not have a working knowledge. All of these advancements affected and impacted the Bank and the Trust department and it�s �buy and hold� investment strategy.

Additionally, we have had the benefit of the powerful minds of John Langbein of Yale University and Gene Maloney of Federated Investors bringing to the forefront the concept of the Prudent Investor Rule. Intended to provide greater flexibility to the corporate fiduciary by replacing the older more confining Prudent Man Rule, it allowed the fiduciary the ability to broaden the expanse of investment options available to a corporate trustee or corporate executor. It enhanced the corporate trustee�s ability to deal with the diversity in investment management ability (and availability) and allowed the corporate fiduciary to �hire out� the job to the mutual funds and fund managers and managers of managers. The Prudent Investor rule has had some wonderful benefits but it has the unintended consequence that has fostered the ability of a corporate fiduciary who can manage a trust or estate without an understanding of the very basic tenets of a fiduciary�s duty. It focused the corporate fiduciary on its role as investment manager and took the focus away from the traditional holistic advisor and administrator of the trust document found in the traditional trust department. Today�s �Private Wealth Management� may not understand the traditional role of the trust department and frankly, that role has changed. The client has become more sophisticated and wanted to be treated as an investment client and wanted exposure to the more advanced type of money management. Risk management is now largely done by asset �selection� and asset diversification within the trust relationship and is seen as a function of the investment management process. This has lead to the loss of � or �maybe better said� the infiltration of�the old time trust department with the current sales culture (selling asset management) that permeates most of them. We believe this has had a negative effect on the objectivity of the advisor and causes them to be product focused.

At the same time, banks were merging and crossing state lines and becoming regional financial institutions with a larger and a growing bureaucracy. Executive management was moving farther and farther from the client base and the concept of the �financial supermarket� was fully entrenched. Today�s example of Private Banking or Private Wealth Management will present a client relationship manager as the centerpiece of the relationship management process. That person will have access to a team of professional assistance to guide him in the areas of trust, investment management, retail banking, lending and all other manner of product solutions that a client may be sold.

All of this has caused the corporate fiduciary to get confused and lose sight of the basic tenets of the trust department, to objectively deliver a service to its clients and client families. Objectivity, once the hallmark of the great fiduciary institutions of the past has given way to the sales culture that causes the bank to sell products to trust / investment clients rather than listening to the client talk about their concerns, ask appropriate questions and offer solutions without regard to the resulting compensation.

So, this is what we do, why we are here, our job is to sit on the same side of the table with the client, serve as an advocate for their objectives and help the client to understand the concepts of long term planning that will most efficiently move them forward. We look holistically at our clients and their total estate profile. We assist in the administration in the management of wealth. We are only compensated by our clients; we have no product other than our advice to sell.

The client has become a more accomplished investor. We will assist the client access the best available investment thinking consistent with their objective and risk profile. We see our typical client as a person who one who will benefit from the advanced planning techniques that many advisors and planning experts are advocating today. The planning �technology� has advanced at much the same rate as the investing technology.

We see more complex planning solutions getting pushed down into smaller estate profiles. For example, 30 years ago the concept of Family Limited Partnership as a gifting and management tool for the administration of family wealth was only used for very large estates. Now, we commonly see them in estate planning at the 3 to 5 million dollar level because they are a great way to manage and manipulate assets. Transfer tax rules have gotten more complicated as the applicable tax credit amounts have become a moving target. We are not just talking about the business owners here. Saving money and building an estate is also done through the accumulation of retirement assets, company stock options, deferred compensation and prudent successful investment in other assets.

In the delivery of service and focus on the client we have gone back in time to our traditional roots. In the delivery of administrative help and our understanding of very complex solutions we are on the cutting edge. We believe we represent the next phase in the evolution of our industry and that is a very exciting thing.

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