Risk Management and the New Business Process Presentation to FIRMA Conference 2006 Morgan Stanley Trust, N.A. John Sabino, President

Disclaimer Morgan Stanley Trust The information contained in presentation represents generic industry information and does not express the views of Morgan Stanley or Morgan Stanley Trust Morgan Stanley does not give legal or tax advice

The Dream Morgan Stanley Trust Presentation to FIRMA Conference 100% clean business All newly created trust agreements drafted by competent legal counsel Funded with cash Mother Theresa as the beneficiary

The Reality Morgan Stanley Trust Presentation to FIRMA Conference Taking business from successor trustees Incomplete facts Funded with esoteric assets or large capital gain positions Client is fee sensitive A spend-thrift is the beneficiary

The Framework Morgan Stanley Trust Presentation to FIRMA Conference Look at the process end-to-end. Many parts of the organization should be involved in the design and implementation of new business not just the sales organization Have a clear definition of what you are and what your organization is good at  Be honest  Don’t try to be all things to all people Watch for incremental creep in capabilities  Settling an estate in Florida vs. Louisiana  Custodial services for an individual as opposed to an institution Don’t be afraid to say no

Setting Sales Goals Morgan Stanley Trust Presentation to FIRMA Conference Don’t set product specific goals that are too granular E.g, IRA, CRT, Foundation Never run sales contests Let the client’s requirements drive the process Sales credit is not given until the account is open and funded

New Business Review Morgan Stanley Trust Presentation to FIRMA Conference Define the rules up front and have a formal training program for sales staff New business review must be a separate function reporting to a different place in the organization than sales Exceptions to normal review process should require hard copy sign off by senior level people OFAC/Patriot Act checking – do early in the process

Morgan Stanley Trust Presentation to FIRMA Conference A formula-based incentive structure works best since rules are clearly defined and expectations can be easily set Have a subjective component to incentive compensation driven by the quality of the business Consider 360° feedback as a component of sales performance Subtract off assets and revenue from sales people for business that leaves within two years Put in place the proper sales incentives

Morgan Stanley Trust Presentation to FIRMA Conference The basics Make sure the client or beneficiaries have the power to remove or appoint Ask for a list of all the assets Ask for documentation of all prior trustee changes (e.g., removals, resignations, declinations, appointments) Properly disclose all your fees and practices in writing Make sure you are qualified to serve in the designated state in that capacity Set client expectations up front

Morgan Stanley Trust Presentation to FIRMA Conference The role of trust administration Involve in the process up front Meet the client before the business comes in to see if expectations can be met

Morgan Stanley Trust Presentation to FIRMA Conference Do’s Put the proper incentives in place for all parties Involve trust administration early Encourage everyone in the organization to ask if anything seems not quite-right Look at prior transaction history if possible Know your co-trustee Have your investment team involved up front Have a tracking mechanism in place to gather all the assets and make sure they are invested in a timely manner

Morgan Stanley Trust Presentation to FIRMA Conference Don’ts Don’t commit to a specific level of distribution up front Don’t take on undue risk just to hit a sales target Don’t promise investment performance Don’t practice law or draft documents Don’t commit sins of omission

Morgan Stanley Trust Presentation to FIRMA Conference Red Flags Frequent change in trustee Rapidly depleting principal/frequent distributions Concentrated positions Siblings that don’t speak An offshore nexus Illiquidity Missing pages of statements or documents Individual trustee who doesn’t have complete information on all the assets

Morgan Stanley Trust Presentation to FIRMA Conference Mitigation of risks Accounting of prior trustees’ actions Environmental assessment of real assets Hold harmless agreements Consider special trustees for special situations Develop a detailed diversification plan in writing for concentrated positions Seek investment waivers from co-trustees where appropriate Get letters of direction where appropriate Only accept investment direction from sophisticated clients (e.g. accredited investors)

Morgan Stanley Trust Presentation to FIRMA Conference Successor Trustee Appointments Client appoints you under will Understand all the funding assets Proper disclosure to all beneficiaries including fees and potential conflicts

Morgan Stanley Trust Presentation to FIRMA Conference Pay Special Attention Reporting requirements on custodial accounts Reporting requirements on ‘institutional’ accounts Sub-accounting capabilities Special needs trusts

Morgan Stanley Trust Presentation to FIRMA Conference Tough Calls What will you charge for holding a concentrated position? Serving as trustee for senior executives in your organization or other interested or related parties Saying yes because the client has a big relationship somewhere in your overall organization

Morgan Stanley Trust Presentation to FIRMA Conference Other Best Practices Perform post-mortems on accounts that haven’t gone as expected and see what you can learn Review your litigation or threatened litigation to look for patterns Get a copy of the tax return – best way to see all the assets Continually learn from your peers and from trade periodicals Keep up with changes in regulation Periodic audit of the sales/new business review process Client surveys on how the new account/acceptance process worked

Morgan Stanley Trust Presentation to FIRMA Conference Board Discussions What discussion would you rather have with your board or boss? - You missed your sales target or - You missed a ticking time bomb