dojP000493.xml

dojP000493.xml

born-digital

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2002-02-11

Monday, February 11, 2002 5:12 PM
educate calimants

February 11, 2002

Kenneth L. Zwick, Director
Office of Management Programs
Civil Division
U.S. Department of Justice
Main Building, Room 3140
950 Pennsylvania Avenue
Washington, DC 20530

Dear Mr. Zwick:


There has been much discussion of how to calculate awards from the Victim Compensation Fund, but very little of whether the claimants are prepared to manage whatever money they do end up receiving, a question which could influence their future standard of living as much as the size of the awards. As I suspect that many of the claimants do not have experience handling large sums of money, the Fund should help prepare them to make the important financial and legal decisions that will come with the awards.

Many of the bond brokers, investment managers, and insurance executives killed at the World Trade Center earned large salaries and six- or seven-figure annual bonuses. And although the deceased may have controlled the family finances, his or her spouse will usually have some familiarity with investing and estate planning, as well as relationships with financial advisors, accountants, and/or lawyers. While a certain number of these affluent families may still be taken advantage of or commit their own financial mistakes, most will incorporate the Fund's award into their pre-existing investment accounts and estate plan.

Many more claimants, however, have never handled sums close to even the minimum award. While still mourning their spouses and comforting their children the claimants of firemen, secretaries, clerks, and dishwashers will have to decide what to do with at least $300,000 or $500,000 from all sources (I assume that at least some of the payments will be in a lump sum). The current volatility in financial markets, partly a result of the events of September 11, makes this job even more difficult. Many, especially those with young children, will also need legal advice on trusts and estate planning. Without good financial and legal help, it is unfortunate but inevitable that in these circumstances many of these claimants will make decisions that will harm their families' financial future. More than a few will fall prey to outright fraud. Many more will dissipate funds through speculation directed by themselves, a well-meaning relative, or a commission-seeking broker. Others may invest too much in a risky family business. Some may flee from risk altogether, keeping their funds in bank deposits that offer safety of principal but also inadequate returns for their families' long-term needs. Most of those who avoid these pitfalls will still pay traditional brokers and actively managed mutual funds far too much in fees while their investments do less well than market indexes. I do not mean to be condescending with these predictions, only realistic, for both academic research and the business section of the newspaper provide ample evidence that even those considered sophisticated investors rarely beat market indexes and sometimes are taken advantage of by even the most respected securities firms.

To improve the odds of better outcomes for the Fund's beneficiaries I suggest that you organize two educational seminars, one on investments and one on estate planning. Though the less affluent claimants would need them more, they should be made available to all. Introductory pamphlets could be distributed before the seminars and materials for further study handed out afterward. While there are many people who could conduct a good investment seminar, I will suggest some candidates:

, founder and former chairman of the Vanguard Mutual Fund Group (the most honest and lowest-cost mutual fund company; its web site offers excellent free educational materials).

, Professor at the University of Pennsylvania's Wharton School and author of books on investing.

, author of a personal finance column in the Wall Street Journal.

While I do not know any of them, I think they all would be happy to help the Fund, whether by talking to the beneficiaries themselves or by recommending good substitutes. Alternatively, you could contact the finance department of a few leading business schools for suggestions. Any competent trusts and estates department of a law firm could prepare the legal seminar, perhaps using Nolo press's excellent self-help materials as an introduction. Two meetings are not going to make the beneficiaries financial or legal experts, but they could familiarize them with the essential concepts of investments and estate planning-the relationships between investment risk and return and real and nominal returns, the benefits of diversification, and estate-tax exemptions, to name a few. Without some exposure to these ideas, they will be more vulnerable to unscrupulous or incompetent "experts" and less able to benefit from the advice of honest professionals.

The beneficiaries will also need individualized advice. While the federal government probably cannot recommend specific securities firms or law firms it might solicit investment and estate-planning proposals for several hypothetical beneficiaries-say three levels of affluence, with or without minor children. The responses, except those from firms with poor regulatory records, could be combined in a booklet and distributed to beneficiaries. Many of these financial and legal firms would be willing to provide free planning services to the victims' families.

Even with these precautions, some of the claimants' will lack the education or maturity to husband their awards. Perhaps for these beneficiaries the Fund could offer a variable annuity as an alternative to a lump sum payment. The Fund could solicit proposals from insurers with high credit ratings and present the results to the beneficiaries. Again, it seems likely that the insurers would offer their most-favorable terms to the Funds' beneficiaries.

You may well have already considered these ideas, in which case I apologize for taking your time. If you would like to discuss any of these issues, please contact me.


Sincerely,

Individual Comment
Scarsdale, NY

2002-02-11