Risk Management and the New Business Process

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

2. 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

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

4. Presentation to FIRMA Conference The Reality Morgan Stanley Trust • 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

5. Presentation to FIRMA Conference The Framework Morgan Stanley Trust • 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

6. Presentation to FIRMA Conference Setting Sales Goals Morgan Stanley Trust • 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

7. Presentation to FIRMA Conference New Business Review Morgan Stanley Trust • 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

8. Presentation to FIRMA Conference Put in place the proper sales incentives Morgan Stanley Trust • 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

9. Presentation to FIRMA Conference The basics Morgan Stanley Trust • 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

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

11. Presentation to FIRMA Conference Do’s Morgan Stanley Trust • 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

12. Presentation to FIRMA Conference Don’ts Morgan Stanley Trust • 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

13. Presentation to FIRMA Conference Red Flags Morgan Stanley Trust • 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

14. Presentation to FIRMA Conference Mitigation of risks Morgan Stanley Trust • 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)

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

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

17. Presentation to FIRMA Conference Tough Calls Morgan Stanley Trust • 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

18. Presentation to FIRMA Conference Other Best Practices Morgan Stanley Trust • 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

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