Financial Services

1. Financial Services • Cash management services • Investment products • Trust services

2. Financial Services • Bank holding companies • Engage in activities closely related to banking as approved by the Federal Reserve Board (e.g., credit, deposits, trust services, leasing, debt and equity investments, savings institution, etc.) • No geographic restrictions in the U.S. under the 1995 Reigle-Neal Act allowing interstate banking. • Financial services are normally broken down by wholesale (business) and retail (consumer) services.

3. Cash management services • Cash management to assist business firms • Speed collections (and thereby reduce float on uncollected checks). • Utilize cash efficiently to avoid excess holdings and timely availability to make payments. • Cash concentration brings together deposits in many areas for a firm into a single account. • Zero balance accounts reduce a firm’s bank account balance to zero, as funds are transferred into the account when a bill is to be paid by the firm. • Lock boxes are post office boxes of a business concern for receiving payments for goods and services. Banks empty the lock boxes and deposit the funds for firms in their accounts. Lock boxes are strategically located to speed collection times. • Banking payments services in international trade. • Data processing services for institutions and firms. • FDIC insured deposits of cash up to $100,000 per account.

4. Investment products • Glass-Steagall Act, which was part of the 1933 Banking Act, separated commercial banking from investment banking. • In 1987 the Federal Reserve reinterpreted this Act to mean that bank holding companies could own nonbank securities subsidiaries if approved by the Fed. Firewalls separate the affiliated securities firms and other parts of the BHC. • In 1999 the Financial Services Modernization Act dropped barriers under Glass-Steagall. Now BHCs can offer securities and insurance services. The firewall concept is still applicable.

5. Investment products • New investment products: • Annuities are investment products offering payments at fixed intervals for a stated number of years to a beneficiary. Payments can be fixed, variable, or lump sum. • Mutual funds are investment companies that pool investors’ funds and purchase a portfolio of securities (e.g., stock, bond, hybrid, and money market funds). Banks can have a proprietary (owner) relationship or nonproprietary (agent) relationship with mutual funds. • Sweep accounts for temporary transfer of funds from non-interest bearing accounts into an investment account earning higher yields. • Syndication of new stock and bond, as well as commercial paper, issues of firms by a group of investment banks. Banks are also using this same process in commercial loans. • Private banking provides custom tailored services to high net worth individuals.

6. Trust services • A legal entity that can hold and manage assets for one or more beneficiaries over time. • Grantor is the creator of the trust. Trustee is manager of the trust. A trust institution can act as an agent for the trustee to invest funds according to the directions of the trustee. The trustee and trust organization can be the same but do not have to be the same. Beneficiaries receive the benefits of the trust. • Trust institutions handle employee benefit programs, personal trusts and estates, and corporate trusts. Employee benefit programs include profit sharing plans, defined benefit plans, and defined contribution plans (401K). Corporate trusts for managing bond issues.

7. Trust services • Types of trusts: • Business trusts historically in the U.S. were formed among firms in the same industry to avoid competition and gain monopoly power. The Sherman Antitrust Act of 1890 and other legislation struck down such anti-competitive behavior. • Today holding companies (ownership of affiliated firms) and consortiums (association of financial institutions but no cross ownership) have replaced trusts as a common form of business organization. • Real estate investment trusts (REITS) is a trust that purchases real estate and offer shares of ownership to investors. • Trust companies can be within or outside a bank for purposes of estate planning to distribute their assets after death and reduce taxes for beneficiaries. Estate tax rates range from 37% to 55%.

8. Trust services • Trust companies: • Revocable living trust allows the grantor to retain control over the assets during their lifetime. • Credit shelter trust is designed to take advantage of estate tax credits for grantors, with a $1 million exclusion allowable in 2006. • Marital trust is used to shelter estate assets tranferred to a surviving spouse from estate taxes. • Irrevocable trust is used to take advantage of the estate tax exclusion amount, as well as for protecting life insurance policies from estate taxes and for protecting estate assets from creditors. • Charitable trust is for the benefit of a charity, educational institution, or religious establishment. • Trust deposit is for a specific depositor or payment of a specific debt obligation. • Unit investment trust is an investment company that buys a fixed portfolio until its termination date, when proceeds are paid to owners. Shares in UITs can be purchased in the stock market. Many kinds of UITs specializing in S&P500, DJIA, tech, energy, etc.