The IOLTA Challenge

Drama. By law, the funds that are generated by IOLTA (Interest On Lawyers Trust Accounts) are only allowed to be the interest that is earned from interest-bearing checking accounts in most jurisdictions that require or allow IOLTA, and that law has caused disheartening problems for the many socially-engaged beneficiaries of those funds. For example,

“The amount of IOLTA income depends on interest rates paid on the accounts. When rates drop and stay low, as they have from the beginning of 2008 to the present, IOLTA revenue declines. Many IOLTA programs have been forced to reduce grants to legal aid providers, in many cases by large percentages. Though the effects of the historically low interest rates will be felt for some time, these rates tend to be cyclical. To offset revenue declines, IOLTA programs throughout the country negotiate with financial institutions to reduce service charges and increase interest rates on IOLTA accounts. Working with banks and attorneys helps ensure that IOLTA generates as much funding as possible in order to provide legal aid for those who have nowhere else to turn.” – March 2013, IOLTA.ORG

The hope (above) that “…these rates tend to be cyclical…” is unfounded (and misplaced, please see below for another solution) in both theory and practice and, of course, that is not an area of expertise for attorneys and justices, and, in any case, there is no one who knows anything about it. For example, who knows what the interest rates will be in July? Or next year? It’s all just an opinion and we appear to be helpless in a world that is awash with “money” hoping to become “capital”. Please see our recent Post, Volatility Risk Is Not “Risk”, March 2013, for more on that dilemma.

Moreover, there is also the odd situation that “Few lawyers understand how the IOLTA program works, and almost no one outside the legal profession has an inkling as to what IOLTA stands for.” – CATO, December 18, 1997.

And the Supreme Court of the United States has also been engaged thereby (BROWN et al. v. LEGAL FOUNDATION OF WASHINGTON et al. No. 01—1325. Argued December 9, 2002–Decided March 26, 2003) and clarified the rules and sanctified the programme despite many diverse and compelling challenges.

However, in the absence of investment returns, the IOLTA programme can only be an expensive “safe-keeping” programme and that is the case now with near zero interest rates on checking accounts and there is no incentive for the banks to offer any rate that does not suit them, at any time. The banks do not need to compete for our funds – we just give it to them because we are afraid of losing it. To not be afraid, we need – in law – to be certain of losing it.

The solution is right in front of us. Most IOLTA programmes are supported by NOW accounts –  interest-bearing checking accounts known as negotiable orders of withdrawal accounts – and we need to say to the banks that we want “3% plus inflation, every year, no matter what” guaranteed, or we’ll take our money to the bank that will. And if there is no such “bank”, it’s easy enough to create one that can effectively deal with the several billion dollars of IOLTA funds.

Of course, that is quite a challenge but we think that one needs to accept that an investment is just and only the purchase of risk, no matter what we do, and therefore, we need to make the purchase proactively and with our heads up. Please see almost any of these Posts and for a recent specific example of what can be done in the capital markets, The Wall Street Put, March 2013, or The Canada Pension Bond, February 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

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