Managing Other People's Money as Agent or Fiduciary Had Its Origins in Boston

In the early and mid-19th century, Boston's Clipper Ship owners and captains were amongst the equivalent of today's HNW class, accumulating substantial wealth through their maritime trade activities. Because these individuals often spent extended periods overseas in remote parts of the globe, they were unable to participate in their personal financial decisions for long periods of time. To allow important decisions to be made in a timely fashion, often agents, and ultimately trustees, were formally engaged to manage the financial affairs of their absentee principals.

So began the evolution of the fiduciary role, the origins of the Boston Trustee, and "prudent man rule" of trustee conduct. Admiralty law firms of the day merged with conventional law practices and early on, attorneys served as trustees tasked to manage their client's liquid assets and real estate. They operated under powers granted through trust instruments written by the attorney-trustees themselves to define the scope of their responsibilities. Thus, and uniquely to Boston, lawyers acted on behalf of both their trust beneficiaries in personal legal matters and also managed their clients' portfolio investments — a dual service that continues in Boston in a substantial way even today. Boston's larger full-service law firms manage combined funds approaching, by current estimates, $20 billion in client agency and trust portfolio assets under instruments still drawn by the same attorneys who also function as named trustees. Only Philadelphia law firms, where the practice evolved under somewhat similar circumstances, continue this binary role and relationship, albeit to a lesser extent.

In the early 20th century, Boston became increasingly recognized as a center of investment management. The first mutual fund, Massachusetts Investor's Trust, was formed in Boston in 1924 and opened to public investors four years later. Wellington Fund, the first mutual fund to include both stocks and bonds (to become known generically as balanced funds) was launched in Philadelphia by Walter Morgan in 1928.

"Big Money in Boston"¹

In 1946, Boston's George Doriot, ex-Army General and Associate Dean of Harvard's Business School, founded American Research and Development Corporation, the first venture capital firm which in turn spawned Digital Equipment Corporation (DEC) and a series of other "128 Technology Companies." Ultimately, this was followed by the development of such venture capital firms as Peter Brooke's TA Associates, Greylock, and Bain Capital Ventures, eventually leading to today's private equity movement.

The management of institutional endowments by outside managers, including Yale's failed 1970 Endowment Management Company experiment, had its origins in Boston, as did early hedge funds and a number of family office formats. The common thread throughout these enterprises was belief in the idea that superior research and uniquely derived information (i.e., active portfolio management) produces superior investment returns.
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¹ John C. Bogle @ BSAS Luncheon, May 17, 2013

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