Who needs a blind trust?

October 22, 2012, 8:55 PM UTC

FORTUNE — Tonight’s presidential debate is meant to focus the candidates’ attention on foreign policy, but don’t be surprised if the subject of Gov. Mitt Romney’s investments in Chinese companies comes up, as it did during a particularly heated moment during the Oct. 16 debate between the Republican candidate and President Barack Obama.

When the president questioned his rival’s investments abroad, Gov. Romney responded essentially by invoking a concept that frequently comes up when wealthy men and women run for office—the blind trust.

In theory, blind trusts are a sweet deal. The perfect blend of legislative aloofness and financial savvy, the construct has been routing potential conflicts of interest for America’s wealthy political elite since Lyndon B. Johnson. Almost every serious presidential candidate from Barack Obama to George Bush to Bill Clinton has had at least one blind trust at one point. When he became governor of Massachusetts in 2003, Romney set up two of them, for himself and his wife.

The advantages are clear: by giving up the right to personally manage their money, public officials can deflect any allegations of insider trading or crooked investments. It also allows a trustee to invest aggressively without facing lengthy disclosure procedures or risking political blowback.

But despite the perks and the recent press, only a few federal lawmakers actually have a blind trust. According to the Senate ethics committee, just 7 out of 100 U.S. Senators have gone through the approval process to set one up. In the House of Representatives, the percentage is even smaller. As of 2010, only 12 of the 435 members of the House had an official blind trust, according to the Center for Responsive Politics. And those numbers haven’t changed much in the past decade.

Why so few takers? Blind trusts seem simple, but they’re actually a complex and cumbersome financial instrument. Startup costs can easily run into the tens of thousands of dollars, says Kenneth A. Gross, an ethics lawyer at Skadden Arps who has helped candidates navigate the process, and they’re generally a pain to create and maintain. Often, Gross says, with a blind trust, “You’re just making your life much more complicated for no reason.”

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For starters, not every blind trust is actually blind. Often, a wealthy person’s blind trust might be described as at best slightly myopic. That can bring political repercussions.

Just ask Romney circa 1994. A much-circulated video of the candidate during his bid for Ted Kennedy’s Senate seat shows Romney calling blind trusts an “age old ruse.”

A politician can “give a blind trust rules” about where and how to invest, Romney said at the time, undermining its blindness.

Just as troublesome, once a blind trust is created, it’s impossible for a legislator to forget what went into it. That caused problems in 2005, after Senate Majority Leader Bill Frist asked his trustee to sell some $10 million in shares of HCA — the hospital company his family founded — in a deal that closed days before the stock lost a tenth of its value. Somewhat ironically, Frist said that the reason he wanted to sell the shares was to avoid the appearance of a conflict of interest. The Securities and Exchange Commission investigated the incident and opted not to press charges. Still, the political fallout was big, and it didn’t matter that Frist’s trusts were technically blind. It was clear that he knew management hadn’t sold his entire stake in the company he helped build.

In Romney’s case, much of his finances are tied up with private equity, mostly managed by his old colleagues at Bain Capital. Through no fault of his own, Romney likely has a pretty good idea of what’s in those funds – given that Bain’s strategies are widely reported in the financial press.

The bottom line: “the public should not expect too much for the blind trust mechanism,” says Robert L. Walker a lawyer at Wiley Rein LLP, who has been staff director of both the Senate and House ethics committees.

Even when a politician follows the rules perfectly, some trusts are less blind than others. While the statutes are essentially the same for the Senate, the House and the Executive Branch, they’re enforced differently. On the state level, there’s even greater disparity. Romney’s money is managed by a Boston attorney, and he would likely need to create a new, stricter blind trust in order to comply with federal regulations if elected.

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But besides the legal and political morass, perhaps the biggest deterrent is financial. Blind trusts are only really useful to a few politicians. And to be one of them, you must be really, really rich.

“Unless you’ve got just a bajillion dollars in the kinds of investment funds that require constant management,” says Cleta Mitchell of law firm Foley & Lardner in D.C., and former campaign council to Rick Santorum. “Then really the cost of managing that is a lot.”

Skadden Arps’s Gross says that he typically advises businessmen and other wealthy candidates to consider plain vanilla investments like mutual funds or index funds. Notably, Obama went this route after his own early brushes with controversy. In 2007, the then-senator came under fire after his trust invested tens of thousands in donors’ companies. His office said at the time that advisers had made the investments under the terms of a blind trust that had yet to be finalized, but the story still ran on the front page of The New York Times.

Some of the country’s wealthiest politicians have eschewed blind trusts altogether. Bill and Hillary Clinton liquidated theirs and left the holdings in cash to avoid perceptions of conflict of interest when Hilary ran for office in 2008. California Representative Darrell Issa, Massachusetts Senator John Kerry, and House Minority Leader Nancy Pelosi are other examples of extremely well-endowed legislators without blind trusts, though none of the three have portfolios bland enough to avoid occasionally pointed question from the press.

Candidates with vanilla holdings, says Gross, often “do just as well, and probably better,” than those with closely managed trusts. Today’s diversified index funds have more aggressive, riskier options, Gross says. That allows politicians to pursue serious investment growth without signing up for the hassle (and giant fees) that come with a blind trust.

Blind trusts do serve a purpose, though. For some candidates with assets that can’t be easily liquidated, there are few other options. “It may be the only response that someone who has extremely complicated holdings can take,” Wiley Rein’s Walker says. That might be true in Mitt Romney’s case, where a complex bundle of private equity holdings and his stake in Bain Capital would make it extremely difficult for him to simply put everything in Treasury bonds — to say nothing of the tax implications of prematurely bailing on his investments.

That’s not to say only a sophisticated investor can set up a blind trust. The option is open to anyone, and it’s likely to become increasingly popular. With the passage of the Stock Act, which beefs up financial disclosure laws and explicitly bans insider trading, blind trusts may gain appeal for being both ethicist-approved and confidential.

There’s even a book about it: Blind Trust, a thriller written by California Senator Barbara Boxer, follows a protagonist unjustly blamed for untoward financial dealings in a trust she didn’t control. Boxer, who has one of her own, is also the chair of the Senate ethics committee, which regulates them. The moral of the story is one both Romney and Obama are familiar with by now: Handle blind trusts with care. Not only can politicians often discern their contents, so can the public.