As a trustee, making investment decisions for the trust assets is one of the most important responsibilities. There are several key principles trustees should follow when exercising their investment powers. First, trustees have a duty to invest trust assets prudently and diversify the investments. They should obtain proper advice from investment professionals and manage the risk profile according to the trust purpose and beneficiaries’ needs. Trustees should also regularly monitor the trust portfolio performance and make adjustments when necessary. When delegating investment authority, trustees should appoint qualified and trustworthy investment managers and set clear investment guidelines. With balanced risk management, trustees can generate reasonable returns from trust investments while fulfilling their fiduciary duties.
Trustees have wide investment powers but also prudent investor duties
Modern trust laws grant trustees extensive investment powers, allowing them to invest in a wide range of assets globally. However, such powers come with fiduciary duties of care and prudence. As a prudent investor, a trustee should develop a sound investment strategy suitable for the trust purpose, rather than acting on personal preferences. The trustee should consider portfolio diversification, risk profile, expected returns, time horizon, liquidity needs, tax implications and other relevant factors. While aiming for capital growth, the trustee should also ensure proper asset protection and avoid inappropriate speculative investments that compromise the trust fund. The trustee may delegate investment functions but not the responsibilities. So oversight is still required if using external investment managers.
Trustees should obtain expert investment advice when necessary
Not all trustees possess the financial sophistication required for effective investment management. Seeking advice from qualified investment advisers is important for making prudent decisions, especially when the trust assets involve sophisticated investment products. The adviser can help the trustee analyze the trust portfolio, design an investment plan catering to the trust’s needs, select appropriate financial instruments and monitor investment performance regularly. However, the trustee should still apply discretion when acting on advice and not blindly follow recommendations if they appear unsuitable. The trustee also needs to exercise reasonable care in appointing and supervising the adviser. As long as due process is followed, the trustee can rely on expert advice to justify investment actions made in good faith.
Risk management is key for trustee investments
A vital part of the prudent investor rule is managing investment risks. Trustees have a duty to safeguard the trust capital, so the risk tolerance should match the trust purpose and needs of current versus future beneficiaries. Conservative investments like cash and bonds may be suitable for trusts focused on wealth preservation for elderly beneficiaries. Growth-oriented investments like stocks can be considered for generation-skipping trusts aiming to grow assets over decades. Highly speculative investments are generally not appropriate. Asset allocation and portfolio diversification across different asset classes, geographies, industries and currencies can help mitigate risks. Trustees should continuously monitor the risk profile and performance, adjusting investments in response to changing market conditions and trust circumstances.
Delegating investment authority requires care and monitoring
Given the complexity of global financial markets, many trustees choose to delegate investment authority to professional advisers or managers. This can be appropriate if the appointee has superior skills and the trustee retains oversight responsibility. Factors to consider include the adviser’s credentials, experience, investment philosophy and track record. Background checks on ethics and regulatory compliance are also prudent. Investment guidelines reflecting risk tolerances and any excluded assets should be set. Performance benchmarks should be established for periodic reviews by the trustee, along with requirements for regular reporting by the adviser. Underperforming advisers need to be replaced promptly. With careful appointment and monitoring, trustees can meet their duties while benefiting from specialist investment expertise.
Trustees have significant legal powers yet also heavy responsibilities when investing trust assets. Exercising prudence, seeking advice and managing risks are essential fiduciary duties. Delegating to professionals can be beneficial but does not absolve the trustee’s oversight role. With good governance and balanced decision making, trustees can make trust investments work effectively for the beneficiaries.