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The role of the trustee when it comes to investment

This article considers the specific requirements of a trustee in respect of the trust investments set out in the Trustee Act 2000.

The role of a trustee is of course one that should not be entered into lightly, as it carries risks and responsibilities. Whether appointed as a trustee under a will or standing as a trustee of a trust established during an individual’s lifetime, there are specific duties that trustees must comply with. In this article, we will consider those duties and responsibilities in more detail and the specific requirements in respect of trust investments set out in the Trustee Act 2000.

Whether, in the case of will trusts, where the executors are typically also the trustees, where funds are set aside for a child or children under the age of 18 via a trust, where parents or chosen trusted individuals or professionals, such as a solicitor.

Dealing with trust investments

Quite evidently you will not need us at Matrix Capital to advise you about the responsibilities of honesty, integrity and good faith on behalf of any trust’s beneficiaries. Indeed, these very words are by-words of your profession and codes.

However, when acting on behalf of future beneficiaries, particularly in the difficult and turbulent times for world markets, we might be able to support you as trustees when it comes to investing assets in line with a trust’s objectives.

The Trustee Act 2000 introduced updated default rules for investments made by trustees. Unless the powers conferred by the Act are over-ridden within the trust deed, the Act provides significantly wider investment powers than had previously and gives trustees the power to invest the trust capital as if they were the absolute owners themselves.

A statutory duty of care applies to all trustees, whereby they must exercise such care and skill as ‘is reasonable in the circumstances.’ A professional trustee, or one having special knowledge and experience, would be subject to a higher duty of care. This statutory duty applies to decisions taken when investments are made or reviewed, property or land is purchased, managed or insured, or if a decision taken to appoint a third party to assist in the investment process. The standard investment criteria set out in the Trustee Act 2000 stipulate three key elements that must be adhered to.

Firstly, trustees need to ensure that the investments selected are suitable for the trust in question. Factors that a trustee must consider here is the objective of the trust and requirements of beneficiaries, the time horizon for investment, and the level of risk to which trust investments are exposed.

Secondly, any investments selected need to show sufficient diversification, as appropriate to the trust in question. For the majority of cases, this means that the investment strategy needs to allocate funds across different assets (such as equities, fixed interest securities, property and cash) geographies and sectors. The precise level of diversification will be determined by the terms and purposes of the trust. For example, in the case of a trust holding £5,000 for the benefit of a child who will be 18 in a year’s time, it is highly likely that a cash deposit would be appropriate and the need for diversification would be low. Conversely, a large trust fund providing income to a beneficiary and capital to residual beneficiaries in the future, would be expected to invest in an adequately diversified portfolio.

Whether it is a short-term cash requirement, or a longer-term asset backed investment approach that is appropriate, Matrix Capital can add value and expertise.

Thirdly, trustees need to keep investments under regular review. This is frequently overlooked by trustees, and the importance of this requirement cannot be overstated. In today’s rapidly changing investment landscape, arranging an investment portfolio and not reviewing the suitability and performance on a regular basis could lead to significant underperformance, and invite criticism from beneficiaries. It is understood that regular review is key to any trust or indeed client where Matrix Capital is involved.

The need to obtain advice

The Trustee Act requires trustees to obtain qualified investment advice when considering exercising the power of investment or reviewing existing trust investments. The only exclusion to this requirement is where trustees reasonably consider obtaining advice to be an unnecessary step, for example, where the trustees believe they possess the relevant skills to reach a decision. Given the potential risk of criticism or litigation from beneficiaries, we would not expect to see many trustees make decisions themselves without seeking appropriate advice.

To assist with the regular review of trust investments, trustees can delegate certain functions, for example, ongoing management of trust investments, to an agent, who acts on the trustees’ behalf. When delegating this responsibility to a professional, there needs to be firm agreement in place as to the objectives of the trust investments, the level of risk and any other guidance, such as the need to produce income, that is relevant.

Frequently, trustees look to appoint an adviser such as Matrix Capital who can build suitable portfolios or assist in appointing an investment manager or managers to do so on a discretionary basis. This will ensure that the trust portfolio is kept under close review and changes are made to the investment portfolio as appropriate.

If you are interested in discussing the above with one of our experienced financial planners at Matrix Capital, please contact us.

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