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The challenges for trustees are unique. Trust deeds often detail multiple beneficiaries with opposing views and wishes. A life tenant, for example, will wish to maximise the income they receive whereas the remainderman will want to see the overall value of the capital grow at the expense of the income received by the life tenant. Additionally, given the volatility of global stock markets, a major concern for trustees is how to protect the assets contained in their trusts.
When faced with all of these considerations what does the trustee do? It is the duty of the trustees to protect the assets of the Trust and this is best achieved by implementing a prudent investment process.
Prudent Investment Process
The prudence of trustees’ decisions is measured primarily by the investment process used rather than by the actual financial outcomes achieved as a result of any particular investment decisions. To comply with the requirements of the prudent investment rules, trustees should implement a three-step investment process, such as:
1. Establishment of the Trust’s Investment Objectives
These must be formalised in writing in relation to the requirements of the trust deed and balance the needs and wishes of all beneficiaries and not just for the benefit of current beneficiaries. This can present trustees with a real challenge as beneficiaries often have conflicting investment requirements for income, capital growth, liquidity and tax efficiency as well as tolerance for risk and portfolio volatility. These trade-offs can become particularly complicated when beneficiaries live in different countries and tax jurisdictions. Trustees should review and change these objectives as the law and beneficiary’s circumstances change.
2. Development and implementation of an Investment Strategy
The investment strategy is a formal written investment plan that sets out the trust’s strategy to satisfy the investment objectives of the trust taking account of:
- The capital available for investment and the beneficiaries needs for income
- The trust’s investment horizon and tolerance for risk
- Liquidity needs of the trust
The investment strategy document can be used by trustees to demonstrate to them the clarity and prudence with which investment decisions have been made. In this sense, it is an important risk management tool for trustees. In making the decisions on asset allocation across the asset classes and selection of individual investments within each asset class, trustees should follow proven investment principles and strategies to optimise the trust’s return.
3. Ongoing Investment Portfolio Management and Administration
Trustees must regularly evaluate and review the performance of the investment portfolio and its compliance with the investment strategy. Trustees also have an obligation to keep appropriate records of their investment transactions and their investment portfolio.
We recommend that trustees seek the professional advice and support they need to ensure their ultimate investment success and mitigate the potential legal liabilities that can arise in the absence of a prudent investment process.
Solutions to Trustees
GAM can help trustees implement a prudent investment process through our investment management service as well as provide an independent review of the portfolio when managed by the trustees themselves or a third party.
1. Advisory Service
GAM follows a structured investment process. Empirical research has shown that over 90% of investment returns are attributed to asset allocation and as such GAM adopts a top-down approach choosing the best investments from each asset class whose allocation is set according to the trust’s investment objectives, attitude to risk and time horizon.
Key Benefits to Trustees
- As a licensed investment manager, GAM is qualified to advise upon the implementation of an investment strategy to satisfy the trust’s investment objectives and undertake the ongoing administration of the investment portfolio.
2. Trust Review Service
Where the investment management is undertaken by the trustees themselves or a third party, GAM is qualified to provide an independent review of the investment portfolio on behalf of the trustees. The service aims to carry out a detailed analysis of the current investment portfolio, highlight any areas of concern and offer a solution to these concerns. This is achieved by a:
i. Fact Finding
- A meeting with the trustees to collate information regarding the trust’s investment objectives, attitude to risk and time horizon
ii. Trustee Investment and Suitability report, covering
- Suitability of the investments to meet the trust’s objectives
- Suitability of the trust’s assets in relation to the current investment climate
- Asset allocation
- Review of performance against a relevant benchmark
- Recommended corrective action to address any weaknesses within the portfolio
iii. Subsequent Annual Trustee Review meeting, to include
- An up-to-date Trustee Investment and Suitability report.
Key Benefits to Trustees
- The documentation resulting from the Trustee Review Service will assist trustees in ensuring they can prove a structured approach to reviewing and documenting the trust assets.
- The Trust Review Service demonstrates the obtaining of professional advice, which is clearly in the spirit of the Act(s) and the Trust Review Service formalises this relationship.
1. Advisory Service