Originally published in the STEP Journal, March 2009
Sharon Parr TEP, Head of Barclays Wealth Structuring UK, discusses the steadying hand of a prudent trustee.
Credit crunch, financial crisis, turmoil in the world stock markets, banks and investment houses going bust, alleged fraud in the fund industry, recession... there is no doubting that we are in the middle of a storm and that as trustees we have to remain calm and focused and ensure that investment strategies and actions remain on course.
In times of recession and turmoil, marketing teams talk of opportunities, speculative investors gamble on volatile stock markets, investment managers fret over red screens and falling indices and trustees... well, trustees try to pull on the cloak of prudence, settle down behind their ledgers, and do what they always do best – stay safe, boring, but inherently trustworthy and reliable.
Yet there is an immense challenge to acting as a prudent trustee when everything around you is falling apart. It can take great strength and resolve in the face of beneficiaries and settlors who are panicking, angry, worried and who may, quite blatantly, disagree with what their trustee is doing and suggesting. Hanging over all this, of course, is the ugly threat of litigation should it all go wrong.
Believing in the basics
Worried? There is no need to be because as professional trustees we are fully aware of our duties and responsibilities and all that is needed is to continue to steer the steady course and follow the clear objectives originally set down.
It is not a question of panic and survival and clinging to life rafts, it is a time for ensuring you adhere to your internally laid down trustee investment policies and processes, double checking that every action is correct, that second opinions and expert advice are sought as and when necessary and that individual trust strategies are reviewed and reassessed. In short – it is a time to stay focused, calm and to act with prudence.
The Prudent Man Rule
It is worth considering what the word 'prudent' may mean when applied to a trustee. One often quoted definition, which also fits the current climate, is 'The Prudent Man Rule', which is based on common law stemming from a decision of the Massachusetts Court in 1830.
The Rule directs trustees 'to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested'.
There is also a more potent phrase applied to the trustee's responsibility towards the trust assets and which comes from Guernsey Trust Law. It is written in old Guernsey French and is short and simple: 'A bon pere', which in broad terms means that the trustee should look after the trust assets 'as would a good father'.
Given the case for prudence, what should the prudent trustee be focusing on in volatile and turbulent times? The first action must be to remain proactive and to revisit the original objectives agreed with the settlor and/or beneficiaries. This can be done simultaneously with a trust review, because now is the most appropriate time to carry out the next trust review, not on the next review date that may be six months away. A good trust review form will cover all the key areas: liquidity needs (including the management of liquid cash and income requirements); investment parameters; investment performance; investment diversification; a reassessment of the potential volatility of returns to ensure that these remain aligned to the objectives; and, finally, analysis of reports from any advisors to whom trustee powers have been delegated.
Monitoring delegated powers
The latter is a key area because a number of trustee responsibilities will, quite properly, have been delegated to professional advisors. Meeting with them and having a thorough, hard review and open conversation about the investment portfolio is crucial. There are probably four key elements to focus and act upon.
The trustee should review and agree an investment profile with set objectives, which meet the needs of the settlor or beneficiaries and which have a time horizon and acknowledged and accepted risk-tolerance expectations.
The trustee must understand and have total confidence in the ability of the investment manager to deliver on the chosen profile. This is best achieved through a well-articulated and transparent investment process together with continual ongoing communication.
The trustee needs to constantly monitor and openly review and question the investment performance to understand what is driving the returns and, if appropriate, where and why the investment strategy is failing.
In the current volatile climate, it may be appropriate to revisit the profile and strategy more frequently than normal – rather than every three years, change it to 18 months or even annually, even if only to agree that nothing should be changed.
Throughout this process it is also important to ensure that everything is well-documented and all actions properly minuted.
Communication with the settlor and beneficiaries
An extremely important area that can be overlooked amidst the focus on investments, is communicating with the settlor and the beneficiaries. They will have expectations and concerns that need to be dealt with in a professional manner. They will be looking for reassurance and for confidence in their trustee and this is where effective communication skills are extremely important. The words will, of course, have to be supported by action or, if it is appropriate, no action.
A number of settlors and beneficiaries will be immediately active themselves and in contact, wanting to know that you are on top of all the issues and undoubtedly asking you questions that you cannot and should not be answering, such as what are the trustees views on the world stock market? What should be bought and sold? How are you, their trustee, going to limit losses? How long is this all going to last? What are you intending to do and why aren't you doing x, y and z?
This is where corporate trustees need to have in place a clear course of action. This will range from who will speak to the settlors and beneficiaries, through to the message that will be given. They will want to understand why their trustee is (or is not) taking a particular course of action and their trustee needs to be fully briefed with the answers.
Remember – the future starts now
Despite being surrounded by negativity, a trustee must remain positive and also focus on the future. They should take advice on when to sell to avoid selling at the bottom and when to recommence investment to avoid investing in a still-falling market. All the while ensuring they do not bow to pressure from settlors and beneficiaries to take action at an inappropriate time. It is worth remembering that when the equity market crashed in 1987, it recovered to end the year higher than it started. A trustee will be just as readily criticised for 'missing the boat' as for 'sinking the boat'. That is the unenviable position of the modern trustee!
Throughout stormy periods such as these, the fundamental role of the trustee does not really change. Their duties and responsibilities to the settlor and the beneficiaries remain exactly the same as does their duty to preserve the trust assets. If anything changes, it will be the need to focus on the investment of trust assets in even greater detail and constantly review, monitor, question and communicate.
For students wishing to read some classic case law relevant to the prudent trustee and investment of trust assets, I would refer you to the following.
Re Mulligan (deceased) – 1998 New Zealand case
Nestle v NatWest Bank, 1994
Re Chapman 1896
Re Hart's Will Trusts 1943
Dominica Social Security Board v Nature Land Investments 2008
Lord Nicholls of Birkenhead,1995 – quoted in Lewin on Trusts (2008 at p1285)
Harvard College v Armory – Massachusetts Court, 1830
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.