Navigating the Advice Minefield

The importance of choosing the right investment adviser for a trust and monitoring its performance cannot be overemphasised. But the sophistication of modern financial markets and the availability of a huge and developing range of investment products has made the task of a trustee much more difficult than before.

Even UK charity trustees have been forced to review the possibilities of the changing investment world and consider modern investment techniques such as hedging (Steel & ors v Wellcome Custodian Trustees (1988) 1 WLR 167).

The complex constitution of many managed funds may include the use of derivatives and complex charging methods. Trustees should look carefully at how the investment manager is remunerated and whether he is receiving other benefits, such as return commissions, trailing commissions, or performance fees (which may not be suitable for a trust).

Article 21 of the Trusts (Jersey) Law 1984 provides for the appointment of “investment managers whom the trustee reasonably considers competent and qualified to manage the investment of the trust property”. The words “reasonably, competent and qualified” should perhaps be underlined.

The prudent trustee should appreciate that an effective portfolio requires a global perspective on investment involving strategic decisions on asset allocation, geographical allocation, and stock or fund selection, as well as overall currency mix and the base currency for the trust fund.

Following the Barings debacle, trustees should also consider the level of investor protection afforded by proposed investment houses for both securities and cash and whether it may be prudent to appoint several different advisers, particularly in larger trust funds.

Further, in appropriate cases, trustees may wish to consider the use of independent global custody facilities offered by the larger banks as a 'safety net' for trust funds. The main advantages of these facilities are the confidence that stocks are held in good names, the reduction of counter-party risk through standard delivery versus payment settlement procedures, and the ease with which trustees can replace under-performing investment advisers without having to transfer stocks.

In selecting an investment adviser, the trustee must demonstrate prudence and objectivity. This militates heavily against the practice adopted by some bank trustee corporations of both choosing and retaining themselves as investment advisers, regardless of performance.

Trustees should beware of the Rahman decision when considering the powers of the settlor relating to investment.

The preferred route for trustees of a new trust, having made a broad decision on investment policy and parameters in consultation with the settlor, is to request several investment advisers to make presentations or to take part in “beauty parades” for the trustees.

In large trusts it may also be prudent for the trustees to appoint an 'investment committee' to deal with the appointment of investment advisers and review of investment policy. The investment committee would probably consist of a senior member of the trustee company (with appropriate experience), an independent adviser, such as an actuary or stockbroker, and the settlor.

The review or monitoring of a trust's investment performance is a duty trustees must take very seriously. At the very least, they should insist on regular reporting by investment managers and an annual meeting with them to discuss the investment portfolio's per- formance as well as future investment policy.

The investment policy may be influenced by the changing status of beneficiaries, changes in relevant tax laws and the investment climate.

The trustees should request that standard measures of total return are provided on a consistent basis which they should consider against relevant benchmarks, which may vary with the construction of the portfolio. This is a complex area, particularly in larger trust funds where it may be suitable for the trustees to employ the services of professional investment monitoring services.

A number of reputable companies, which have previously been active in monitoring pension fund performance, are now involved in a wider range of performance measurement services including the performance of private trust funds.

Beneficiaries and their advisers are becoming increasingly litigious, and much trust litigation stems from a basic dissatisfaction with trustees, investment performance.

The choice and the monitoring of investment advisers is a minefield in which trustees, particularly professional ones, must tread very carefully.