Unlocking the power of Investment Policy Statements for Trustees

Trustees have long since, demonstrated their purpose in protecting and enhancing the entrusted or settled assets, however to what extent do trustees carry out their responsibility? A subject that is increasingly scrutinised in a world with complex technical asset classes and beneficiaries demanding transparency.

When trustees are challenged as to whether they are acting in the best interests of the beneficiaries it’s really important for trustees to have auditable evidence of robust decision making. We often refer to the matter of Harvard College and Massachusetts General v Francis Armory in 1930, where on appeal Justice Samuel Putnam delivered the famous opinion; 

“All that can be required of a trustee is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of the capital to be invested… Do what you will, the capital is at hazard.” 

 An opinion that still holds value today. 

Whether a trustee delegates investment powers or not, there must be a process that takes account of all investment considerations and the subsequent decisions executed. This is unless the settlor has reserved investment powers, which in some ways exonerates the trustee, although not entirely. Trustees of discretionary trusts where there are financial assets, such as investment portfolios, bank deposits, listed securities, private equity etc, rather than only non-financial assets such as; jewellery, art collections, yachts, aircraft, etc should, at the earliest opportunity construct an Investment Policy Statement that is in the best interests of the wider beneficiary class. 

The Investment Policy Statement or IPS, is designed to record the trustees’ or directors’ overall policy in relation to the investment of the financial assets within the structure. 

The IPS forms part of the permanent record of the structure and should be reviewed regularly for ongoing suitability and accuracy, based on the changing circumstances of the structure and those of the beneficiaries, during its lifecycle of administration. 

Where the trustee does not hold investment powers (reserved powers), it is really important that an IPS is not completed as there would be a risk the trustee is regarded as, proactively involved with investment matters.  

The IPS will capture relevant information including risk appetite, investment restrictions, liquidity requirements along with many other important factors in order to obtain a clear understanding of the investment’s objectives. Nevertheless, an IPS is only of value if it is regularly reviewed and amended to ensure that it remains ‘fit for purpose’. 

Regulated Trust Company Businesses (TCBs) will be expected by their jurisdictional financial services regulator to have a process which evidences investment risk within trust structures. The process should be comprehensive and proportionate to satisfy the fiduciary risk and beneficiary expectations. The process should be consistent and include ongoing regular reviews of the individual IPS.   

Beneficiaries, particularly those in the ‘Next Gen’ category are increasingly aware of their rights to hold trustees accountable for their actions. Whether it’s by questioning the actions and decisions of the trustee and/or resorting to bringing a complaint before the Courts. Although the ‘bar’ is set high for beneficiaries to prove a breach of trust for gross negligence, there are other considerations! For example, when a trustee doesn’t exercise its investment powers appropriately, the trustee then becomes open to criticism by the Court and possible cost orders. There may well be additional scrutiny and possible regulatory fines by the jurisdictional regulator for the trustee, not forgetting the inevitable press coverage and potential of reputational damage! 

In conclusion, trustees play a pivotal role in protecting and enhancing entrusted or settled assets. In an increasingly complex financial landscape, trustees face numerous challenges that demand a high level of professionalism and expertise. By adhering to a comprehensive IPS and conducting regular reviews, trustees can effectively manage financial assets and fulfil their fiduciary duty to beneficiaries. For further information on Investment Policy Statements, or if you have any questions, please contact Graham Marsh.

This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained within this article without obtaining specific professional advice. Please contact Equiom Group to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.