It would appear that many of these trusts were set up several years ago and the landscape has changed significantly since then. I think you are very sensible in being concerned about this, as it may mean that you personally could face problems that result from the possible non-compliance by one of the firm’s other partners. It is probably worth reviewing the changes that have been introduced by the Trustee Act 2000 to identify potential areas of concern and possible solutions.
Before the Trustee Act 2000, the key piece of legislation was the Trustee Investment Act 1961 which laid down a specified approach for the investment decisions that trustees needed to take, in the absence of broader powers granted in the trust document itself.
This approach was not always serving the best interests of the beneficiaries so the Trustee Act 2000 was introduced. This new act gave trustees wide powers of investment, broadly as if they were investing the funds in their own personal capacity.
However, the granting of greater investment freedom to trustees was counterbalanced by a range of formal obligations.
The Trustee Act 2000 requires trustees to exercise reasonable skill and care and defines the standard investment criteria for a trust as:
- The suitability of investments.
- The need for diversification.
It also requires trustees to keep investments under review and to obtain and consider proper advice to ensure that the standard investment criteria are met.
In addition to the particular requirements of the act, you should also take account of the financial planning implications of trustees’ common law responsibilities that operate in parallel with the requirements of the Trustee Act 2000. These duties include taking account of tax considerations including the tax status of the beneficiaries and ensuring fairness between different categories of beneficiary.
There is also an issue with the use of a stockbroker for the investments as problems have been identified with this style of investment, including the fact it is less tax-efficient than collective investments, it is often less well diversified than portfolios of collectives and stockbrokers have an incentive to trade unnecessarily, thereby incurring excessive costs.
Turning now to possible solutions, I would suggest that you consider adopting a trust review service, which would help to formalise the trustees’ approach to ensure they meet all the requirements of the act and provide an audit trail that clearly documents the steps being taken to ensure compliance with the act.
The overall objective of the service would be to carry out a detailed analysis of the firm’s current trustee investment portfolios and highlight any areas of concern in relation to the Trustee Act 2000.
This would ensure that the trustees were meeting the requirements of the act and that the rationale for any changes to the investment portfolio were clearly documented in a manner that significantly reduces the likelihood of them facing any future complaints from the underlying beneficiaries.
As it is difficult for most investment portfolios to outperform significantly in all investment climates, it is equally important that areas such as tax-efficiency and diversification are properly considered and reviewed on a regular basis within a consistent structure.
The trust review service should also provide, on a regular basis, a suitability report which will look beyond just the investment performance and focus on the wider ranging requirements of the act.
This report should formally review, in detail, the following areas:
- Suitability of the investment assets to meet the trust’s objectives.
- Suitability of the trust assets in relation to the current and likely future investment climate.
- The diversification strategy by asset class, geography, fund manager and product type.
- Taxation position of the current assets and summary of the tax-effectiveness of the assets being held.
- Suitability of the existing benchmark and historical performance against this.
- The strategy for formal trust reviews and the documentation produced.
- Overall summary of the current position in relation to all aspects of the Trustee Act 2000.
It is my belief that only a review of this depth on an annual basis will ensure that all aspects of the act are complied with and I would strongly recommend that you consider operating such a service.
Patrick Murphy is director of wealth management at Thinc