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Simon Collins: Ethical case study on acting as a trustee


One of your elderly, and wealthiest, clients has asked you to act as a trustee to the trust that you have recommended.

Currently, you have no direct involvement with the client’s children, who are in their 40s, but you are aware that they have another adviser. The substantial funds that you have under management for your client, both within this trust and elsewhere, may pass to the control of the other adviser. You are therefore aware that this represents an excellent opportunity to become more directly involved with the next generation.

Should you agree to the request?


An intermediary will usually decline to act as a trustee for two reasons; the potential conflict of interest and the potential liabilities that may be incurred.

The FSA primarily deals with conflicts of interest within Chapter 10 of the SYSC, Senior Management Arrangements, Systems and Controls, handbook. Firms have to take all reasonable steps to prevent conflicts of interest from giving rise to a material risk of damage to the interests of clients. This can be between the firm and the client or between one client and another.

As adviser to the settlor your duty is to the settlor while as adviser to the trust, your duty is to the trustees.

However, as a trustee, your duty will generally be to the trust and thereby the interests of the beneficiaries. These may, of course, be both lifetime and ultimate beneficiaries.

If things go as you hope, you will also be appointed to act as adviser to your client’s children – perhaps while your client is still living and the trust remains in existence.

This would mean having responsibilities to the trust, the trustees, the settlor and the beneficiaries. It is these responsibilities that have the potential to cause conflict.

Where conflicts of interest occur, the FSA requires firms to recognise, record, manage and where necessary disclose such conflicts

Fallouts between generations of family are not uncommon and trustees and advisers to trusts can easily find themselves conflicted between the interests of the settlor or lifetime beneficiaries and the ultimate beneficiaries.

You may, for example, feel pressure to increase levels of income for the lifetime beneficiaries from the trust at the expense of capital growth. How do you balance this with your duties as trustee to protect and balance the interests of all beneficiaries including the ultimate beneficiaries?

Conversely, the newly established adviser role to the beneficiaries may well introduce additional pressures.

If you do not act as trustee, then the position becomes clearer and simpler as you are able to distance yourself from any dispute between lifetime and ultimate beneficiaries.

A trustee would be expected to monitor the performance not just of the investments but also of the investment adviser.

Clearly, where you are also acting as adviser to the fund, you would have to distance yourself from any such review process.

One option to be considered is whether another adviser within your firm could act as adviser to the trust, with appropriate Chinese Walls put in place.

You may or may not wish to make a charge to fulfil your duties as a trustee. Under the RDR, the possibility of cross-subsidising your time spent as a trustee through the commission received on the trustee investment will no longer be an option.

Finally, you need to consider the potential liabilities.

Trusts are generally not absolutely clear and there will usually be a degree of discretion that may be exercised by the trustees – for example, what level of risk to incur or what level of income to generate. Trustees may be well advised to arrange insurance to cover their actions though this will come at a cost – which would need to be reflected in any charges levied to the trust.

In theory, it may be possible to address the conflicts of interest arising from this situation but advisers are often better off concentrating on the advisory role and declining the responsibilities and conflicts that a role as a trustee may carry.

Simon Collins is managing director of Resources Compliance


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