Mitigating risks for Trustees with investment decisions

How do Trustees protect themselves against the risk of them being held personally accountable for investment decisions they make?

If you are a trustee who sits on a board of trustees and simply wants the organisation to do a good job of something you really care about, then this may be essential reading.  Most trustees sit in this camp, but their duties often go further, and with that so too goes risk.  This risk tends to be less visible.   Unless of course something goes wrong.  Then it is too late.

I have been a Trustee before I was a financial adviser.  Consultants and asset managers would make presentations to us and the jargon and complexity of their presentations was intimidating.  Not only did I not understand, I was hesitant to ask questions for fear of confirming my ignorance.  I did not know what questions to ask, and had a fear I would not have understood the answers even if I had good questions.

And yet it is me, not them who is accountable to the beneficiaries for a defendable investment strategy.  Thanks goodness nothing went wrong, but what if we had selected a fund manager who simply consistently underperformed?  Would the beneficiaries be happy that they had less money.  Would they consider me to be the cause?  Ignorance would not save me.

There is a standard expected of trustees who are professionals.  The Trusts Act 2019 is specific.  Section 30 states;

Duty to invest prudently

When exercising any power to invest trust property, a trustee must exercise the care and skill that a prudent person of business would exercise in managing the affairs of others, having regard, in particular,—

(a) to any special knowledge or experience that the trustee has or that the trustee holds out as having; and

(b) if the person acts as a trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.

It seems I should have known the questions to ask, and I should have been able to understand the answers.

There is a process developed by an organisation known as Fi360 who have developed standards to guide and protect trustees.  Those standards are organised around four areas that involve a number of individual processes.  They are;

1. Organise
2. Formalise
3. Implement
4. Monitor

For example, in the area of implement this is the standard provided for due diligence process in selecting an investment.  It includes,

1. Does the investment have sufficient regulatory oversight?
2. How long is the providers track record?  Three years is a minimum.
3. How stable is the organisation?
4. How large is the fund?  It should have at least $75m in invested assets.
5. Are the asset holdings consistent with the style of the fund?
6. Is there a strong correlation in style to the peer group?
7. Are the fees reasonable?
8. Is the performance adequate, relative to the risk taken?
9. How does the asset managers performance compare with the peer group across 1,3, 5 year cumulative periods.

This is quite a challenge, not only to get this information, but to be able to make relevant comparisons. As a trustee I would expect to have someone help me answer those questions, and I would want that person to be able to take an objective view and communicate the facts to me in clear simple language.  Often Trustees only get a chance to listen to those pitching for their business.  Sorting the wood from the trees is difficult.

So what is the safe route?

1.  Employ an independent asset consultant, or

2.  Use practitioners who use the Fi360 Global Fiduciary Practices.  Better still use providers who have been certified against those practices.  Look for the CEFEX Accreditation.

As Warren Buffet once said, “it is hard to see who is swimming naked, until the tide goes out”. Of course by then it is also too late.