I believe the majority of trusts are managed by family members rather than professional trustee or fiduciaries. That is hard to prove since trusts are private documents, but my near 30 years of experience working with trustees makes me believe that is the case. Having family members act as trustee saves money over the cost of a professional trustee. That makes sense then, doesn’t it? However, this is often proof of the adage that you get what you pay for.
I act as an expert witness in trustee lawsuits, so I can attest to the fact that most family trustees do not understand what their fiduciary duties are. No one is willing to take the time to educate them. That includes the trust attorney who drafted the document for the family.
What I share here is not exhaustive, nor is it legal advice. It is my observations after years of experience in this field. And I want to make clear; these are not all of the trustee’s fiduciary duties.
The trustee has a duty, under the Uniform Prudent Investor Act, to have an overall investment strategy that has risk and reward objectives that are suitable to the trust. What exactly does that mean?
- It means the trustee has a reasoned expectation that the investment portfolio will, over time, produce a certain total return.
- It means the trustee has calculated the anticipated standard deviation of returns (that is the technical term for risk) of the portfolio.
- And, both of these objectives are suitable for the trust.
So, the trustee is expected, under the law, to perform at a level that is generally only accessible to professional investment advisors. That should be cause for pause!
The trustee has a duty to only pay costs that are reasonable given the adopted overall investment strategy. Depending on the types of investments held by the trust, this may be very difficult. A trust portfolio laden with Private Placements and Limited Partnerships will be paying fees that are hard to discover. They will almost certainly be very high compared to other options that will have similar expected returns and risk profiles.
A trustee is required to diversify the trust portfolio. There is no precise definition of diversification that a trustee can hang his hat on to be sure he has adequate diversification. However, it is clear that one should err on the side of more rather than less diversification. For example, a typical equity portfolio at WorthPointe will contain between 11,000 and 12,000 stocks in the stock mutual funds that make up a fully diversified portfolio. This kind of portfolio carries much less risk than a portfolio of 20 or 25 “best idea” stocks.
So, if you are a trustee, how do you answer these questions?
- What is your overall investment strategy and what are its risk and reward objectives?
- Are the costs you are paying for the investment and management of trust assets reasonable compared to what you could be paying?
- Is your trust portfolio optimally diversified, so you are not susceptible to a lawsuit from inadequate diversification?
Other articles filed under LA/OC CFP Team Posts
July 17, 2019 - That’s not a typo in the headline; this blog is directed toward intrapreneurs — folks who hold manager, VP and director positions at public companies. These ambitious leaders often self-select as, but since they work within large organizations, they have...
June 12, 2019 - As I’ve noted in a previous blog, I like to break down where money goes into four buckets: Live, Give, Owe and Grow. Today, I’m going to expand on that concept by introducing the five sub-categories to the Grow bucket...
May 14, 2019 - The younger you are, the less you’re likely able — or willing — to think about what your retirement might be like. That’s OK, but you probably do know one thing, even if you’re a millennial with years and years...
May 8, 2019 - Analysis paralysis — we’ve all been there at some point. I know I’ve been guilty of it. As a financial advisor, I see it all too often with millennials and Gen Xers when it comes to financial planning. And for...
April 30, 2019 - John Chapman joined WorthPointe in 2018, to bring our presence to Orange County. Since then, his entrepreneurial drive has helped us expand our reach throughout the region. Initially attracted to our company culture and tailored investment approach, John found a...
- No Goals? No Problem — If You Focus on Habits and Systems
- The Morgan Report 2019 Q1 Review: Top Gun Reboot & Investment Landings