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
April 7, 2021 - If your parents are over age 75, it might be time for you to provide some assistance to them. Yes, this is tough. Nothing in life has properly prepared you to address the issue of what kind of help you...
March 29, 2021 - A recent episode of The John Chapman Show featured a conversation with fellow WorthPointe advisor Matt Addington, CFP® about backdoor Roth conversions — a follow up to a previous episode where the pair talked about Roth conversions in general. During...
March 15, 2021 - WorthPointe advisor John Chapman talked with Senior Care Authority founder Frank Samson about finding the best option for senior housing and care on the latest episode of The John Chapman Show. In addition to stressing the importance of being educated...
February 18, 2021 - No one likes to talk about their own death, so estate planning is something often put off—or not done at all—with unfortunate consequences. WorthPointe advisor John Chapman talks with estate planning attorney Darlynn Morgan about why it’s so important to...
November 2, 2020 - With the 2020 election just around the corner, many people may be wondering how the stock market might react and if they should be reviewing their investments leading up to November 3. Understanding that, WorthPointe advisor John Chapman dedicated a...
- Independent Advisors: Do You Have Freedom Or Are You Drowning?
- Financial Advisor Magazine’s 2020 RIA Ranking Has WorthPointe at #416 of 715 firms