A trustee would not get into an Uber until they defined the destination for their ride. A trustee would not hire an employee without describing at some level the work the employee was being hired to do. So then, why do so few trustees communicate a targeted rate of return to the investment advisor to whom they have delegated investment duties? Isn’t defining an investment objective fundamental to fulfilling the trustee’s duty to prudently administer the trust? Following are the common reasons why it’s not done:
1. The trustee doesn’t know how to define what return objective is needed to accomplish the trust purposes. (This is solved with a Texas Instruments BAII Plus time value of money calculator, or by using the “RATE” function in Excel.)
2. The investment advisor says, “You don’t need to define a return objective because even if you did, I can’t guarantee accomplishing that desired outcome.” (This isn’t about what the advisor can or cannot promise. It’s about the trustee charting the course.)
3. The trustee fears that defining a particular return objective will cause the investment advisor to “load up on risk” to accomplish that return objective. (This would only be a concern if the trustee did not have any ability to measure risk which, by the way, is an additional duty of care for a trustee.)
4. The trustee feels that the beneficiary will be disgruntled if the return objective is not accomplished. (The beneficiaries will be disgruntled no matter what the trustee does. It’s better to fulfill one’s duty of care and have disgruntled beneficiaries than fail to fulfill a duty of care and still have disgruntled beneficiaries.)
5. The trustee thinks there is already a return objective defined in the advisor drafted “Investment Policy Statement,” but upon further review realizes this important term is absent. (For the most part, IPS documents written by the investment advisor do not fulfill the trustee’s duties of care; they are CYA for the investment advisor written by their compliance departments.)
6. The trustee thinks they have fulfilled their duty to define a return objective by telling the advisor that a “moderate return” will do. (How does one measure if they have accomplished this wishy-washy objective? A “moderate” investment objective is like telling an Uber driver to “go north”.)
Despite any misunderstanding of the facts, a trustee is responsible for defining a particular and clear return objective to the investment advisor (for example, “6.0%” or “Inflation+4.0%” annualized). Look in any of the statutes that apply (UPIA, ERISA, UPMIFA). Further, the CFA Institute suggests it is critical that “careful specification of the overall investment performance objective” be documented. Failing to define a specific, particular, clear return objective is (1) inconsistent with a trustee’s duties of care and (2) inconsistent with best practices in the industry.
Following is a link to a sample Delegation of Investment Duties document which identifies the elements of a prudent delegation: RESOURCE LIBRARY
So let it be written… So let it be done.
Josh Yager, Esq., CFP®, ChFC®
Anodos helps individual trustees save time, reduce their personal risk, and fulfill their fiduciary duties. We do this by helping trustees develop and maintain a series of governance documents which demonstrates they have fulfilled each of their duties of care. We also will act as an expert witness to defend our clients’ findings in court. What makes us unique is that trustee governance support is all we do. We do not manage money, sell insurance, or accept referral fees. We don't have a horse in the race.
We help trustees save time, reduce risk, and fulfill their fiduciary duties. What makes us unique is that trustee governance support is all we do.