Duty to Establish a Target Return: Section 2(b) of the Uniform Prudent Investor Act directs, “A trustee’s investment and management decisions… must be evaluated… as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.” A prudent trustee would not hire an employee without describing at some level the work the employee was being hired to do. However, lemmings don’t consult their map before running their race with disastrous outcomes, and few trustees take the time to establish a return objective for the assets they are responsible for. Following are the common reasons why this duty is so frequently neglected:
- 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.)
- The investment advisor says, “Even if you did define a return objective, 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.)
- The trustee fears that defining a particular return objective will cause the investment advisor to “load up on risk” to accomplish that target return. (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.)
- 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 a disgruntled beneficiary than fail to fulfill a duty of care and still have a disgruntled beneficiary.)
- 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 industrial complex do not fulfill the trustee’s duty to establish a return objective. Rather, they are frequently CYA documents created by the investment advisor’s compliance department.)
- The trustee thinks they have fulfilled their duty to define a return objective by telling the advisor that a “moderate return” will do. (How would a trustee know if they have accomplished this wishy-washy objective? A “moderate” investment objective is like only telling an Uber driver to “go north.”)
Set the Course: Despite any misunderstanding of the facts, a trustee is responsible for defining a specific and clear return objective to the investment advisor (for example, “6.0%” or “Inflation+3.0%”). All of the prudent investor statutes (UPIA, ERISA, UPMIFA) include this mandate. Further, the CFA Institute suggests it is critical that “careful specification of the overall investment performance objective” be documented.
Compliance Library: A prudent trustee will develop a record that demonstrates they have established a return objective for the trust assets. Though this discipline is rarely practiced and trustees too often accept ambiguous objectives defined by the investment industrial complex, it is the law and it needs to be done.
Give me a call: If you or your clients serve as a trustee and a further discussion would be helpful regarding this duty to establish a return objective, I am available for a phone call to discuss the facts. Simply click here to book a 20-minute consultation.
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.