The Uniform Prudent Investor Act at Section 9(a)(3) directs, “A trustee shall exercise reasonable care, skill and caution by periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.”
Many trustees implicitly trust the investment advisor to whom they (or their predecessor) delegated investment duties. They trust that the advisor’s strategy is reasonable. They trust that the return the advisor produced was acceptable given the level of risk that was taken… that the benchmark the advisor compares themself against is fairly established… that the advisor’s fees are fair. They trust that the advisor’s representation of being “above average” is supported by facts.
This kind of trust may be good enough for some, but for trustees it is not. Few trustees have any evidence – other than what their investment advisor says – that the trust assets are reasonably invested. Trustees are obligated by the Prudent Investor Act to make their investment decisions based on something more than trust. They are obligated to find the facts and record the basis for the confidence they put in the investment advisors they have decided to use.
However, conducting this level of review requires an insider’s knowledge of the investment industry. It requires experience to ferret out the facts from the promotional claims. It requires a disciplined investigation that few trustees are equipped to conduct. To help with this data gathering exercise we have developed a series of questions and framed them in the voice of the trustee so that these questions can be easily “cut and pasted” into an email inquiry:
- What rate of return is the investment portfolio designed to target long-term? (I appreciate that nothing is guaranteed, but as trustee I am obligated to define a plan that takes into consideration a targeted rate of return for trust assets.) – UPIA §2(a) re Duty to Have a Plan
- What blended benchmark of major asset classes reasonably represents the risk and return characteristics of the portfolio? How has the portfolio performed versus this blended benchmark? (I understand that there is no perfect benchmark, but as trustee I am required to balance the risk and return characteristics of the trust assets.) – UPIA §2(b) re Duty to Balance Risk and Return
- Please provide a summary of the major and minor asset classes among which the trust corpus is diversified. (I recognize that reasonable minds may differ on the most appropriate allocation to each distinct asset class, but as trustee I am obligated to exercise reasonable discretion in the allocation of the trust corpus.) – UPIA §3 re Duty to Diversify
- What are the management costs for the portfolio as measured both as a percent of the portfolio and in actual dollars paid? What is this fee based upon? (I understand that fees can range widely based on the strategy and products being used, but I need to create a record that I understand the fee agreement for this trust.) – UPIA §7 re Duty to Incur Only Reasonable Costs
- Please provide a short explanation of the management approach and investment strategy being used to accomplish the risk and return objectives of the trust. (It is my duty to record and confirm that the investment strategy and approach being used are reasonable and consistent with the state’s prudent investor rules.) – UPIA §9 re Duty to Prudently Delegate
Josh Yager, Esq., CFP®, ChFC®
Anodos helps trustees (ERISA, individual, and endowment) save time, reduce their personal risk, and fulfill their fiduciary duties. We do this by helping the trustee conduct audits of the money managers to whom investment duties have been delegated. Fiduciaries have an affirmative duty to provide ongoing and independent oversight of the money managers. What makes us unique is that we do not manage money or sell insurance. Doing fiduciary audits, benchmarking studies, and performance attribution is all we do.
We do what trustees should do, but don't know how
Anodos develops and maintains an investment governance process for trustees so that their fiduciary duties are fulfilled.