The performance of liquid assets in many trusts was dismal in 2022 and likely fell short of expectations projected by the trusts’ investment advisors. If so, some trustees are going to get sued.
In 2022, the S&P 500 was down 18% for the year and the Bloomberg Barclays Aggregate Bond Index was down 13%, the worst since 1976. This means that a trust portfolio with an allocation of 50% stocks and 50% bonds likely had a negative return in excess of 15% in 2022.
Our focus at Anodos over the last 15 years has been to help each trustee prepare for these circumstances that periodically arise and to walk alongside the trustee, attorney or CPA involved to help provide necessary guidance.
Predictably, the investment industry reports, “This is a long term investment process. There will be good years and bad years. You need to be patient and let the markets do their thing.” But this response – which this author fundamentally agrees with – will fall on the deaf ears of the trust beneficiary if that beneficiary is already predisposed to distrust the trustee.
I predict that there will be a disproportionate number of “Trustee Breach” lawsuits in 2023 by disgruntled and misinformed beneficiaries who have unreasonable expectations about how the trustee has decided to deploy the liquid capital of the trust portfolio. This happened in 2001 after the Dot-com Bust, it happened in 2009 after the Financial Crisis, and I predict that a similar spate of spurious lawsuits are going to come down the pike in 2023.
These lawsuits make common claims:
1. The trustee unreasonably and imprudently delegated investment management duties to XYZ firm.
2. The trustee unreasonably and imprudently failed to monitor the activities of XYZ firm.
3. The trustee approved fees to be paid to XYZ firm that are unreasonably high.
4. The trustee failed to establish return objectives and risk expectations of the trust.
5. The trustee failed to prudently diversify the trust capital by failing to allocate more capital to the things that “obviously” would have performed better.
6. The trustee failed to consider the prevailing economic environment in 2022 when overseeing the allocation of the portfolio.
In short, the disgruntled beneficiaries and their overzealous legal counsel – typically working on contingency – will throw the kitchen sink into their Petition for Relief and attempt to dig up any other concerns in their discovery.
It is wise for any trustee along with their attorney to engage an independent party to conduct a portfolio review to opine upon whether the portfolio was reasonably managed despite the poor performance in 2022. This independent report will provide contemporaneous evidence that rebuts each and every of the anticipated claims. Not only can Anodos help mitigate these potential issues, but we will if necessary act as an expert witness in defending our findings in court.
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 help trustees save time, reduce risk, and fulfill their fiduciary duties. What makes us unique is that trustee governance support is all we do.