Duty to incur reasonable investment costs

Duty to Pay Only Fair Fees: Section 7 of the UPIA directs, “In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.” It is fundamental to a trustee’s duties to ensure that expenses incurred by the trust are fair and reasonable. Being able to define who is being paid what by whom and whether these payments are fair and reasonable is implicit in the trustee’s duty of prudence. However, sometimes the fees paid to the members of the investment industrial complex are hard to define or identify. But just because it is hard doesn’t mean it should not be done.

Fair Fee vs. Lowest Fee: A trustee does not have a duty to “scour the market to find the fund with the lowest imaginable fees” (Hecker v. Deere & Co., 569 F.3d 708, 711 (7th Cir.2009).  But the trustee DOES have a duty to determine whether the fees being incurred for the various investment vendors are reasonable and appropriate.

UPIA Guidance: The comments on UPIA note that “wasting beneficiaries’ money is imprudent.” In devising and implementing strategies for the investment and management of trust assets, trustees are obliged to minimize costs. The Restatement of Trusts Section 3(d) notes that “concerns over compensation and other charges are not an obstacle to a reasonable course of action using mutual funds and other pooling arrangements, but they do require special attention by a trustee… [I]t is important for trustees to make careful cost comparisons, particularly among similar products of a specific type being considered for a trust portfolio” (Restatement of Trusts 3d: Prudent Investor Rule § 227, comment m, at 58 (1992).

AdvisoryHQ Study: Each year the online publication AdvisoryHQ conducts a fee study of the average advisory fees charged across the country from a wide sample size of Independent Investment Advisors which can be used as a guide to determine if the advisory fees being paid are consistent with the national average. Following are average financial advisor fees for portfolios of various sizes, as noted in the study.

Compliance Library: A prudent trustee will develop a record that demonstrates they have (1) calculated the amount the trust pays to investment vendors for their oversight, (2) determined whether the vendor’s pricing is competitive, and (3) adequately leveraged the trust’s size to reduce fees.

Let’s Have a Call: I’m happy to have a no-obligation consultation by phone if you or your clients would benefit from a further discussion about trustee compensation. Among the services we provide are (1) trustee compensation studies, (2) investment performance evaluations, and (3) expert testimony in court proceedings.

Onward,

Josh Yager, Esq., CFP®, ChFC®
805-899-1245
jyager@anodosadvisors.com

 

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. 

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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.