Duty to Monitor the Total Return of a Trust Portfolio

Statutory Considerations: Section 2(c)(5) of the Uniform Prudent Investor Acts directs that “Among that a trustee shall consider in investing and managing trust assets are… the expected total return from income and the appreciation of capital;” In response to this duty, a prudent trustee will adopt a policy in which the total investment return for the portfolio will be reported quarterly.

The Standard: Without regular performance data it is impossible to determine if the trust’s actual performance is consistent with the long-term target return for the portfolio. This return calculation should be consistent with the Global Investment Performance Standards (GIPS) developed by the CFA Institute–time-weighted rate of return net of all fees.

Reporting Standards: The CFA Institute’s GIPS Guidance Statement on Calculation Methodology defines total return as “the rate of the return that includes the realized and unrealized gains and losses plus income for the measurement period.” The standards “require a time-weighted return because it removes the effects of external cash flows, which are generally client-driven…and best reflects the investment advisory firm’s ability to manage the portfolio according to a specified mandate, objective, and/or strategy.” ( For partnerships or other investment types where managers retain discretion for timing of funding and cash flows, other calculation methodologies may be more appropriate. ) Further, the return should be calculated net-of-fee to reflect the return the trust actually experiences.

Ask and you shall receive: The vast majority of investment advisor’s firms have access to very sophisticated performance software that will meet this standard. However, it may not be provided unless prompted by the client. In some cases, the advisor is not able to provide Time Weighted Rate of Returns net of fees. If this is the case the trustee needs to carefully consider how committed they are to the relationship if doing so results in an inability to measure the “... total return from income and the appreciation of capital.”

Compliance Library: A prudent trustee will develop a record that demonstrates they have access to performance data that is (1) time weighted to eliminate suing of returns due to positive or negative cash flows and (2) is presented net of fees. (Link to a Sample Engagement Letter for the Anodos Fiduciary Governance Service.)

Give me a call: If you or your clients serve as a trustee and a further discussion would be helpful regarding this duty, I am available for a phone call to discuss the facts. Simply click on the following link to book a 20-minute consultation.