Duty to Prudently Administer or “Check, check, double check, recheck” (1 of 12)

Duty of Prudence: Section 2(a) of the Uniform Prudent Investor Act directs, “A trustee shall administer the trust as a prudent person would…”  But how is one to know how a prudent trustee would act?  There are three sources that inform what “prudence” means. These are (1) the instruction in the trust document itself; (2) the statutory language of the Prudent Investor Act; and (3) the court’s historical interpretation of what the statute means. A prudent trustee will consider these sources and develop a series of policies and procedures that, if followed, ensure compliance with this “prudent person” standard of care.  A “Fiduciary Governance Statement” would reasonably be the first document in the trustee’s compliance library. 

Curating the Compliance Library: Once these policies and procedures have been memorialized, administering the trust consistent with the “prudent person” standard is a matter of having a compliance calendar and following the procedures that a prudent trustee would employ. As each governance procedure is completed a record is created and stored within the compliance library. In this way, the trustee creates an evidentiary record that demonstrates they have acted prudently and in good faith. If the day comes when an attorney representing a disgruntled beneficiary argues that the trustee acted imprudently and in bad faith, the trustee will have a robust document set to rebut this claim. 

Key Documents in the Compliance Library: Following is a list of nine central duties of care for which there should be a series of policies and procedures and for each a document placed into the library every year:

  1. Duty of prudence – UPIA §2(a): Adopt a Fiduciary Governance Statement that defines the policies, procedures and compliance calendar the trustee will follow in their prudent administration of the trust.
  2. Duty to prudently administer – §2(a): A prudent trustee will develop a “trust pro forma” which identifies the expected distribution rate needed to comply with the trust purposes, terms and distribution requirements.
  3. Duty to establish return objective and risk expectations – §2(b): A prudent trustee will establish return objectives and risk expectations that are calibrated to the trust’s anticipated distribution rate and long-term capital objectives.
  4. Duty to measure total return – §2(b)(5): A prudent trustee will measure the total return (income and appreciation) of the trust’s assets to compare actual investment performance against the trustee’s return objectives.
  5. Duty to diversify the trust assets – §3:  A prudent trustee will diversify the trust assets by considering the diversity of securities, economic sectors and asset classes.  If there is excess concentration in a particular asset or asset class, there should be a rational basis for this concentration.
  6. Duty re paying only fair costs – §7:  A prudent trustee will only approve fees that are appropriate given the trust’s size and complexity. This duty not only applies to the investment advisors, property managers, and legal and tax advisors, but also for the fee the trustee receives for their role as chief fiduciary.
  7. Duty to investigate – §2(d): A prudent trustee will investigate if there are any conflicts of interest that may exist between the investment advisor and the trust through layered fee agreements, proprietary products, or other relationships that might interfere with the advisor’s objectivity.
  8. Duty to prudently select investment agents – §9(a)(1,2): A prudent trustee will be able to identify and apply reasonable criteria when selecting the investment advisor that is responsible for managing the trust assets. The trustee will also be able to produce evidence of the objective and investment parameters that they, the trustee, instructed the advisor to manage towards.
  9. Duty to monitor investment agents – §9(a)(3): A prudent trustee will adopt a series of key performance indicators (benchmarks) against which the investment advisor’s activities will be compared.

Give me a call: Click here to book a 20-minute consultation if you or your clients serve as a trustee and a further discussion on this topic would be helpful. 

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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Anodos develops and maintains an investment governance process for trustees so that their fiduciary duties are fulfilled.