UPIA §9 re Prudent Delegation of Investment Duties

Many trustees implicitly trust the investment manager to whom investment duties have been delegated. They trust that the manager’s strategy is reasonable. They trust that the return the manager produced was appropriate given the level of risk that was taken. They trust that the manager’s representation of being “above average” is supported by facts. This kind of trust may be good enough for some, but for a trustee it is not.

The Duty to Prudently Delegate

The Prudent Investor Act directs, “A trustee may delegate investment and management functions… The trustee shall exercise reasonable care, skill, and caution in: (1) selecting an agent; (2) establishing the scope and terms of the delegation…; and (3) periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.”

How Do You Know?

Few trustees have any evidence – other than what their manager says – that the trust assets are reasonably invested. Trustees are obligated 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 money managers they have decided to use.

An Investment Policy Statement Is Not Enough

Many trustees think that by accepting an Investment Policy Statement drafted by their investment manager, they have fulfilled their duty to prudently delegate. They have not. The IPS is evidence of the investment manager’s understanding of the parameters of the relationship, but it does not stand as a substitute for the trustee’s clear delegation to the investment manager.

Checklist for a Prudent Delegation

Following are several suggestions, depending on the nature of the trust, for how a trustee might create an evidentiary record that a prudent delegation has been made.

 

• A prudent delegation will have a written plan that includes the purposes, terms, and distribution requirements of the trust.
• A prudent delegation will establish a fair benchmark for comparison that appropriately balances the risk and return of the trust.
• A prudent delegation will carefully consider the cost of the investment services purchased to determine if they are in line with industry norms and appropriate for the assets being managed and the purposes of the trust.
• A prudent delegation will include a background check of the party to whom investment duties have been delegated on the FINRA website to determine if any complaints, judgments, felonies, or regulatory issues have been filed (see http://brokercheck.finra.org/).
• A prudent delegation is NOT simply sticking with the manager that the decedent/grantor initially used. What was good for the gander may not necessarily be good for the goose.