“A trustee has a responsibility to guard the assets of others with a higher degree of care than he does his own.”
This quotation helps to illustrate why the work of a trustee is often challenging: a trustee has not only himself to consider but an obligation to provide for and protect others. In that context it is perhaps unsurprising that trustees owe wide ranging duties to beneficiaries. This article considers some of those duties and in particular the duty to invest.
The starting point for determining the specific duties owed by a trustee is the trust instrument. However, duties are also imposed by statute (Trustee Act 2000 (the Act)) and by common law. These include duties to:
- Disclose and avoid conflicts of interests
- Use due diligence and exercise reasonable care in managing the trust
- Act jointly with co-trustees
- Not profit from the trust
- Account for and give information to the beneficiary as to the state of the trust and trust property
A duty to invest
Trustees also have a duty to invest. This may be set out in the trust instrument but is also set out in the Act which (at section 3) gives trustees the power to put trust money into any investment in which they would be allowed to invest if they owned the funds themselves. There are, however, some qualifications to this seemingly unlimited power.
The trustee must exercise “such care and skill as is reasonable in the circumstances” - taking into account any special knowledge or experience they may have, or hold themselves out as having. Effectively, this rules out investments which are overly speculative (although see below in relation to assessing the investment risk). It also means that in most cases trustees should seek appropriate professional advice before making an investment decision. However, the fact that a trustee has acted on the advice of a professional will not necessarily excuse a trustee from liability in the event of poor performance. The investment decision remains that of the trustee and should be recorded in writing along with the rationale for the decision. Otherwise it is likely to be very difficult for the trustees to recall the thought process behind the decision in the event of a challenge, potentially years later.
Trustees must also ensure that the investments they make are suitably diverse. Individual investments should be considered in the context of the overall investment portfolio. This is a reflection of “modern portfolio theory” which recognises that, in a broad portfolio, the risk associated with an investment should not be judged in isolation, but against the contribution it makes to the overall risk profile of the portfolio.
The standard of care in choosing investments was considered in the pre-Trustee Act case of Nestle v National Westminster Bank plc (1994). Trustees had managed a trust since 1922 which amounted to £269,203 in 1986. The beneficiaries argued that the trustees had construed their investment powers too restrictively and that if the trust had been properly invested, it would have been worth over £1 million. The beneficiaries’ arguments were accepted. However, the court dismissed the claim because the beneficiaries had not proved that the trustees’ investment policy was one which no reasonably competent trustee would have adopted if they had appreciated the true extent of their investment powers.
On the face of it, the decision in Nestle is reassuring for trustees and their insurers, as is the fact that there are few reported cases against trustees arising from alleged breaches of the duty to invest. However, this perhaps disguises the clear risk of future claims given the significant effect that investment decisions can have on the value of trust assets and that where there is a loss beneficiaries will often look for someone to blame.
It should also be highlighted that the outcome in Nestle may well have been different had the case been decided after the Act came into force. Even at the time the court was critical of the trustees’ failure to carry out regular investment reviews (which are required under the Act).
The obligation to monitor and periodically review investment strategy will be particularly relevant at the moment in the light of Brexit.