Trustee spotlight: why managed investments need regular reviews

Reviewing investments is a big responsibility for trustees. If they are negligent, the trust may fail in its objective and returns could suffer. We explain why this fiduciary duty is more important than ever

Current economic and geopolitical circumstances make reviewing managed investments in trusts more important than ever.

Add in new tax rules and investment styles, plus a focus on fees, and it’s clear why trustees must be diligent and increasingly responsive to change.

Trustees are responsible for ensuring assets perform in line with the trust’s objectives. During the current cost-of-living crisis, with inflation rising and interest rates low, it’s important to make sure investment objectives remain appropriate.

There is additional focus at the moment on how investment managers respond to market volatility as well as world events such as the Ukraine war, which can be unsettling for investors.

Trends in reviewing managed investments

Use of managed investments in trusts is growing, in contrast to non-managed investments held in Trust such as property and yachts. And this trend towards managed investments has shone a spotlight on how trustees look after them.

As trusts are often set up for multi-generational beneficiaries, investments are in place for the long term. This makes the trustees’ role more important.

Unprecedented geopolitical factors affecting investment markets over recent years have increased the focus from trustees. Markets have had to cope with events such as Brexit, the global Covid pandemic, the conflict in Ukraine and Russia, as well as more fundamental issues centred around global economics and monetary policy. Trustees have had to review how their investment managers respond and how these events affect performance.

With living costs also rising globally, it’s vital that trustees ensure their investment return objectives remain suitable to meet the trust’s needs.

When trustees consider changes, it can often be to the investment objective: where getting an inflation-plus return with little risk may once have been achievable, today’s climate makes this much harder.

Trustees must be realistic about what can be achieved. It’s important that the objectives remain current, to avoid cases where the risk/return profile remains mandated for longer than necessary.

As well as changing the objective to reflect the macro-economic outlook, trustees may vary it because of changed circumstances within the structure, such as a new class of beneficiary benefiting from the assets.

This could affect the time horizon and risk appetite, potentially altering the level of risk that can be tolerated within the investment portfolio.

Trustees must monitor tax, technology and fees

Global tax rules for high-net-worth individuals continue to evolve, so it’s important for trustees to monitor the domicile of both assets and beneficiaries to avoid unnecessary detriment.

For example, the tax situation can be challenging when offshore trusts have UK beneficiaries, particularly following recent changes to the UK domicile rules and holding property in offshore trusts.

As well as tax, trustees should look closely at fees. New technology and the rise of hybrid working are driving down costs globally, which feeds through to the investment industry.

It could be easy for trustees to be complacent about fees, which emphasises how vital regular reviews are to ensure they remain appropriate. This should be done while looking at the portfolio and objectives overall. Cheapest isn’t always best.

Investment managers of multi-generational trusts can also be complacent about what a fair fee arrangement looks like today. It’s up to trustees to scrutinise this during reviews.

The role of the trustee in managed investments

While asset management is, of course, outsourced to the investment manager, trustees need a good understanding of the portfolio.

They should know the asset classes and geographic regions to which the trust is exposed, as well as the liquidity of the assets. This is especially important if the trust makes capital distributions or pays out an income.

Trustees should review assets at least once a quarter. But it can be done more frequently if there are significant events such as a change in the trust structure or a seismic investment market shift.

If trustees are unhappy about anything, the starting point is normally talking to the investment manager to review the portfolio.

That discussion can allow the manager to explain why assets are managed in a certain way and any reasons for any deviation in performance. It also creates an opportunity to discuss the mandate objectives and fees, to make sure both remain suitable.

If the trustees believe that the investment manager is no longer best suited to achieve the trust objectives, the next step would be to approach alternative investment managers to assess how they can better achieve the objectives.

Paying for a professional trustee service can make fulfilling these duties much easier.

How Intertrust Group can help with trustee services

At Intertrust Group, we spend time building relationships with investment managers and beneficiaries.

Transparency and regular communication can turn potentially challenging situations into much smoother ones. We can also draw on our team of experts to assist with tax advice or search for new investment managers.

The benefits of expertly reviewing managed investments, and taking action where needed, cannot be overestimated.

 Why Intertrust Group?

• Intertrust Group in Jersey can assist family offices and private clients with professional trustee services.
• Our expert team of more than 300 specialists can create tailored solutions to protect your wealth and meet your long-term goals.
• Intertrust Group is a publicly listed company with 70 years’ experience providing world-class trust and corporate services to clients around the world.