Monitoring Beneficiary Investments

Monitoring Beneficiary Investments

Establishing The Scope Of The Delegation And Monitoring The Investment Agent

You will need to establish the scope and terms of the delegation and define what role the investment agent shall play and how they will work with you. At no time may you delegate investment functions in a way which is contrary to, or inconsistent with, the terms of the trust document.

Are you going to grant to the investment agent absolute discretion to determine asset allocation, and what percentages of the various asset classes will comprise the trust portfolio?

. Are you going to let the investment agent select the individual securities or funds? . Are you going to limit the scope of the investment agent?

Assuming you may, and indeed do, delegate, all investment functions to an agent, you need to speak with the agent, and understand what actions he or she wishes to take. They need to understand that a trustee is required to have an investment plan or strategy to comply with the prudent investor rule.

You, as trustee, will still be required to monitor the work of the investment agent on an on-going basis. Ostriches need not apply. You can’t just throw the investments into the lap of the agent and throw up your hands. You need to periodically review performance and also whether the agent is doing what you want him or her to do. If the agent is doing things which are not contemplated by the delegation, you have a duty to stop it. If you want the agent to purchase index funds and a select basket of equities, and she is purchasing options, you need to put a stop to that.

Are You Permitted To Delegate?

This rule permitting a trustee to delegate investment functions certainly varies from state to state and you should check the governing law of the trust administration. Your trust counsel will certainly understand the issues of delegation and methods by which you, as trustee, may be protected from possible li ability, for the investment of the trust assets. Trust counsel can also assist with defining the scope of the delegation. If a state does not permit delegation, or if the trust document suggests that it cannot be done, it may make sense to seek permission of the beneficiaries, or, better yet, a court, to establish a delegation of investment functions.

On a personal note, my passion is making and collecting wine. One of the highest designations which a wine professional may attain is that of “master sommelier” – one with advanced skill and knowledge through both classroom achievement and in depth experience. As one sommelier instructor stated to a class of students: “If you know a lot about California wine, and a good amount about Bordeaux, you’re going to fail.” The point is well taken.

Just as a master sommelier must be an expert in a vast array of wines, wine-making regions, techniques, terrors, and food, your investment agent must be competent enough to understand the myriad of investment issues. I hinted at this earlier, but it bears repeating: stay away from relatives. I can’t tell you how many “nephews” or “boyfriends” were “hired” to invest the trust assets inappropriately. Knowing a decent amount about investing, the stock market, and watching CNBC each day, falls miserably short. It is difficult for me to imagine an individual who has both the time and the experience to properly manage funds of another. You need to hire an expert.

There are a lot of “financial consultants” and other investment or “wealth professionals” who aren’t worth the cost of their embossed and raised business cards or their slick marketing brochures. Many of them are “stock jocks” or salespersons.

While many financial professionals may indeed be knowledge able and savvy, finding a great “financial consultant” is harder that finding a good trust department or bank. Consider trust departments of banks and trust companies themselves with a so-called “open platform”.

Many banks and trust companies have the research teams and economists on board to provide advice and commentary about stocks and bonds, the equity markets, interest rates and the economy. If they are truly objective and independent, they will also provide access to other money managers, or suggest other funds, not just their own.

If you need an international component to your portfolio, an open platform investment agent will suggest mutual funds or money managers or index funds which may be appropriate for the trust portfolio – not just the proprietary funds which that investment agent’s employer sells. You want an open platform – the opportunity to invest in a host of other funds or money managers – including their competition.

When you are ready to retain an investment agent:

• Interview them
• Talk to them
• Meet each person on their team that may be working with you
• Meet the portfolio managers who will be doing the actual investing
• Meet the account officers or relationship managers who will be handling the day-to-day
• Ask them how long their average client stays with them . How large is their average portfolio?

Costs And Fees

You have an ongoing duty to keep compensation and costs reasonable – including that of your investment agent. Various sources suggest that the average mutual fund which invests in equities charges anywhere from 1.11 – 1.25% on an annual basis. Compare this to the Vanguard 500 Index fund which invests in the S&P 500 Index and charges .08% annually. That’s a huge swing!

Be mindful of fees within fees. The underlying funds which an investment agent might invest in will most probably be in addition to the investment agent’s own fees, and your compensation. You need to understand how investment services and products are priced. It will affect how much is reasonable for you to take as compensation. After all, if you are delegating investment authority to an agent, and they are charging, say, .80% annually, can you justify charging a trustee fee of 1% annually? No.

The average annual fee for a bank or trust company to serve as trustee of an account whose value may go up to $3 million is somewhere between .9% and 1.3% annually. As suggested, should you delegate investment authority to an investment agent, your fee for serving as trustee should not be as high as if you hadn’t hired an investment agent. Had you retained the authority over all investment functions, there’s more work for you to do. By delegating to an investment agent, you are doing less work and, supposedly, incurring less liability. So, frankly, you shouldn’t get paid as much.

No double dipping! You can’t hire an investment agent who charges the trust 1% to invest that $5 Million trust and you also take a 1% fee. Be reasonable. Pigs get fat but hogs get slaughtered.

Be mindful of smaller banks which offer you a discount off their published fee schedule. Sales persons at banks are hired to get new business – to convince you to use them and not their competitors. They get paid based upon the new revenue that they bring in. While you can negotiate anything, including fiduciary fees, be mindful of a sales person who is selling you on price. While cost is a factor, it is merely one factor and less important than the experience, knowledge and service which an investment agent will provide.

Don’t sign a fee agreement or other account opening documents without having your counsel read it first. There may be language in there which you don’t want. Watch out for arbitration provisions and other terms which may prohibit you from handling disputes in a court of law, or which alter the standard of care which an investment agent should provide to you. Finally, be on the lookout for hidden exit fees and other commissions or costs which may not be reasonable.

Recently, I was hired to negotiate a trustee’s fee dispute between a wealthy client and a small bank which wanted a 1% “exit fee” when they were fired. While 1% doesn’t seem that awful, it was $100,000 for about a year’s work – on top of their management fee! My role was to sue them for “unreasonable” compensation or settle the dispute.

I worked. They settled. But if someone had read the account opening documents prior to signing them, all this could have been averted.