A requirement of The Trustee Act 2000 is that an Investment Policy Statement should be prepared for all trusts. This should have had a major impact on all those professionally involved with the drafting or advisory work on trusts, particularly Trustees.
If you are a Trustee then you may be regularly presented with literature from investment advisory companies informing you that you must delegate the investment management of trusts. They will make the point that you should allow them to manage all of your trust funds or end up being liable for breach of my duties under the Act.
However, there are available precedents that allow trustees to insert a clause allowing the trustees to opt out of the restrictions on delegation in ss12 to 15 of the Act, which includes the duty to prepare an investment policy statement. Is this worthwhile, when you can turn the burden of preparing an investment policy statement into a blessing and a useful tool for trustees?
Although the Trustee Act states that the investment policy statement should be prepared by the Trustees, in practice most trustees would struggle to produce an investment policy statement that is practical and fit for purpose.
The investment policy statement should be drafted primarily to protect the beneficiaries of the trust. So for best practice the draft should be prepared by an investment advisory firm , they should make clear of a link to an asset allocation model that is specific to the beneficiaries and benchmarked to a model that is regularly published and therefore widely available.
An investment policy statement drafted in this manner is a very useful discipline and a very valuable exercise for both investment advisors and trustees, and of course ultimately the beneficiaries.
The benchmarking to a widely available index will provide a means for the trustees to regularly check on the investment performance of the trust and the skills of the investment manager.
This is particularly helpful when holding annual trustee meetings, as it enables trustees to ensure that the investments are being managed in line with the criteria established.
It also enables trustees to “cut through any waffle” and any failure to perform in line with benchmarked asset allocation performance will provide the trustees with a rationale for appointing a different investment manager.
We trust that this article has been useful. If you have any queries on trusts or preparation of investment policy statements. Contact one of our Financial Planning Consultants, at Pareto Lawrence we offer both Financial and tax planning advice to corporate and private clients.
Watch out for our forthcoming blog on “How Pension Trustees are sidestepping Investment Policy Statements to the detriment of policyholders”.