Solicitors
Solicitors refer clients to MH Financial Management for two reasons:
They know they are dealing with a professional, a Chartered Accountant who has spent several years in the City with KMPG Peat Marwick, one of the largest firms of Accountants in the World. It is very rare for Independent Financial Advisers to hold this qualification.
Solicitors expect Martin to provide the same first class service as their own practice. MH Financial Management offer a unique and empathetic service to the bereaved and can advise on Trustee investments for the surviving spouse. This often means providing an income now (for nursing home fees for example) and for the capital to eventually pass intact to the remainder men.
THE TRUSTEE ACT 2000
The Trustee Act 2000 came into force on 1 February 2001. It replaces the Trustee Investment Act 1961 and parts of other legislation affecting trustees including the 1925 Trustee Act.
It is designed to improve and bring up to date legal provisions in what had been a complex and unsatisfactory area. It upgrades trustees powers in relation to investment, delegation, insurance, and acquiring land. In particular it grants wide investment powers to all trustees, replacing the limited provisions of the 1961 Trustee Investment Act. While many trusts established since 1961 have wide express powers of investment, there are many who do not.
The provision of wide statutory investment powers is only a part of what the Act does.
It defines trustee investment responsibilities in relation to taking advice and reviewing investments, and confers new delegation powers particularly of relevance in relation to investment management.
The result is that trustees have to become more proactive than previously; their attention is much more closely drawn to their duty to actively consider and review investment assets.
They are also being required more explicitly to take expert advice and this is the role of specialist investment advisers such as MH Financial Management Limited.
The Duty of Care (Section 1)
The Act starts by defining a general duty of care imposed on trustees when undertaking a range of functions as trustees. These functions include exercising investment powers. The full range of functions is specified in Schedule 1 of the Act and also includes acquiring land, using agents and insuring property.
The duty is that when exercising any of these functions a trustee must:
Exercise such care and skill as is reasonable in the circumstances having regard in particular; to any specialist knowledge or experience that he has or holds himself out as having, and if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind or business or profession.
The first element has a subjective element; the knowledge and experience of the particular trustee (whether actual or represented by him).
The second element has an objective element; what would be expected of a professional person acting as a trustee. For example, where you are within a profession like that of a solicitor, but in practice do not have the technical knowledge, and do not hold yourself out as having it, the objective test is still likely to apply.
It is clear that a higher standard is required of professional, remunerated trustees and even if the professional trustee is not remunerated. However, that is covered under the general law, where trustees are under a general duty to maximise return on a trusts assets; in the best interest of the trust.
Investment The General Power of Investment (Section 3)
A trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust. This excludes investment in land. Other than secured loans, but Section 8 gives separate powers dealing with acquiring and investing in land. You will see that: All trustees now have wide investment powers.
There is similar wording to the standard sort of investment powers normally included in trusts. Historically, this has been limited to income producing assets, but current practice would go beyond this with a variety of capital growth investments.
The Standard Investment Criteria (Section 4)
Exercising an investment power (under the Act or otherwise eg a specific power in the trust deed), or Reviewing the investments of the trust. The criteria a trustee must have regard to in these situations are:
The suitability to the trust of investments of the same kind as any particular investment proposed to be made or retained (eg a particular unit trust), and the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.
There is a specific duty to review investments from time to time. This is not clear but an Annual review at the very least is likely to be sufficient.
Charity trustees are expected to review their investments and investment policy at least annually. Suitability relates to issues of risk and timescale; what sort of return needs to be produced over what period? Where is the balance between producing an ongoing income and retaining growth? There may be issues of ethical policies, particularly where charities are concerned. The diversification and circumstances of the trust raises issues of size and purpose. Small assets may give limited scope for diversification.
A Will Trust may be invested solely in a freehold property with good reason for not selling and diversifying. There is the Needs to Take Advice When exercising investment powers: a trustee must (unless the exception applies) obtain and consider proper advice about the way in which, having regard to the standard investment criteria, the power should be exercised. (Section 5(1)). This duty applies to the exercise of any investment power, whether under the Act or otherwise.
When reviewing investments:
When reviewing the investments of the trust, a trustee must (unless the exception applies) obtain and consider proper advice about whether, having regard to the standard investment criteria, the investments should be varied (Section 5(2)).
The Exception:
A trustee need not obtain such advice if he reasonably concludes that in all the circumstances it is unnecessary or inappropriate to do so. (Section 5(3)). Examples of where advice would not be necessary: The small size of the trust funds does not justify the relative expense of taking advice.
The trustees have the necessary investment skills and knowledge themselves. The size or nature of the specific investment in question does not justify taking advice.
Proper Advice
Proper advice is the advice of a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment, (Section S(4)). The trustees have to consider though not necessarily follow the advice.
The checklist for trustees on exercising investment powers would include:
Is the proposed investment in their powers?
Is the type of investment suitable in relation to the nature of the trust?
Is the particular investment of the type suitable for the trust?
Is it appropriate for this trust to be diversifying investments, and if so does the proposed investment fit within that objective?
Is advice necessary or unnecessary?
If advice is necessary, who can best give it?
In practice, trustees will most likely want an ongoing relationship with one investment advisor at a firm and will consult and take advice from that person well before reaching the final stage above.
Summary of the provisions relating to Investments:
All trustees now have the wide general investment power.
All investment powers are to be exercised in accordance with the Standard Investment Criteria; suitability and need for diversification.
There must be regular review of investments in the light of the Standard Investment Criteria, and variation as necessary (active management).
There is the need to obtain advice before exercising powers or when reviewing unless reasonable not to. The standard duty of care applies to all these activities. Appointing Agents Delegable Functions can be delegated to an agent.
For private trusts, this includes any function except for certain key functions which the Act specifies must be retained and exercised by the trustees personally: Distribution of assets.
Deciding whether payments made out of income or capital.
Appointment of trustees
Delegation of trustee functions. The approach for charities is different. Only certain specified functions can be delegated, chiefly: Investment of assets, and Fundraising. The Act therefore specifically permits the delegation of investment management functions to an agent. This goes beyond simply obtaining advice on proposed investments from an advisor.
Trustees are given general power to determine and agree the remuneration of any agent.
MH Financial Management Limited are specialist Trustee Investment Advisors and look forward to being of assistance. Please contact MH Financial Management on 01727 860000 for an initial discussion.