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Investing trust and company assets (Appointment of an investment advisor,…
Investing trust and company assets
TSPs have a duty to protect and preserve the value of the trust fund and to enhance it as far as is reasonably possible. In order to do this, it is likely that the TSP will need to invest the trust fund. An OSP may choose to incorporate an underlying company to hold the investment
The objective of the trust will influence the TSP's investment choices, for example if the trustee is required to provide an income for the beneficiaries the trust fund will need to be invested in a different manner to that that would be required if the TSP required capital growth
TSPs especially in offshore jurisdictions will usually have express wide powers of investment included in their trust deed and also benefit from further powers contained within the trust law of their jurisdiction
Historically there were no regulations in respect of the powers and duties of TSPs relating to the investment of trust assts. TSPs only had the necessary power to invest the trust assets in those investments that were specified in the trust deed
In the UK, the TA2000 has substantially amended the investment powers and duties of TSPs in the UK and has also introduced prudent investment powers and rules. Section 3(1) of TA2000 provides that unless the terms of the trust deed says otherwise, all TSPs of all existing and future trusts may invest the trust assets as though they are beneficiary entitled to the trust funds
Standard investment criteria
Under s.4 of TA2000, the TSP, when exercising any power of investment should
have regard to the 'standard investment criteria'
review the performance of the investments of the trust
consider whether, having regard to the standard investment criteria, they should be varied
The standard investment criteria in relation to a trust are
the suitability to the trust of the investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind
the need for diversification of investments of the trust, in so far as it is appropriate to the circumstances of the trust
Obtain investment advice
Under s.5 of TA2000, before exercising any power of investment, a TSP, having regard to the standard investment criteria
should obtain and consider proper advice about the way in which the power should be exercised
When reviewing the investments of the trust, a TSP should obtain and consider proper advice about whether the investments should be varied
Proper advice is the advice of a person reasonably believed by the TSP to be qualified to give it by his, her or its ability in, and practical experience of financial and other matters relating to the proposed investment
Appointment of an investment advisor
Unless the TSP has particular investment expertise, the TSP would normally appoint professional investment advisers to assist them with the administration of the trust assets
The TSP would need to ensure that before they do this, they are certain that they are authorised to do so under the terms of the trust or the laws of the jurisdiction
In some instances, the client acts as the investment adviser. Where this is the case, the client should be formally appointed in the same way as any other adviser, remunerated if appropriate. The TSP should ensure that they are confident that the client has the necessary expertise to warrant such an appointment
Before appointing an investment adviser, the TSP may review the following items
Name of the regulator of the investment adviser
Reputation of the investment adviser and size of the firm - to include assets under management, number of clients and type of clients
Ownership structure of the firm
Expertise and services provided by the investment manager including details of staff experience and any areas of specialisation
Performance of the investment manager against their peers and against the market
Fees and charges of the services offered by the investment manager
Reporting process (frequency and type of reporting)
Custodians to be used for holding the trust assets
Any restrictions imposed on the manager by its regulator
That the appointed adviser is a professional and has a proven track record in the duties and responsibilities to be undertaken
The status of the prospective adviser (settlor, beneficiary etc?)
That the individual or firm has an understanding of the trust concept
That a succession plan is in place to appoint a replacement adviser if the appointed adviser were to die
That the service level agreement or similar document is in place
That written objectives are in place with the investment adviser to cover such matters as
risk appetite
any income or capital growth requirements
any liabilities which need to be planned for
any constraints or special requirements
any relevant tax and/or legal considerations
how the investments should be managed (eg discretionary / advisory)
Monitoring of investments
A TSP should undertake regular reviews of the investments of the trust to consider aspects such as
the performance of the portfolio against its benchmark
whether the investment manager has performed in line with the market
whether the investment manager has invested the funds in line with the objective of the trust fund (for example income or capital growth)
whether the investment managers is taking too much risk to achieve the performance
whether the circumstances of the beneficiaries have changed since the previous investment review
Where the performance is not adequate, the trustee should consider whether it is appropriate to take action such as disposing of the investments, though this may be difficult if the investment is an a family company
Investment in family companies
Given that the TSP has a duty to protect and preserve the trust fund and to enhance it as far as is reasonably possible, it it usual for TSPs to invest in investment portfolios that are managed by investment professionals and for them to avoid higher risk investments
Investments in private companies pose additional risks to TSPs as the trustee is required to actively monitor the investment and to take action where the investment is not performing well. Such off such holding may be against the wishes of the settlor or beneficiaries. The TSP will need to manage their expectations while being being sure to chart the correct path to disposal or think carefully about the risks of retaining such assets
OSPs should carry out due diligence and sufficient monitoring on these types of assets and ensure that they are appropriately reviewed and sufficient information is obtained from the directors of these companies about underlying assets. In this respect OSPs will usually
Obtain certified copies of the certificate of incorporation and the Constitution documentation of the companies
Obtain copies of register of directors, shareholders and secretary and update if any changes are made in the future
Obtain copies of the financial statements of the companies
Examine whether there are any requirements for regulatory approval for the activities being undertaken by the companies
Complete full due diligence on all directors and beneficial owners
Ascertain whether or not there are any tax related issues