Trust Investment – Lessons Learned In Hard Times (2)
The recent global economic crisis proved a catalyst for breach of trust actions inter alia involving trust investment, with beneficiaries asserting that trust losses resulted from trustees’ negligence. How can the trustees of a Jersey proper law trust guard against such claims?
The starting point must be to understand the scope of a trustee’s powers and duties with respect to the trust assets and trust investment.
The Trusts (Jersey) Law 1984, as amended (the “Trusts Law”), gives trustees broad powers to deal with trust property and with trust investment; all the same powers as a natural person acting as beneficial owner of that property.
That legislation recognises that not every settlor will want the trustees to have such broad discretion, so trustees’ powers to deal with trust property are made subject to the terms of the trust. Save in the case of reserved powers trusts, most modern discretionary trusts do vest trustees with very broad powers to administer the trust assets.
With power comes responsibility, and a trustee’s freedom to deal with trust assets and trust investment is made subject to irreducible duties that the legislation imposes on trustees. A trustee must act with due diligence, as would a prudent person, to the best of his ability and skill, and observe the utmost good faith.
The Trusts Law also provides, that subject to the trust terms, a trustee shall, so far as reasonable, preserve and enhance the value of the Trust Fund. It is, however, common for trust instruments to expressly exclude these obligations.
In relation to a trustee’s investment duty, the English Court of Appeal judgment in the case of Learoyd v Whitely (1887) 12 AC 727 considered that such duty “is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.” That is an old English case, but likely to resonate in the approach of the Jersey courts.
An appropriate investment strategy is fundamental to ensuring that the trustee meets the high standard expected. The settlor’s rationale for establishing the trust will inform that strategy, and it must be formulated having regard to the powers conferred, and duties imposed, upon the trustee by the Trusts Law and the trust terms.
The Trusts Law does not impose an obligation on trustees to diversify trust assets, however, it may well be difficult to reconcile losses caused by lack of diversification with the fundamental obligation of prudence to which trustees must adhere.
Case authority recognises that diversification can afford protection. In the English case of Nestle v National Westminster Bank (1996) 10(4) TLI 112 the court advocated the principle that trustee investment performance should be assessed by reference to the risk level of the entire portfolio, rather than the risk attaching to each investment in isolation.
Trustees must also consider whether they possess the necessary skills to enable them to manage the trust assets effectively. The Jersey courts are likely to apply the general principle set out in the English case Cowan and others v Scargill and others  1 Ch 270. Namely, if trustees do not possess the requisite expertise, then it is their duty to seek investment advice, and to act on that advice with the same degree of prudence as is imposed on them in relation to trust investments.
The Trusts Law requires that trustees only delegate their powers to investment managers whom they consider to be competent and qualified. It also acknowledges that trustees who delegate in good faith and without neglect should not be liable for losses arising due to that delegation.
Devising a creditable investment strategy will be inadequate of itself. Ongoing monitoring of investments and delegates is essential. Regular reviews and reports will alert the trustees when underperformance needs to be addressed.
Being aware of investment powers and duties, formulating an appropriately diversified investment strategy, with appropriate delegation and ongoing performance monitoring, can guard against claims against trustees if investments do not perform.
For further information contact Mason Birbeck on 00 44 1534 630530 or email firstname.lastname@example.org