Contents

Chapter 7
Investment

Investment managers

RECOMMENDATION

R17 The new Trusts Act should provide that:
(1) Trustees are authorised to appoint investment managers and give them authority to make investment decisions.
(2) The appointment of investment managers should be subject to the following legislative safeguards:
(a) trustees must act honestly and in good faith (R2(1)(c)) and exercise the reasonable care, diligence and skill of a prudent person of business (R14(2)) when appointing an investment manager, and must review the investment manager’s performance periodically;  
(b) trustees must create a written policy statement that gives guidance as to how investment functions are to be exercised by an investment manager setting out the general investment objectives, and require investment managers to agree to comply with the policy statement; and  
(c) trustees are liable for any default of their investment manager where the trustees have failed to act honestly and in good faith (R2(1)(c)) and exercise the reasonable care, diligence and skill of a prudent person of business (R14(2)) when making the appointment of a manager or monitoring the investment manager’s performance.

New default position

7.36Currently trustees can, and normally should, get advice on potential investments. However, they must personally assess such advice and decide whether to accept or reject it. Under the current default provisions trustees are not able to appoint investment managers and give them authority to make investment decisions, although our research indicated that many modern trust deeds enable trustees to do this.

7.37The Commission recommends that trustees should be able to appoint investment managers with authority to make investment decisions as the new default position. Most submitters favoured trustees having the power to delegate to investment managers. Submitters commented on the complexity of the investment task, preferring that it be handled by specialised professionals, as it is not reasonable to expect trustees to possess this degree of expertise or engage in complex financial analysis when highly trained specialists can undertake such tasks for a fee. The use of investment managers recognises that making sound investment decisions in today’s world requires considerable skill and judgement. The range of potential investment products and combinations is now immense and investment has become far more complex as a result. It is simply not realistic to require trustees to undertake this function personally.

7.38A suitably qualified and competent professional investment manager is likely to do a better job than many lay trustees. With appropriate safeguards there may also be less risk in allowing for the appointment of experts than in leaving investment in the hands of trustees. The recommended power to appoint investment managers is constrained by important safeguards designed to ensure that trustees set the investment policy and exercise appropriate care in choosing and monitoring their appointed manager. The Commission considers that periodic review of the investment manager’s decisions and having a written policy statement are necessary to ensure trustees remain accountable for their actions.

7.39As already noted, the new provisions will be default provisions. It would therefore be possible for a settlor to exclude or alter the power of appointment, or exclude or modify any of the safeguards in the trust deed.

Application to existing trustsTop

7.40Trustees of existing trusts should have the power to appoint investment managers, subject to anything in the terms of the trust precluding this.