A sound understanding of basic investment duties goes a long way towards reducing the risks. Here are some general rules:
Invest trust property only in a manner authorized by the trust deed and the law.
Historically, the range of trust investments was restricted by statute and trustees, necessarily, had to adopt a highly cautious approach. Over time, as attitudes changed and the portfolio of investment products expanded, the old rules came to be viewed as outdated. It was felt that trustees and beneficiaries were unduly prejudiced by lack of access to opportunities. Today, it is accepted practice for trustees to be given wide investment powers.
In the Isle of Man, the modern approach to trust investment is enshrined in the Trustee Act 2001 (the Act) – section 3 provides that “a trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust”. Known as the “general power of investment”, it applies in addition to the powers in the trust deed, but subject to any modifications or restrictions which the trust deed may impose.
Have regard to the “standard investment criteria”.
With regards to any proposed investment, trustees should consider (1) the suitability of that kind of investment to the trust, and of the particular investment as an investment of that kind, and (2) the need for diversification of investments of the trust, in so far as is appropriate to its circumstances.
Keep investments under review.
Trustees must review trust investments from time to time and consider whether they should be varied, again, having regard to the standard investment criteria.
Take investment advice from someone qualified to give it.
This applies unless the trustees conclude that advice is unnecessary or inappropriate in the circumstances.
Exercise reasonable care and skill.
The Act imposes a duty of care which requires trustees to exercise such care and skill as is reasonable in the circumstances when investing trust property. A parallel duty exists under common law “to take such care as an ordinary prudent man would make if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide”.
When choosing investments, have regard for financial considerations only.
Trustees must not allow themselves to be influenced by their own or anyone else’s personal, political or ethical views.
If investment decisions are to be delegated to an investment manager, ensure the appointment is properly documented.
The appointment should be in writing and must contain an agreed policy statement. The arrangement must be kept under review.
These are general principles and, for the most part, subject to express modification in the terms of the trust. Each trust is different and there is no substitute for reading the terms of the trust deed.