The Trustee Act 2000 makes it clear that trustees are required to obtain and consider investment advice from a person they consider qualified to give it. This makes a great deal of sense but how does it work in practice?

The first job of the Investment Adviser is to help the trustees to prepare an Investment Policy Statement. This statement is intended to clearly identify what the proposed investment is required to achieve, over what time period, and how performance will be assessed in the future. A typical Investment Policy Statement will include the following:-

• The overall level of return expected and minimum yield required
• The income or capital requirements
• The nature of timing of any liabilities
• The liquidity requirement, including dates of planned expenditure
• The marketability of the investments – important if income needs to be raised quickly
• The time horizon of the trust – less than five years or long term
• The time horizon over which performance will be assessed
• The residence and tax status of the trust and the beneficiaries
• Any socially responsible investment constraints
• Other tax and legal constraints

Once agreed with the trustees, the statement will help the adviser in devising a strategy to generate a sufficient return to fulfill these objectives over the short, medium and long term.

Investment Risk

In an ideal world, trustees would expect a competitive and rising income with no risk to capital. In the real world however, interest from deposit accounts will not even match inflation. This means that the assets of very many trusts are guaranteed to go down in real terms. To protect trust assets against inflation and/or to generate a reasonable income in the current climate, some investment risk has to be accepted. Whilst cash that will be needed in the next year or two will have to be kept on deposit, money not earmarked for short term expenditure should be invested in a professionally designed portfolio of assets such as equities, gilts, corporate bonds and commercial property. The investment adviser will be able to suggest a portfolio to fulfill the objectives within the Investment Policy Statement and to explain the risks involved. It is for the trustees to decide if that level of risk is acceptable or whether the stated growth or income requirements were over optimistic. A degree of compromise is often required before an investment portfolio is finally agreed upon.

Investment Management

The size of the required investment largely dictates how the portfolio will be managed. This is because a major factor in reducing investment risk is diversification. As an example, investing in a portfolio of 40 or 50 shares carries much less risk than investing in just one or two. This means that smaller amounts might be directed towards collective investment such as unit trusts or investment trusts which can provide the required spread. There is often a combination of the two approaches with UK investments being directly held and foreign investments being in collectives. This is because the UK portion of a portfolio is invariable larger than the amount invested in (say) the USA or Europe.

Designing a suitable portfolio is only the start of the process. As different assets grow at different rates, the risk profile will move away from where it was originally set. For example, a typical portfolio might be invested 40% in equities with the balance in cash and fixed interest securities. If stock markets have a good year, the equity content might grow to 50% or more and the risk profile will have increased. A process needs to be established to regularly monitor and adjust the risk profile of the portfolio. The day to day management of larger portfolios, including rebalancing to maintain the original risk profile, is often passed to a discretionary fund management company. The role of the nominated Investment Adviser then becomes one of helping the trustees to evaluate the performance of the Investment Manager against the benchmarks agreed in the Investment Policy Statement as required by the Trustee Act 2000.

Independent Advice

To obtain impartial advice on the entire investment market, trustees should deal with an Independent Financial Adviser. There will than be no concerns about their recommendations being tainted because of access to a limited range of products or funds. Similarly, an Independent Financial Adviser will have no compunction about replacing an under-performing fund manager in the future – whereas an adviser working for the same company might not be in a position to do so.