General Fiduciary Standards

Care: The trustee must do their homework by gathering pertinent information to use in their investment decisions. This could exclude seeking advice. A higher level of care is required under the new rule.

Skill: It means that if the trustee does not have the relevant investment knowledge, he has the duty to seek such advice

Study Session 2, Reading 10

General Fiduciary Standards (cont.)

Caution: It states that caution is used to balance the need for current income with the need to guard against inflation. In addition, a total return approach to money management should be employed. In certain cases principal growth is used.

Loyalty: It is required by the trustee to avoid conflicts of interest by always acting exclusively in the best interest of beneficiaries.

Impartiality: It requires that the trustee act in a fair and reasonable manner when handling conflicting interests of beneficiaries.

Study Session 2, Reading 10

Prudent Man Rule vs Prudent Investor Rule

Prudent Man Rule: Diversification is expected of portfolio managers as a method of reducing risk.

Prudent Investor Rule: The duty of the fiduciary to invest and manage assets in the best interests of another.

Study Session 2, Reading 10

Prudent Man Rule vs Prudent Investor Rule (cont.)

Principles of Prudent Man Rule

Diversification is expected of portfolio managers as a method of reducing risk.

Trustees must base an investment's appropriateness on its risk/return profile (how it contributes to the overall risk of the portfolio).

Excessive trading as well as excessive fees and other transactions cost that are not warranted by the portfolio risk return objectives should be avoided.

Study Session 2, Reading 10

Prudent Man Rule vs Prudent Investor Rule (cont.)

Principles of Prudent Man Rule

Current income for the trust must be balanced against the need for growth.

Trustees are allowed to delegate investment authority. In fact, this is a duty if the trustee does not have the required level of expertise.

Study Session 2, Reading 10

Prudent Man Rule vs Prudent Investor Rule (cont.)

Use of Total Return: This rule measures reasonable portfolio return as total return (Income plus capital growth). It also emphasizes that the trustee’s duty is to not only preserve the purchasing power of the trust but in certain cases to realize principal growth in excess of inflation.

Risk Management: Under the new rule, the trustee has the obligation to assess the risk and return objectives of the trust beneficiaries and manage the trust in a prudent manner consistent with those objectives, rather than to avoid all risk.

Study Session 2, Reading 10

Prudent Man Rule vs Prudent Investor Rule (cont.)

Evaluation in a portfolio context: While the new rule calls for the avoidance of undue speculation and risk, it also encourages trustees to view risk in a portfolio context. For example, stock options are risky when help in isolation but can actually reduce portfolio risk when held as part of a properly structured portfolio. Protective put options are an example of this type of strategy.

Study Session 2, Reading 10

Investing and Managing Trust Assets

Factors Considered by the Trustee while Investing and Managing Trust Assets

Economic Conditions;Effects of Inflation and deflation;Impact of investment decisions on the beneficiary’s tax

liability;How each individual investment contributes to the risk and

return of the overall portfolio;

Study Session 2, Reading 10

Investing and Managing Trust Assets (cont.)

Factors Considered by the Trustee while Investing and Managing Trust Assets

Expected total return for capital appreciation and income;Other resources of the beneficiary;The beneficiary liquidity, income and capital preservation

requirements;Whether any assets have a special relationship to the

requirement of the beneficiary or the trust.

Study Session 2, Reading 10

Investing and Managing Trust Assets (cont.)

Factors Considered by the Trustee while Investing and Managing Trust Assets

Expected total return for capital appreciation and income;Other resources of the beneficiary;The beneficiary liquidity, income and capital preservation

requirements;Whether any assets have a special relationship to the

requirement of the beneficiary or the trust.

Study Session 2, Reading 10