As published in Hawke's Bay Today. Canny View by Nick Stewart, Authorised Financial Adviser.
With 300,000 to 500,000 trusts operating in New Zealand, a new trusts bill introduced to Parliament earlier this year has the potential to deliver wide-ranging impacts.
In this three-part series I've given an overview of the legislation and explored the ramifications of changes and what people need to do to protect themselves.
This week I'm addressing the implications for trustees who oversee investment portfolios (known as investment stewards).
Their disclosure obligations in the new trust act will increase the reputational and liability risk of not properly engaging with investment governance practices.
Investment governance is a specialised discipline focusing on the legal duties of care and loyalty owed by investment fiduciaries (fiducial obligation).
One of the key areas is around disclosure.
The new trust bill proposes a general obligation for trustees to make enough information available to beneficiaries to enable the terms of the trust deed to be enforced against trustees.
Put simply, this would mean trustees cannot decide to withhold trust information from beneficiaries, based on the age or circumstances of the beneficiary making the request.
Moving to the investment side, many trustees don't have the relevant documents, which sit under the definition of trust information, for purpose of the bill.
These documents include an investment policy statement, signed by all trustees and evidence of monitoring financial investments and the services provided, for example, by a financial adviser.
They must also have documented proof showing the efforts of trustees to carry out regular due diligence on providers - especially when they engage them.
Part of the due diligence process is understanding the cost you are paying for the service you are getting.
A significant number of trustees do not know the true cost of the management of the investment assets.
Frequently, that is because there is cost under the waterline, like brokerage or commission.
Another point to note is that many trustees believe the information they are receiving is advice when, in fact, it is an information-only service with no liability on the adviser.
That means the information is provided for the trustees to make the ultimate decision on whether to invest or not.
You need to ask yourself - are we receiving advice or is this an information only service?
Imagine if you were a trustee who signed off on money being invested in New Zealand's largest Ponzi scheme, Ross Asset Management. There was no investment policy statement, no registered documents, and no custodian to firewall assets from the financial adviser.
It would have exposed the trustees, under the proposed bill, to possible litigation and reputational risk.
It's also common that trustees have not read the trust deed for some time, if at all, which may prohibit certain types of investment, thus the investment made is in breach of the trust deed.
The bill is going to affect many lawyers, accountants and other professionals who act as independent trustees for clients.
Those who volunteer their time and skills as trustees will certainly want to consider whether they continue to make independent trustee services part of their offering.
Making decisions about investments is time consuming and requires specialised understanding.
It's only natural trustees would want to stay out of trouble in managing the risk, therefore trustee services in a personal capacity might not be offered in the future.
The likely outcome is that trustee services will be the domain of professional trustee companies and that those independent trustees who do remain will need to be compensated for their time as professionals because they will be judged, in mediation or in court, as professionals.
• Nick Stewart is an authorised financial adviser and executive director of Stewart Financial Group. Stewart Group is a Hawke's Bay-owned and operated independent financial planning firm based in Hastings. The advice given here is general and does not constitute specific advice to any person.
• The views expressed in this article are those of Stewart Financial Group Ltd. The disclosure statement for Stewart Group is available free of charge by contacting us on 0800 878 961. This article contains class advice only and does not consider objectives or situation of any particular investor. It should not be construed as a solicitation to buy or sell any financial product, or to engage in or refrain from engaging in any transaction. We recommend that you consider the appropriateness of information to your situation.
