Free financial advice for professional trustees

The purpose of this article is to dispel some myths about investing on behalf of trusts, and provide some general advice to professional trustees that may result in the beneficiaries of your trusts being substantially better off.

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As background, I’ve previously acted as a trust lawyer, and have also worked in a professional trustee organisation where I was responsible for a large number of trusts. And of course, I’m an Authorised Financial Adviser.

One thing that often bothered me as I acted in a trustee capacity, or acted on behalf of trustees, was that I saw the trustee spending considerable time on the trust, having to apply a lot of professional discretion in difficult circumstances, and take on a large amount of risk while doing so. Yet the trust’s investment adviser would often end up generating substantially more revenue from the assets of the trust than the professional trustee.

You have a trust with a $500,000 investment portfolio? It’s no problem for the investment adviser to charge 1% of funds under advice and receive $5,000, but it’s a very different thing for the professional trustee to charge anything close to that.

I'll be frank: in my view, the trustee does more for a trust than the financial adviser. And I say that as a financial adviser.

There is a tendency amongst financial advisers and investment advisers to make investing seem more complicated than it really is. It’s also common for advisers to say that providing financial advice to trustees of a trust is riskier or more complicated than advising for individuals.

It’s not more complicated. In fact, in my view, it’s easier, because you’re dealing with people in a particular role (ie, as trustee of a trust with specific objectives/beneficiaries) rather than dealing with them within the much broader and messier contexts of their lives.

If you are dealing with an investment adviser who implements your advice (as opposed to an advice-only financial adviser, like me), the implementation of the advice will be more complicated, because there are more parties and forms involved - often related to anti-money laundering and counter-terrorist financing regulations.

But implementation of advice is different from advice and this is largely administrative in nature. The real value is, and should be, in the advice.

When you advise in relation to assets in a trust, the major thing you need to consider are the terms of the trust and the trust’s objectives. You need to defer to the trustees in terms of whether there are any other considerations such as a need to prioritise income over capital growth or preservation, due to the circumstances of the beneficiaries, but it’s really not that hard for the adviser to ask these questions. A good trustee will usually volunteer any important considerations.

To the extent there are any unique aspects to advising in relation to trust investments, it’s largely about having a cursory understanding of the legislation (eg section 13E of the Trustee Act 1956, which sets out the matters to which a trustee may have regard in exercising the power of investment), and understanding the trust deed and other trust documents, to make sure that their investment recommendations align with the terms of the trust.

On to my free advice.

The vast majority of trusts I’ve encountered would be serviced just as well by a low-fee, index-based, widely-diversified investment fund as a more complex portfolio managed actively by an investment adviser.

Consider any of the Simplicity investment funds, for instance. I recommend these funds to many clients (but not all - and to clarify, I'm not affiliated with Simplicity). Fees for these funds are $30 per year plus 0.31% of funds invested. For an investment portfolio of $500,000, this comes to fees of $1,580 per year.

SuperLife also has a suite of products which are similar in nature. The fees are slightly higher, but SuperLife has a wider range of investment options if, say, it was appropriate to invest more aggressively than the Simplicity Growth fund allows.

If you use a traditional investment adviser, however, the total fees associated with the investment are likely to be 1% to 2% per year, if not higher after factoring in all transaction costs. In other words, the trust will be paying fees of $5,000 to $10,000 – if not more – per year.

There is no evidence that an actively managed investment with a similar asset allocation will outperform the Simplicity fund over time, or will manage downside risk any more effectively.

However, I can tell you with certainty that you could be saving the trust – and benefiting its beneficiaries – many thousands of dollars per year.

Don’t get me wrong! This is illustrative only, and there are some considerations that an adviser can genuinely provide value in relation to. For example:

  • What asset allocation is suitable, and consequently whether, something resembling a conservative, balanced, or growth portfolio would be appropriate. 
  • Whether a PIE fund (that is taxed internally at a set rate) is appropriate, or whether to use an alternative structure – although, this is probably best decided in conjunction with the accountant for the trust.
  • Whether a fund or set of investments that more clearly prioritises income or capital preservation/growth is appropriate.

The point I want to stress is that investing on behalf of a trust is not as hard or as complicated as many financial advisers like to make out. If anything, they are conflating the tasks of providing advice with the task of implementing that advice. Or they are betraying their own lack of understanding about how trusts work.

My strong bias is to see the beneficiaries of a trust to get as much from the trust as possible, rather than for fees to be redistributed to investment advisers who, in my view, don’t deserve as much revenue from the trust as the actual professional trustees.

And as a fiduciary, I think this focus on beneficiary outcomes lines up with the interests of a professional trustee. 

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.