Your Fiduciary Duty to Invest “Prudently”
We have previously discussed the fundamental duty of loyalty. In this post, we will discuss the trustee’s duty to exercise care and skill in the management and investment of trust assets.
Acting in the best interests of the trust and the trust beneficiaries, a trustee has the duty to protect and preserve trust assets and, generally, to make the assets productive. In making investment decisions and managing trust assets, the trustee must further abide by the “prudent investor rule,” which requires a trustee to exercise reasonable care, skill and caution. See Colo. Rev. Stat. §§ 15-1.1-101, et. seq. (the “Uniform Prudent Investor Act”) and §§ 15-1-1101, et. seq. (the “Uniform Management of Institutional Funds Act”).
Pursuant to the prudent investor rule, a trustee should consider broad investment factors, such as: current economic conditions, effects of inflation or deflation, tax consequences, the nature of closely-held business interests, alternative investments, expected returns on income and capital, other resources of the trust or trust beneficiaries, the need for liquidity versus preservation of capital, the production of income, the special value or relationship of a particular asset to the trust or the beneficiaries, diversification of investments, and more. See, Restatement (Second) of Trusts § 227. Additionally, while it is important to note that Colorado courts have not officially adopted the Restatement (Third) of Trusts, one could refer to § 90, which lists five helpful “principles” of the prudent investor rule. Generally, any single investment will not violate the prudent investor rule and the trustee should manage the trust portfolio as a whole taking into account these considerations.
The trustee must also abide by any specific instructions in the trust instrument. He should exercise caution in doing so, however, because there are many instances in which blindly following the trust terms may result in unreasonable investment decisions. For example, if the settlor instructs the trustee that he is not required to diversify investments in the case of a closely-held family entity, the trustee would still want to closely monitor the performance of such investments to ensure that the closely-held entity value is not plummeting to the point that the beneficiaries’ interests may be significantly impaired.
It is important to note that poor performance of investments alone will not subject the trustee to a claim for breaching his duties to prudently invest. Beneficiaries frequently and incorrectly think they will have a claim against a trustee simply for poor performance. The trustee, however, will be able to overcome such a claim so long as the underlying investment decisions were reasonably made.
Colorado law does authorize a trustee to hire professionals and to delegate certain aspects of investing and portfolio management. However, the law does not allow for wholesale delegation and the trustee should exercise great caution in hiring professional advisors or fund managers. See Colo. Rev. Stat. §15-1.1-109 (trustee has the authority to delegate investment and management functions, but must engage and monitor such professionals carefully); see also GEORGE G. BOGERT, ET AL, The Law of Trusts and Trustees § 557; Colo. Rev. Stat. §15-1-804(2)(x)(I)(trustee has the power to “employ attorneys or other advisors to assist the fiduciary in the performance of his or her duties” (emphasis added)).
Finally, a trustee should keep in mind that uninformed beneficiaries are uneasy beneficiaries. Not only is it a good idea for a trustee to provide information to the beneficiaries as to investment and asset management decisions, Colorado law requires the trustee to keep beneficiaries “reasonably informed” and to provide accountings to beneficiaries upon reasonable request. Colo. Rev. Stat. § 15-16-303. Keeping beneficiaries informed as to investment decisions not only provides peace of mind to the beneficiaries, but may provide the trustee with an argument particularly in the situation where the beneficiaries have consented to risky or unusual investment strategies. See Beyer v. First Nat. Bank of Colorado Springs, 843 P.2d 53 (Colo. App. 1992).
In sum, the trustee has a duty to continually observe and evaluate investments to ensure that they are consistent with the purpose of the trust, current economic conditions, and the needs of the current and remainder beneficiaries. So long as the trustee exercises reasonable care in investment decisions, exercises care in selecting and hiring investment advisors and professionals, follows the general principles of prudent investing, and keeps the beneficiaries informed, the likelihood of a claim against the trustee for improper investment decisions may be reduced.