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Why Trustees Must Monitor the Activities of Their Agents

What is the trustee’s duty when delegating investment management to an agent?

For trustees, delegating investment management responsibilities can be an effective strategy, particularly for complex trusts holding various assets. However, the delegation of duties does not absolve the trustee of responsibility; instead, it creates a duty to monitor the agent’s actions consistently. This obligation is critical in ensuring that trust objectives are met and that the trustee acts in the beneficiaries' best interests.

The duty to monitor an agent’s activities includes several key components, beginning with clear objectives. Before delegating investment duties, a trustee must establish specific return and risk expectations aligned with the trust’s purpose. For instance, a trustee might define a target return rate and acceptable risk level based on the trust’s long-term goals. These expectations form the foundation for evaluating the agent’s performance and create a measurable standard against which the trustee can assess the agent’s work.

Once these expectations are set, regular reviews become essential. Trustees should ask their agents to provide detailed reports comparing the actual performance of the trust’s assets to the pre-established goals. These reports often include metrics like returns since the inception of the delegation and a comparison against relevant benchmarks or indexes, ensuring that the trust’s performance remains within an acceptable range. Trustees can also ask agents to calculate risk metrics, like standard deviation, to determine whether the agent has managed the trust’s assets with the expected level of risk.

An annual review of the fees paid to the agent is also prudent. The trustee should document confirmation that the agreed-upon fees align with the original terms of engagement, providing transparency and clarity for all involved. This step, along with periodic performance assessments, is vital for demonstrating that the trustee has taken proactive measures to oversee the agent’s work.

A trustee’s documentation of these monitoring activities can be assembled into a compliance library, providing a clear record of oversight. This library serves a dual purpose. First, it allows the trustee to ensure they have fulfilled their duties effectively. Second, it offers a defense against potential challenges from beneficiaries, proving that the trustee took responsible and informed actions when delegating investment responsibilities. The goal is not necessarily to outperform benchmarks but to achieve the trust’s objectives within acceptable risk and cost parameters.

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