Trustee investments - trustee making a profit?

This question is supplemental to one I raised on the forum a few weeks ago relating to the duty to balance the interests of life tenants and remaindermen - where the trustees invested in a non-income producing bond (and my thanks to those members who replied).

It transpires that the IFA who advised the trustees is in fact the husband of one of the trustees. There is no disclosure of this relationship in any minutes or correspondence.

  1. Do members consider this is acceptable and that the trustee in question is NOT earning a profit from their position and there is no duty of disclosure?
  2. Do members consider whether such an arrangement would be acceptable provided the relationship is disclosed to the other trustees and the beneficiaries?
  3. Do members consider this arrangement to constitute a breach of the trustee’s fiduciary duty not to (directly or indirectly) make a profit from the trust?

In this case, the IFA earned 3% initial commission on the £150k invested and has received trail fees of 0.5% per annum - over 12 years this amounts to some £13,500 in total. In the words of Private Eye - ’ Trebles all round’!

Michael McCabe
Galloways Accounting Trust Corporation Limited

  1. No
  2. No - full informed consent by all beneficiaries and then you could argue this.
  3. Yes

Definitely should have been disclosed, and clearly the trustee knew or should have known about it.

Dear Michael

I responded to your first question regarding the investment into a non-income-producing asset, i.e. an insurance company investment bond.

The adviser should have specialised in advising on trustee investments, tax returns had potentially been completed unnecessarily, trustee expenses were higher than expected, and possibly an unsuitable investment had been recommended.

In light of what you have uncovered regarding the IFA being a husband of one of the trustees and not declaring the trustee indirectly financially benefiting from employing the adviser smells of a conflicted interest and “self-dealing”. The trustee has a fiduciary duty to act in the best interests of the trust and its beneficiaries, taking advantage of their position to indirectly benefit themselves without declaring this material interest is not in the best interests of the beneficiaries. The trustee is, in effect employing the IFA at any cost because the IFA is her husband. Therefore, this could be a breach of the trustee’s duty of loyalty. It also begs the question of whether a trustee who the spouse of the IFA is would question the advice was found to be flawed; this is doubtful and illustrates a conflicted interest. We specialise in providing financial advice to trustees, and although advice is not all about charges, our advice charge would have been less than the 3% charged in this case. Is the adviser fully independent, and is he Chartered? Because of this, trustees and their employed advisers should not be closely related unless a “better than best” advice situation can be proven, which is very difficult.

If you need my help, please message me directly.

Haroon,

Many thanks for taking the time to respond. This is very helpful

Clive,

Thank you. You have confirmed what we thought to be the position. Many thanks for your very helpgul responses - to both posts!