Opinion

An advice-like grip

Finance | James Brooke Turner | 1 Nov 2007

Does the Trustee Act 2000 undermine trustees, asks James Brooke Turner.

Consider the following words from the Trustee Act 2000 about advice. “When reviewing the investments of the trust, a trus-tee must (unless the exception applies) obtain and consider proper advice about whether, having regard to the standard investment cri-teria, the investments should be varied. The exception is that a trustee need not obtain such advice if he reasonably concludes that in all the circumstances it is unnecessary or inappropriate to do so.”It could not be clearer that if you are a trustee you should usually take advice about investments.

Investments are important and can rep-resent a great deal of money. Investing unwisely is obviously an undesirable action; no rational (or honest) person would do such a thing. But it is puzzling that the act is writ-ten in a way that demands advice be taken by trustees only about investments, rather than more generally about money. Investment management can be complicated, particu-larly some of the more arcane areas such as hedge funds, commodities and so forth, but in reality it is no more complicated than many other aspects of running a charity.

A charity with an investment fund of £100,000 is perhaps more likely to lose it through poor employment practice than it is through poor investment management. If it loses money in investment management it will usually have something left – the same can’t be said of losing a case of sexual dis-crimination – it has the capacity to wipe out a small endowment. Yet strangely the act makes no provision for trustees to take advice about employment law – or indeed other aspects of charity management. Why are investments so special?

The Act does at least include an exemption – if the trustees think that they don’t need investment advice then it is alright not to take it. It is this that is confusing. On the one hand the act suggests that trustees are usually incapable of taking a decision about invest-ments without proper advice (a trustee must obtain and consider proper advice), and on the other hand expects them to determine whether or not the advice is any good (a trus-tee need not obtain such advice…). This is a confusing remit for a trustee – if the basic principle is that a trustee has to take advice, presumably because they are not competent in this field, how can trustees be expected to know when the advice is either inappropri-ate or unnecessary?

Advice covers many aspects of invest-ment management from the selection of individual stocks in an individual portfolio right through to consulting advice for pension funds. The requirement to take advice can be a useful deterrent for an ambitious amateur stockbroker to practice with charity funds. However, trustees are frequently warned off thinking for themselves about their investment strategy. From personal experience the best charity investment strategies that I have come across have been those developed by the trus-tees after a process of careful and considered reflection. The ones that seem least rigorous are the ones that simply accept a boiler plate approach. Only trustees really understand what risk means to their charity. Advisers can only understand this second hand.

The advantage of a boiler plate approach is that it satisfies the requirements of the Act; the disadvantage is that it may not satisfy the needs of the charity.

Tweet

Directory: Office of the Third Sector
Who's Who: James Brooke Turner