As the open-architecture “Advisor Friendly” trust model continues to grow and expand, advisors are now better able to compete with traditional Bank/Trust companies in the lucrative irrevocable trust arena. Modifications to trust laws and regulations have “unbundled” and bifurcated the management of trust assets by allowing this function to be “Delegated” to a preferred independent advisor selected by the grantor or beneficiary.
In the common Advisor-Client relationship, the advisor is bound by both regulation and ethics to the “Know Your Client” standards. FINRA Rules 2090 (Know your customer) and 2111 (Suitability) ensure advisors know detailed information about their clients’ tolerance for risk, understanding of investments, and which investments are prudent for a clients’ personal circumstances.
However, when an advisor is hired by a trustee through delegation to manage assets in an irrevocable trust, two very distinct and significant differences enter into play beyond the scope of an advisor’s traditional relationship with an individual investor.
Let’s take a closer look at why these two characteristics are often overlooked and misunderstood by advisors.
First, when managing an irrevocable trust, the advisor’s legal “client” is the trustee of the trust. Most often, this will be an institution or individual with whom the advisor has no previous relationship. Typically, the advisor has established a relationship with the grantor and/or beneficiary(s) of the trust which has led to their delegation to manage the trust’s assets. It is critical for the advisor to understand the beneficiary has no legal authority to determine the trust’s asset allocation and investment strategy.
State Trust law will ultimately dictate investment policy and how the assets are managed. The trust document may also contain language and instructions that may augment state law. Fiduciary investing guidelines are also outlined in the Uniform Prudent Investor Act (UPIA). The trustee, in their fiduciary capacity, is legally bound to these parameters and hence responsible for the oversight necessary to ensure the delegated advisor is also adhering to these constraints. The trustee will establish a suitable investment policy that will include considerations such as:
- Age, health, marital status, and needs of the beneficiaries
- The grantor’s intention and purpose for the trust
- How each beneficiary is to be treated regarding their priority for distributions
- The length of time the trust is intended to last
- Anticipated current and future beneficiary distributions
- Tax and estate planning consequences
- Illiquid or non-incoming producing assets in the trust
As most trusts are created to support both current and future beneficiaries, this leads us to the second often overlooked matter. The delegated advisor is often focused on pleasing and meeting the expectations of the current beneficiary. The trustee, on the other hand, is required to consider both current and future beneficiaries regarding distributions, investment policy, and asset allocation. The trustee must maintain a position of impartiality and balance regarding the creation of income, capital appreciation, risk, and protection of the trust principal.
Advisors oblivious to these concerns and restrictions, and acting without regards to these fiduciary requirements, may be setting themselves and the trustee up for a “breach of fiduciary duty” lawsuit.
Advisors can be blindsided by future beneficiaries with whom they have no relationship or even knew existed. This frequently occurs due to:
- Failure to properly diversify the portfolio
- Conflict of interest if the advisor is also a trustee or co-trustee
- Portfolio risk not in line with expected time horizon
- Attempting to create excessive distributable income for the current beneficiary
- Maintaining a concentrated asset position
- Fees that are significantly higher than industry norms
- Lack of liquidity for distributions
- No understanding of the beneficiary’s other sources of income
Certainly there may be many reasons a grantor or beneficiary selected a preferred advisor to manage their trust’s assets. Each advisor has their own “secret sauce" and the portfolio management highway offers many lanes to drive in. Partnering with an established “Advisor Friendly” trust company will ensure you stay between the guardrails and eliminate the risk of “going off road."
Want to learn more? A wealth of resources, documents and tips for advisors available right HERE.
About the Author
As a founding member of one of the original “Advisor Friendly” independent trust companies in 1991 and widely considered a “pioneer” in this rapidly expanding arena, Mike Flinn consults with advisors in the strategies and questions necessary to engage clients in the successor trustee dialogue. During his career, he has enabled advisors to capture and manage over $6 billion in new trust assets.
Mike Flinn
Vice President, National Sales Manager
BOK Financial Advisor Trust Services
Direct 480-596-4334 or MFlinn@bokf.com
© BOKF, N.A. Member FDIC. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
The content in this presentation is for informational and educational purposes only and does not constitute legal, tax, or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax, and investment advice. Neither BOK Financial Corporation nor its affiliates offer legal advice.
