The Entrepreneurial Trustee

The past two years of global economic downturn have, among other things, brought about fundamental reassessment of the importance of the concept of risk, and in many cases have resulted in increased aversion to any loss.

This same market turmoil has produced a range of buying opportunities for those ready to exploit them. Such opportunities are likely to interest mainly those with a higher risk appetite, given that (supposedly) risk-free alternatives (such as cash deposits) continue to deliver historically low returns.

Opportunities abound

Being entrepreneurial in the current environment is relatively easy for an individual who controls assets directly. They can exploit opportunities as they see fit and make sure that the cash/leverage is in place to help progress their plans.

If the assets (or the majority of them) are held in trust but not controlled directly by the beneficiaries, the beneficiaries need to request that the trustee consider making such investments. This requires the trustee to consider risks and be more adventurous than they ordinarily might. As a result, trustees may refuse these types of requests.

However, if the trustees agree the principle (and the terms of the trust allow), myriad tactical opportunities present themselves, including:

purchasing land, product and stock at bargain prices buying up assets from distressed firms acquiring the competition to increase market share. Commercial considerations

Unlike fund managers, trustees are not paid a performance fee for taking risks. It is a moot point whether remuneration based on performance would or should affect trustees' decision-making. Fund managers have a different, performance-driven, focus to trustees, who have a primary duty to protect and enhance trust assets. So, the prudent trustee must be risk-averse by nature.

In the future, inflation may cause assets to depreciate faster in real terms. Cash and gilts may be low-risk investment solutions for clients in the current climate, but will they be regarded as prudent in hindsight by beneficiaries when there has been below market performance in the trust fund?

'A process must be established whereby the trustee can take a degree of risk within the trust, without abdicating his responsibility as a "prudent man"'

If trust assets are illiquid, then leveraging the trust assets is a possibility to generate liquidity for investment purposes. Taking on debt must be considered carefully by a trustee, although many have...

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