Discretionary Trust Money Investment Options

MBerriman

There is a family inheritance of £175k to be invested in a trust for the benefit of our disabled sister. Our solicitor who will be registering the Trust with HMRC has recommended an IFA. This IFA has in turn advised their Discretionary Portfolio Service where a minimum investment of £75k applies. There is a desire to invest in the long term for the benefit of our sister while keeping say £20-£30k of funds in more easily accessible accounts. I believe we do have a legal duty as trustees to seek the best rates of return for the trust funds. My question is are there better and safer alternatives than handing the majority of the total trust amount to an unknown and unproven IFA? Any advice on this subject would be greatly appreciated. Thank you.

Linton

You should not be looking for the best rates of return. The higher the rate of return the higher the risk that the money wont be available when needed.  You as trustee should be looking for the appropriate level of safety considering the circumstances.  This is where the skill of an IFA comes in, to provide a portfolio that provides the right balance of long term safety and sufficient return.  So you would expect an IFA portfolio to be relatively cautious.

The advantage for a Trustee using an IFA is that if a regulated IFA invests inappropriately they can be sued and the trust could get compensation. If you manage the investments yourself and mess it up you could be held personally responsible.

Personally in your position I would rather be able to choose the IFA, perhaps from a short list rather than simply using the one recommended by the solicitor.  I think it is important that you and the IFA understand and trust each other.  The interpersonal relationship is as important as pure technical skill.

MBerriman

Many thanks Linton really helpful advice. Our risk profile is at the cautious end of the spectrum. Interesting to read about the compensation angle.

Albermarle

Interesting to read about the compensation angle.

Just to be 100% clear on this point . The IFA can not be held responsible just because your investments go down/do not perform very well ( due to problems in the financial markets , like those caused by Covid 19 for example) They can only be sued for compensation if when giving advice they have not followed the correct procedures and/or given advice that was obviously wrong/inappropriate for your situation/requirements.

advised their Discretionary Portfolio Service 

You can maybe see that an IFA has two roles . One is to gather info about you and your requirements and put together a plan suitable for what you have requested .Then secondly part ( but not necessarily all)  of this plan will involve designing a suitable portfolio of investments. They can do this individually or have off the shelf solutions. Or they can devolve this to a Discretionary Fund Manager . Of course the DFM will have a separate charge in addition to the IFA charge . Also DFM can change around your investments without asking you , although of course they will still operate under the remit given to them by the IFA.

If there is no DFM involved and the IFA is controlling the investments directly, then they will ask you first before changing anything . This may not be that important as if you are nor experienced in investing you will probably just agree to any change anyway.

dunstonh

believe we do have a legal duty as trustees to seek the best rates of return for the trust funds.

That is incorrect.   You have a duty to obtain the most suitable options for the beneficiary.   That is not the same as seeking the best rates of return as that would involve taking increased investment risks that may not be suitable.

My question is are there better and safer alternatives than handing the majority of the total trust amount to an unknown and unproven IFA?

IFAs are regulated by the FCA and are clearly known with a few checks.  With a discretionary portfolio, you do not invest in the IFA and the IFA is not making the investment decisions.  It will be the discretionary investment manager. They will have the regulatory permissions to that and will also be known. Indeed, most DFMs are known brand names (within financial services. Some will be known to those with a small financial services knowledge).

The use of an IFA and DFM (and I am not a fan of DFM services on the whole) is that it would satisfy any legal challenge against the trustees about not doing the right thing. 

Our risk profile is at the cautious end of the spectrum.

It is important that the risk profile should be one appropriate for the trust and timescale and beneficiary.  The trustees should not impost their risk profile on the investment as it is not their money and does not share their objectives.