Chapter 5
Investment powers

Appointing investment managers

(1) New legislation should authorise trustees to appoint investment managers and give them authority to make investment decisions.
(2) The appointment of investment managers should be subject to the following legislative safeguards:
(a)trustees must act honestly and in good faith and exercise reasonable care when appointing an investment manager, and must review the investment manager’s performance periodically;
(b)trustees must create a written policy statement that gives guidance as to how investment functions are to be exercised by an investment manager setting out the general investment objectives, and require investment managers to agree to comply with the policy statement; and
(c)trustees are liable for any default of the investment manager where the trustees have failed to act honestly and in good faith and exercise reasonable care when making the appointment of a manager or monitoring the investment manager’s performance.
Please give us your views on this proposal.

Current law

5.45Currently trustees can, and normally should, get advice on potential investments. They must, however, personally assess such advice and decide whether to accept or reject it. They can therefore act on advice but cannot appoint investment experts and authorise them to decide.

5.46Many trust deeds do enable trustees to use investment managers to make investment decisions. This approach recognises that making sound investment decisions in today’s world requires considerable skill and judgement. The range of potential investment products and combinations is immense. Investment techniques and methodologies are various and complex.


5.47Under the current default provisions trustees are not able to appoint investment managers and give them authority to make investment decisions. This limits the ability of trustees to follow a portfolio management approach to investment fully utilising the skill and judgement of professional investment managers to make investment decisions.

5.48The question is whether trustees should be able to appoint investment managers and give them authority to make decisions about investment, and, if so, what safeguards should apply.

Options for reform

5.49The two broad options that were considered are:

(a)retaining the status quo. The default provisions should not enable trustees to appoint investment managers with the authority to make investment decisions; or
(b)introducing new default provisions that enable trustees to appoint investment managers with authority to make investment decisions subject to suitable safeguards.

5.50If option (b) is implemented, then safeguards should be applied to manage the appointment of an investment manager. The general safeguards we considered are as follows:

5.51If option (b) is implemented, consideration must also be given to the question of whether trustees should remain liable for the actions or decisions of their appointee. The two options considered were:

5.52We have also now considered the option of requiring the trustees to set the trust fund’s investment objectives and requiring the investment manager to act within the limits of those objectives. This option was raised by Taylor Grant Tesiram, which discussed the approach taken in the Trustee Act 2000 (UK). Under that regime trustees must prepare a policy statement in writing that sets out the objectives of the exercise of the function and enter into a written agreement whereby the delegate agrees to ensure compliance with the policy statement. KPMG suggested a similar approach in which investment policy decisions would be reserved to trustees so that the trustees could set investment strategy and policy in accordance with the terms of the trust, and only the implementation would be delegated.

5.53Any provision authorising the appointment of an investment manager would be a default provision. It would therefore be possible for a settlor to exclude or alter any power of appointment or exclude or modify any of the safeguards in the trust deed, although the duty of a trustee to act honestly and in good faith in all matters is mandatory and could not be excluded.


Allowing investment managers

5.54The Commission favours a default position that permits trustees to appoint investment managers, subject to appropriate safeguards. The main argument against such a reform is that the obligation to make investment decisions is one at the heart of a trustee’s role. Investment is an obligation accepted by a trustee when he or she accepts appointment and should therefore be exercised personally by the trustee. Investment managers also might not be familiar with trust matters so trustees should be actively involved in making decisions on asset allocation.

5.55However, most submitters who responded on this issue favoured trustees having the power to delegate to investment managers. Our research indicates that most modern trust deeds do permit delegation of decision-making in this area. The range of potential investment products and combinations is now immense and investment has become far more complex as a result. It is not realistic to require trustees to undertake this function personally. Trustees of many private trusts take on the role of trustee without payment and do not have the time or expertise to make complex investment decisions or monitor on a regular basis the investment performance of the fund. A suitably qualified and competent professional investment manager is likely to do a better job than many trustees. With appropriate safeguards there may be less risk in allowing for the appointment of experts than in leaving investment in the hands of trustees. Submitters commented on the complexity of the investment task, preferring that it be handled by specialised professionals as it is not reasonable to expect trustees to possess this degree of expertise or engage in complex financial analysis when highly trained specialists can undertake such tasks for a fee.

5.56Further, if the default provisions in new legislation allow for the appointment of investment managers, then settlors are still able to contract out of that default if they do not want trustees to delegate investment in this way.


5.57The main safeguard almost all submitters favoured was a requirement for trustees to act prudently in selecting investment managers and in monitoring their performance. There was general agreement that trustees must use reasonable care in choosing the investment manager and should be required to review their performance on a regular basis. One noted that trustees must be cognisant that investment fund managers might not be familiar with trust matters and trustees need to remain actively involved in decisions on asset allocation and maintaining equity between income and capital.

5.58Some submitters noted that at common law a trustee has a duty of care in selecting an agent and must act prudently. The trustee’s duty of prudence extends to also providing proper instructions and monitoring investments. Views on whether these obligations should be stated in new legislation differed. The Society for Trust and Estate Practitioners, New Zealand made the point in respect of monitoring that given the complexity of investment markets, it would not be realistic for the trustee to be expected to closely review or second guess the decisions of investment managers. Instead its view was that there should be an obligation for the trustee to receive and consider investment reports so that the trustee can cancel the investment mandate if the performance is clearly inadequate.

5.59We agree that trustees should be explicitly required to act honestly and in good faith and to exercise reasonable care when appointing an investment manager and must review the investment manager’s performance periodically. Although these obligations are part of the trustee’s duty general duty of good faith and the duty to act prudently there may still be value in expressly spelling them out in this provision.157

5.60In addition, we consider that the default provisions should impose liability on the trustees for any defaults of the investment manager only where the trustees have failed to exercise reasonable care or act honestly and in good faith when making the appointment of a manager or have failed to monitor the investment manager’s performance. Submitters on this issue overwhelmingly supported this approach. Most submitters considered that there should be no liability where the trustee has acted prudently. If a trustee has exercised appropriate care and has delegated investment decision-making in good faith because the trustee does not have the necessary expertise, it would seem to be anomalous for the trustee to remain liable for what the delegate does.

5.61Most submitters considered that trustees should have broad powers to define the terms of appointment of the investment manager. Most also considered that it was not appropriate for legislation to prescribe the classes of organisation or people to whom investment decision-making can be delegated. Submitters considered that the duty to act prudently will restrict the choice of investment managers in the way it currently restricts decisions on advisers. The point was also made that trustees would fail the prudence test if they acted on the advice of someone who is not a registered financial adviser.

5.62We agree that it is not appropriate to prescribe in legislation the classes of organisation or people to whom investment decision-making powers can be delegated. The duty to act prudently should be sufficient. In addition the investment world changes frequently so any list of approved organisations would quickly become outdated.

5.63We have been convinced that there is merit in the option, suggested by Taylor Grant Tesiram and KPMG, of having trustees set out their investment objectives. This would be an effective way of requiring the trustees to think carefully about the purpose of the trust and requiring investment strategies consistent with such purpose, rather than completely washing their hands of the investment role when an investment manager is used. It would be a practical way of emphasising the trustee’s ultimate role of accounting for trust property for the benefit of the beneficiaries. We do not envisage that this would be a detailed policy, but more a basic statement of the general approach to risk and to the types of returns that are desirable. The statement would allow trustees to ensure the investment strategy takes into account the interests and needs of the beneficiaries, including potentially the individual beneficiaries’ needs, depending on the number and nature of the beneficiaries of the trust.

157See ch 3 for a discussion on the duties of trustees.