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If A = B and B = C, then A = C. This is the “transitive property of equality” that we learned in our remedial algebra classes so long ago.

Is there a transitive property of fiduciary duties?  We know that the trustee owes duties of care to the trust beneficiaries. We also know that an investment advisor registered under the Investment Advisers Act of 1940 is a fiduciary to their clients, including those who are trustees.  Can it be said that if a trustee hires a Registered Investment Advisor (RIA) to manage the trust capital, the trustee has fulfilled their fiduciary duties to the beneficiaries? No! Because there is no transitive property of fiduciary duties.

The duties that an RIA owes to the Trustee are different duties than a trustee owes to the beneficiaries they service. And yet trustees and investment advisors confuse these facts all the time. Trustees wrongly think, “I’ve hired a fiduciary investment advisor, which means my job is done.” Nope. Or the RIA wrongly thinks, “I understand Modern Portfolio Theory and the Prudent Investor Act. There is no reason for the trustee to review my activities because I am already in compliance.”  Nope.

For the most part the trustee is prohibited from delegating key decision making authority to any third party. Only the trustee has the authority to set the return objectives or risk expectations for the trust capital. Only the trustee has the authority to determine what a reasonable distribution rate is. Only the trustee is responsible for testing whether the fee charged by the RIA is fair or if the investment advisor’s portfolio is diversified. Only the trustee has the responsibility to independently monitor the activities of the investment advisor even if the investment advisor is a fiduciary to the trustee.

The trustee does NOT get a hall pass if they hire an investment advisor who is a fiduciary and registered under the Investment Advisers Act of 1940. The only duty that the trustee is absolved from doing is the day-to-day management of the trust capital. But all other duties, including prudently delegating to and monitoring the investment advisor, are responsibilities that the trustee must still fulfill.

If you have any questions on estate planning, please call Karen L. Stewart, Attorney and Counselor at (248) 735-0900.

For more information, please see my website, www.customestateplans.com

Excerpts from an article written by Josh Yager, Esq., Anodos Advisors, Santa Barbara, CA, April 16, 2018