The Role of an Investment Agent – What You Need to Know

With a trust, it’s vital that the assets are protected and invested in a manner consistent with the agreement that’s been laid out. The trustee relies on the Investment Agent to be consistent and meet the standard required along with adhering to what’s been previously agreed.

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In this article, we discuss the role of an Investment Agent in connection with the administration and investment of a trust’s assets.

Trusts May Cover a Decade or Longer Duration

Trusts of various kinds are not just for short-term purposes. In many cases, they’re set-up to provide a structured pool of financial resources to offer financial assistance, income, or other benefits to the beneficiary (or beneficiaries when there’s more than one).

Due to the ravages of U.S. inflation over time, investment capital declines in value when it’s left in a non-interest bearing account. It likely will not last the duration that it’s intended to unless it is “put to work” in different types of investments that provide a healthy return.

How the Prudent Investor Rule Relates to Trustees

A trust agreement requires that the trustee follows the prudent investor rule, which broadly states that the assets within the trust must be invested sensibly while not putting them at undue risk.

Essentially, assets invested through a clear investment plan ensures that they are treated as if they’re the trustee’s own. Indeed, it’s necessary for the trustee to actively monitor how the Investment Agent is managing the portfolio to confirm (and later reconfirm) that the standards for prudency are being met.

Trusts and the Matter of Risk Determination

The trustee may choose to decide the asset class mix and percentage weighting that makes up the asset allocation for the investment portfolio. Alternatively, they may instead assign part or all of this responsibility to the Investment Agent with appropriate guidelines as referred to previously.

The issuance of Declaration of Trust documents the instructions for how the assets should be managed and invested. Largely this relates to assets in connection to the perceived risk that they carry. In a scenario where beta – the volatility of an investment – is considered “risk” instead of the absolute loss of capital, the trustee needs to determine how risk is to be successfully managed to minimize it.

How Will Assets Be Invested?

When responsible for beneficiary investments, they must be safeguarded from significant loss. This encourages the trustee and/or the Investment Agent to weigh quite heavily with their asset allocation towards less volatile, lower-earning investments such as commercial paper, money-markets, and government bonds. These cash equivalents and fixed income investments provide ballast for more volatile assets like the U.S. equity market.

It’s also worth deciding whether an index-only strategy will be deployed for equity or bond markets, or if actively managed funds are acceptable. The latter permits the possible wide deviation in fund returns from how the broader market has performed, the former rides with the fortunes of the stock market for better or worse.

An Investment Agent accepts the responsibility to invest a trust’s assets wisely while meeting the expected standard and following the guidelines agreed with the trustee. Admittedly, it’s no small undertaking at all and is critically important that it’s done well.