ANODOS ADVISORS - FIDUCIARY SHIELD FOR TRUSTEES -

Transcription

1 ANODOS ADVISORS - FIDUCIARY SHIELD FOR TRUSTEES - 1

2 OVERVIEW 1. Fiduciary Governance Process 2. Duties of a Trustee Duty to Have a Plan Duty to Balance Risk and Return Duty to Pay Fair Fees Duty to Diversify unless you can t Duty to Pay Fair Fees Duty to Prudently Select, Delegate and Monitor 3. Q&A 2

3 THE RULES ARE COMPLEX 3

4 TRUSTEE S DUTIES UNDER UPIA Duty Citation * Duty to have a plan Duty to monitor risk/return 16047(a) 16047(b) Duty to diversify Duty to pay only fair fees Duty to prudently delegate Duty to monitor agent s activities 16052(a)(1) 16052(a)(2) * California Probate Code citations for Uniform Prudent Investor Act duties 4

5 DEMONSTRATING PRUDENCE & GOOD FAITH Statute = Duty Policy & Procedure Memo Recording Compliance Prudence & Good Faith 5

6 EXCULPATION CLAUSE (GET OUT OF JAIL FREE CARD) 6

7 POLLING QUESTION #1 7

8 DUTY TO HAVE A PLAN 8

9 DUTY TO HAVE A PLAN A trustee shall invest and manage trust assets. by considering the purposes, terms, distribution requirements, and other circumstances of the trust (a) What is the rate of return needed to accomplish the trust s purposes, terms, and distribution requirements? WRITE A MEMO! 9

10 WHAT RETURN IS NEEDED? A well crafted plan will identify the following: PV Trust Corpus PMT Distributions N Time Horizon FV Terminal Value Solve for the Rate of Return needed to accomplish these objectives. 10

11 SAMPLE PLAN Age Starting $ (PV) Growth (I) Distrib. (PMT) Ending $ (FV) 86 2,345,000? (150,000)? 87???? 88???? 89???? 90???? 91???? 92???? 93???? 94???? 95???? 96???? 97???? 98???? 99??? 700,000 11

12 SAMPLE PLAN Age Starting $ (PV) Growth (I) * Distrib. (PMT) ** Ending $ (FV) 86 2,345, ,250 (150,000) 2,312, ,312, ,613 (157,500) 2,270, ,270, ,518 (165,375) 2,218, ,218, ,925 (173,644) 2,155, ,155, ,789 (182,326) 2,081, ,081, ,063 (191,442) 1,993, ,993,871 99,694 (201,014) 1,892, ,892,550 94,628 (211,065) 1,776, ,776,113 88,806 (221,618) 1,643, ,643,300 82,165 (232,699) 1,492, ,492,766 74,638 (244,334) 1,323, ,323,070 66,153 (256,551) 1,132, ,132,672 56,634 (269,378) 919, ,927 45,996 (282,847) 683,076 * Growth assumed to be 6% per year ** Distributions increase at 5% per year 12

13 DUTY TO MONITOR RISK & RETURN 13

14 DUTY TO MONITOR RISK & RETURN A trustee's investment and management decisions must be evaluated as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust (b) Was the risk that was taken appropriate given the return that was realized? WRITE A MEMO! 14

15 DUTY TO MONITOR RISK & RETURN Measurement of risk via price fluctuation Standard deviation Risk adjusted return Covariance Security concentration Sources of risk that cause price fluctuation Leverage Valuation Concentration Liquidity 15

16 HOW DID YOU DO LAST YEAR? Month Manager Benchmark Jan -0.71% -0.44% Feb 0.73% 0.55% Mar 1.82% 0.70% Apr 2.45% 2.36% May -0.16% 0.43% Jun 1.61% 1.23% Jul 1.04% 1.10% Aug -1.40% 0.42% Sep -2.89% -1.13% Oct 3.54% 2.43% Nov -1.80% -1.05% Dec 3.54% 2.29% Return If the manager can t provide monthly return data in an SEC compliant format, you have a problem. 16

17 POLLING QUESTION #2 17

18 DUTY TO DIVERSIFY 18

19 DUTY TO DIVERSIFY In making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so Is there any excessive concentration in the portfolio s allocation or gaps in the design? WRITE A MEMO! 19

20 DUTY TO DIVERSIFY Security level diversification Too few securities Asset-specific risk Grandpa s ranch Knox v. HSBC (Woolworth case) Asset class diversification Holding assets that have low correlation Lots of securities but all of the same type (class) The estate of Brede 20

21 DUTY TO DIVERSIFY Number of distinct asset classes in the trust Bonds v. Stocks v. Real Estate v. Other US Stocks v. Non-US Stocks Big v. Small Stocks Value v. Growth Stocks Liquid vs. Illiquid Assets Diversification of strategy: Active vs. Passive WRITE A MEMO! 21

22 WAYS TO DESCRIBE DIVERSIFICATION Stocks v. Bonds v. Real Estate $1,200,000 $800,000 $345,000 51% 34% 15% 22

23 WAYS TO DESCRIBE DIVERSIFICATION Stocks v. Bonds v. Real Estate 51% 34% 15% Big Stocks v. Small Stocks $1,000,000 $200,000 83% 17% 23

24 WAYS TO DESCRIBE DIVERSIFICATION Stocks v. Bonds v. Real Estate 51% 34% 15% Big Stocks v. Small Stocks 83% 17% US Stocks v. Non-US Stocks $900,000 $300,000 75% 25% 24

25 WAYS TO DESCRIBE DIVERSIFICATION Stocks v. Bonds v. Real Estate 51% 34% 15% Big Stocks v. Small Stocks 83% 17% US Stocks v. Non-US Stocks 75% 25% Growth Stocks v. Value Stocks $600,000 $600,000 50% 50% 25

26 WAYS TO DESCRIBE DIVERSIFICATION Stocks v. Bonds v. Real Estate 51% 34% 15% Big Stocks v. Small Stocks 83% 17% US Stocks v. Non-US Stocks 75% 25% Growth Stocks v. Value Stocks 50% 50% Long Bonds v. Short Bonds $200,000 $600,000 25% 75% 26

27 WAYS TO DESCRIBE DIVERSIFICATION Stocks v. Bonds v. Real Estate 51% 34% 15% Big Stocks v. Small Stocks 83% 17% US Stocks v. Non-US Stocks 75% 25% Growth Stocks v. Value Stocks 50% 50% Long Bonds v. Short Bonds 25% 75% High Quality v. High Yield $700,000 $100,000 88% 12% 27

28 WAYS TO DESCRIBE DIVERSIFICATION Stocks v. Bonds v. Real Estate 51% 34% 15% Big Stocks v. Small Stocks 83% 17% US Stocks v. Non-US Stocks 75% 25% Growth Stocks v. Value Stocks 50% 50% Long Bonds v. Short Bonds 25% 75% High Quality v. High Yield 88% 12% Liquid v. Illiquid $2,000,000 $345,000 88% 15% 28

29 WAYS TO DESCRIBE DIVERSIFICATION Stocks v. Bonds v. Real Estate 51% 34% 15% Big Stocks v. Small Stocks 83% 17% US Stocks v. Non-US Stocks 75% 25% Growth Stocks v. Value Stocks 50% 50% Long Bonds v. Short Bonds 25% 75% High Quality v. High Yield 88% 12% Liquid v. Illiquid 85% 15% WRITE A MEMO! 29

30 DUTY TO PAY ONLY FAIR FEES 30

31 DUTY TO PAY ONLY FAIR FEES A trustee may only incur costs that are appropriate and reasonable in relation to the assets, overall investment strategy, purposes, and other circumstances of the trust Is the fee being paid to the manager to whom investment duties have been delegated fair and reasonable? WRITE A MEMO! 31

32 DUTY TO PAY ONLY FAIR FEES Managed (AUM based) RIA Separately Managed Account Negotiable Fee noted on the investment statement Fiduciary Standard Brokered 12(b)(1) Good for buy and hold Bond bunker Low basis stocks Suitability Standard 32

33 DUTY TO PRUDENTLY DELEGATE 33

34 THE SELECTION OF AN AGENT A trustee may delegate investment and management functions The trustee shall exercise prudence in the selection of an agent (a)(1) Why was the manager selected? WRITE A MEMO! 34

35 THE SELECTION OF AN AGENT Bad Reasons Friends with manager Good returns Explains things well Good Reasons Investment process Good standing / credentialing Understands trustee s duties Will accept delegation per the PIA 35

36 THE SELECTION OF AN AGENT Copy of firm ADV filing Is the manager/firm in good standing? Are there any client complaints or settlements? Any felonies reported? WRITE A MEMO! 36

37 THE SELECTION OF AN AGENT - DISPUTES - Rollance Adair Verkennis 37

38 THE SELECTION OF AN AGENT - CRIMINAL ACTIVITIES - Rollance Adair Verkennis 38

39 THE SELECTION OF AN AGENT - EMPLOYMENT HISTORY - Matt Lum 39

40 DUTY TO DELEGATE & MONITOR 40

41 DUTY TO DELEGATE & MONITOR The trustee shall exercise prudence in establishing the scope and terms of the delegation and periodically reviewing the agent s compliance with the terms of the delegation (a)(2,3) Has the manager done what they said they would do? WRITE A MEMO! 41

42 DUTY TO DELEGATE & MONITOR Key Performance Indicators Data Target Rate of Return 6.0% Risk Parameters (Standard Deviation) 9.0% Anticipated Distributions 6% of Corpus $150,000 Time Horizon 15+ years Liquidity Requirements 100% Agreed upon fee as a % 0.90% Agreed upon fee as a $ $18,000 WRITE A MEMO! 42

43 POLLING QUESTION #3 43

44 PROVING PRUDENCE & GOOD FAITH Statute = Duty Policy & Procedure Memo Recording Compliance Prudence & Good Faith 44

45 THE ANODOS FIDUCIARY SHIELD SERVICE The Service: Development of the six fiduciary memos for the trustee s compliance library. For Individual Trustees: Eldest child, surviving spouse, family friend, trusted advisors (CPA or attorney). The Cost: Typically $3,600 paid by the trust, but may increase depending on the complexity of the case. What Makes Anodos Unique: Anodos does not sell insurance, manage investment assets, or accept referral fees. Fiduciary governance is all we do. We don t have a horse in the race. 45

46 Q & A 46

47 CONTACT INFO. FOR JOSH YAGER

48 POLLING QUESTION #4 48

49 POLLING QUESTION #5 49