As in every crisis, there are bound to be trustees and financial managers who have served their clients well and those who have borne the brunt of market volatility. If businesses, in particular large listed entities or sizeable companies with private-equity funding, go into liquidation that is likely to result in greater scrutiny from investors and shareholders alike.
For professional asset managers and trustees, the key concern from their clients and beneficiaries of trusts are whether or not any investments that fail or fail to provide adequate returns were reasonable and in keeping with the mandate of the relevant fiduciary.
Key concerns for fiduciaries
Although vast amounts of private wealth is entombed in complex trust arrangements, the sheer amount of wealth held by either private or public pension funds far eclipses the former. That is not to say that trustees of private trusts have it easier, it is simply that the levels of formal regulation and scrutiny vary.
With pension funds, not only are they subject to regulation and internal corporate governance but they also tend to delegate the asset management function to professionals.
This often means that if investment decisions have resulted in losses, pension funds will have to consider pursuing the relevant assets managers. For example, the Swedish Pensions Agency is currently suing a UBS entity for allegedly having mismanaged funds.
Pursuing an adviser is well and good, but for smaller trusts/funds where the trustees or the trust company performs the investment function, there may not be somewhere or someone to pass the buck.
In such situations, it will be interesting to see whether beneficiaries have the appetite to pursue trustees for financial mismanagement and investment decisions. Often it is a case of the volume of sums involved, but that is not to say that losses necessarily translate to successful claims against trustees.
If investment decisions are adequately considered and compliant with the mandate in the trust documents, they are less likely to be impugned. That said, trustees may well find themselves in hot water if they cannot find documentary evidence to support earlier decisions.
As always, the cruel gaze of hindsight can often cast doubt over the reasonableness of decisions made years before, highlighting the importance of standardised processes for the protection of decision-makers.
It remains to be seen whether the end of fiscal support will open the floodgates to insolvencies and the claims for financial mismanagement that tend to follow in their wake. What is clear is that fiduciaries who proactively manage their own risk are likely to fare better than those who do not.
Shamilee Arora is associate at Cooke, Young & Keidan LLP
