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Published byDarcy Tate Modified over 8 years ago
Performing a Fiduciary Review of Trust Administration FIRMA April 2009 Independent Fiduciary Services ® Independent Fiduciary Services, Inc. 805 15 th Street, NW Suite 1120 Washington, DC 20005 202-898-2270 744 Broad Street Suite 1120 Newark, NJ 07102 973-424-6400
2 Theory Behind the Review Trustee(s) are responsible for the prudent management of the Trust Trustee(s) typically have the power to delegate their fiduciary authority Trust functions that are frequently delegated include: Trust administration Investment management Custody
3 Theory Behind the Review If Trustees delegate their authority : They must delegate in a prudent manner Are there documented processes and procedures in place that demonstrate a prudent process? They must monitor the functions that have been delegated Direct monitoring by Trust Use of external firm for on-going monitoring Periodic, comprehensive review of delegated functions by qualified, independent and experienced firm
4 Characteristics to Look For in a Fiduciary Auditor Experience Primary business is investment consulting Serve a diverse client base Independence No brokerage or investment management affiliates No revenues of any kind from investment managers or broker/dealers No conflicts of interest Dual expertise – as fiduciary and consultant
5 Areas for Review – Legal Framework Review Structure of the Trust Governance & Organizational Framework ( corporate trustee, individual trustee, multiple trustees; board of trustees, committees ) Decision-making Process (How are decisions made?) Roles & Responsibilities (Defined? Documented?) Delegations (What functions have been delegated? To whom?) Relevant Laws & Regulations: Constraints? Federal & State Laws and Regulations Uniform Prudent Investor Act
6 Areas for Review – Governance Framework Review Governing Document(s) that control the management and operations of the Trust The Trust Document (or comparable governing document) - Key areas of review include: Trust Purposes, Goals & Objectives Trustee and Committee Powers, Duties & Limitations Fiduciary Standards Administrative Procedures; Financial & Tax Requirements Compensation & Fees Conflicts of Interest Communication with Beneficiaries
7 Areas for Review – Governance Framework Review Governing Document(s) that control the management and operation of the Trust Trustee Delegation(s) Scope of Delegation(s) Restrictions? Limitations? Adherence to Fiduciary Standards What standard applies to trustee(s)? What standard applies to service providers? Oversight and Monitoring Is there a monitoring function?
8 Areas for Review – Contractual Arrangements Review contractual arrangements between the Trust and its advisors, which may include: A Trust Administrator Investment Consultants & Investment Managers A Trustee Bank Tax Advisor(s) Legal Counsel Key areas of review include: Scope of Work Fiduciary Standards Fees Conflicts of Interest
9 Areas for Review - Investment Policy, Asset Allocation and Structure Review Investment Policy Statement and supporting documents for clarity and completeness, including: Asset Class and Manager Guidelines Tax planning Cash flow guidelines Review the asset allocation and the process through which the asset mix is determined Review current investment manager structure Is it consistent with investment policy and objectives? What types of investment products are utilized, e.g., commingled funds and/or separately managed accounts? Are portfolios are managed by Trustee Bank or outside entities? Evaluate how tax objectives and other constraints factor into specific investment decisions
10 Areas for Review - Investment Performance, Reporting and Benchmarking Review current investment performance reports to determine whether they are clear and contain the necessary exhibits Evaluate the appropriateness of performance evaluation measures, and utilized and recommend changes in benchmarks as necessary If a Trustee Bank manages a portion of the Trust assets, explore whether potential conflicts exist between the Bank’s investment management practices and its investment reporting and evaluation responsibilities Review how conflicts are “managed”
11 Areas for Review – Manager Due Diligence Review process through which potential new or replacement investment managers are identified, evaluated and selected Review the process and materials through which investment manager recommendations are presented to the Trust and how decisions are made Understand and evaluate how outside investment managers are evaluated on an ongoing basis Understand the process through which outside investment manager activity is incorporated into and reflective of the Trust’s overall tax planning and implementation strategy
12 Areas for Review – Costs, Brokerage and Trading and Custody Review the fee schedules for outside investment managers and investment vehicles and whether those fees are within commercially reasonable ranges. Evaluate the process by which calculation and payment of fees are controlled. Evaluate the process through which Trustee Bank assures best execution in its own trades and monitors best execution in the trades of its outside managers, where applicable.
13 Areas for Review – Costs, Brokerage and Trading and Custody Evaluate the process and controls over use and reporting of soft dollars and similar brokerage credits relative to the obtaining and use of “research” for the benefit of the Trust. Evaluate the basis, commercial reasonableness, computation, and controls over Trustee Bank’s compensation for its various roles, identify any possible conflicts or lapses of control, and recommend corrective measures. Evaluate Trustee Bank ’s process and controls over reclamation of taxes withheld on foreign investment income, voting of proxies, making and effectuating decisions on corporate actions, and deciding and acting on securities class action and other claims.
14 Fee Structure for Review The fee structure should help to ensure that the fiduciary auditor’s advice is independent and objective; totally free of conflicts of interest Flat fee NO other compensation of any sort from the engagement, such as fees or commissions from investment managers, broker dealers, commission recapture programs
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