Foreword

I am not a financial adviser and not so many of our readers are but I feel it is appropriate to cover some much ignored ground in this editorial. I hope it proves to be timely and encouraging.

It seems that ECA readers are increasingly called upon to be professional trustees. Accountants and such like seem less willing as the years go by.

Probably the most irritating thing professional trustees can receive in that capacity during a time of stock market turmoil is a blanket ‘Sell everything’ note from a broker or similar financial adviser. How should these trustees react?

Most brokers do not issue such notes these days. Even during the 2002-3 period I did not receive a single one and the inevitable (?) bounce duly occurred. But I doubt I am the only aficionado of ECA to have received one recently – in the wake of the sub-prime debacle, which commenced in late August.

Financial advisers sometimes weirdly suggest that trustees are ‘obliged’ to follow their advice. But this is simply not the case especially when fundamental trust investment principles would be breached by doing so. We are not stooges.

That can naturally create much discomfort for the professional trustee, especially when their lay co-appointees are also taking fright. Nerve may well be required. Hopefully not as much as in 1974, but I’m afraid it comes with taking on the role. Do what I do. Say ‘no’ and leave the country for a while with some nice thick books to read. Drop the mobile in the deep end of the pool. If the world is indeed ending, take a ringside seat in a villa with a nice view. If not, it still works well by way of mind therapy.

Such a sell notice (and its kin, the ‘irregular’ partial sale notice) suggests to me that the supposed financial whizz is declaring themselves unhappy with their own initial asset allocation. If the trust money was invested for the long term (as trust money usually is), that underlying allocation should simply not have to be changed overnight should it?

Of course, I am assuming that beneficial needs have not unexpectedly, dramatically and irreversibly changed and that we are not suddenly entering a 1930s-style depression (advisers tend not to suggest this is the case in my experience, because it is obvious when it fails to turn up). But if in more normal (if very turbulent) circumstances, advisors are so profoundly unhappy with the quality of their advice, then they should probably be sacked for prior incompetence/imprudence. They are essentially acknowledging that they have adopted a position involving the taking of excessive risk, which the trust cannot handle. That naturally runs contrary to the basics of trustee investment. Take out the axe.

It also suggests to me that the guru is unaware that trustee investment is what we are involved in – not trustee speculation. Trustee investment involves seeking to maximise returns and minimise costs on a suitable, risk-adjusted basis. These are rarely facilitated by triggering capital-gains tax charges on the basis of fire sales and triggering possible exit-related transactional charges.

The whole idea of such a sell-out is also theoretically bankrupt. We simply do not know what will cause the market to rise or fall, by how much, or when. In May 2007, the head of the US Federal Reserve said ‘We do not expect significant spillover from the sub-prime market to the rest of the economy, or to the financial system.’ If he did not know what hope for us? At least it is comforting that a £100bn-plus problem is not considered ‘significant’ perhaps? I also note that three Bear Stearns (BS) hedge funds quickly collapsed. One finance publication voted BS ‘Best risk manager’ in 2006. Trusts investing in hedge funds recently became rather de rigeur in some quarters did it not?

We could, if we sold, find we had just spent an awful lot on the original purchases and sales, only to be caught out again if the market suddenly rose (perhaps even higher than it was originally) before we could reinvest – along with all the additional cost associated with that. Factoring in added administration charges and stress-related costs/burdens invariably means only the broker/financial adviser wins either way. Selling shares on the way down is a proven way to secure losses. That is obvious. But when panic sets in, do we remember this as professional trustees any more than anyone else? I hope so.

David Coldrick
Consulting editor
david.coldrick@wrigleys.co.uk