As we embark on this exploration of best practices among professional independent trustees, it’s fitting to lay the foundation for the entire series by focusing on the fundamental framework that demands, defines, and animates your conduct, decisions, and liability as a professional trustee: the professional fiduciary standard of care. You may not realize that courts have adopted a dual framework for determining trustee liability – the “prudent person” standard of care and the “professional fiduciary” standard of care.
The “prudent person” standard of care applies to all trustees, compensated and uncompensated, regardless of their skill, experience, knowledge or expertise[i]. The professional fiduciary standard of care applies to you if you are compensated for serving as a trustee, and this standard of care is variable; it scales with how you present yourself to the public and to prospective clients, so the more you tout your skills, expertise, knowledge and experience, the more stringently you will be judged if your conduct is ever questioned. Importantly, the professional fiduciary standard is based in part on how other professional trustees, whether they be individuals or institutions, have or would have acted in a similar situation. In other words, you and uncle Bob are not treated equally in a court of law. Courts are much less forgiving when the conduct in question relates to a professional trustee.
And frankly, they should be. A simple sense of truth and fairness mandates that if someone claims to possess certain skills, experience, knowledge and expertise, offers and is compensated for those services which rely on those skills, experience, knowledge and expertise, that individual should be required to demonstrate those claimed skills, experience, knowledge and expertise and should be held accountable when they fail to do so.
In fact, this concept is codified in the Uniform Prudent Investor Act[ii] and the Restatement (Third) of Trusts[iii]. For you, the courts will ask not “what would a prudent person do in this situation?”, but rather, “what would a prudent professional do in this situation?” In the second part of this piece we’ll look at exactly how the courts answer that question, but for now, it’s important to recognize that the legal definition of negligence is subjective and relative, and that courts can and have determined that what would otherwise be considered prudent for a prudent person could in fact be negligent for a professional fiduciary, and that what would be considered negligent for a prudent person could in fact be grossly negligent for a professional trustee. Courts can, at their discretion when warranted, ignore or set aside exculpatory language in the trust document absolving the trustee of liability resulting from negligent conduct if such conduct violates what the court views as a professional fiduciary standard of care.
When it comes specifically to overseeing trust assets (which may include privately held businesses, real estate, mineral rights or other illiquid and/or esoteric assets in addition to publicly traded stocks and bonds), professional trustees are expected to affirmatively use their expertise to establish a cohesive, diversified trust-level investment strategy that serves the unique needs and situation of the trust, analyze trust assets as a singular portfolio at the trust level, to understand the risk and return tradeoffs of each asset and the interplay among all the trust assets, to assess and understand the investment managers (and business managers if applicable), to monitor them on an ongoing and continuous basis, to adjust the overall investment strategy whenever conditions warrant, and to document their decision-making process.
This conduct is considered merely the baseline conduct, not best practices, for a professional trustee. For uncle Bob on the other hand, such conduct is implausible and unrealistic. It’s important to note that courts do not focus on the outcome specifically, they focus on the process and whether the trustee applied the same level of skill, experience, knowledge and expertise they claimed to have, and importantly, the same level of skill, knowledge and expertise that another professional trustee has or likely would have demonstrated in a similar situation.
The elevated professional fiduciary standard of care is such fruitful soil for legal action that trial attorneys use the concept as bait to attract and represent disgruntled beneficiaries. To see this in action, simply search the internet for “trustee standard of care” and note how many results on page 1 consist of content published by trial attorneys explaining the concept in order to lead beneficiaries down the path of legal action (hint, it’s virtually every result on page 1).
This reality creates a challenging dilemma for individual professional trustees; you must tout your own skills, experience, knowledge and expertise in order to compete against banks and trust companies but doing so elevates the standard of care to which you’ll be held and elevates your liability in the process.
Can you meet this elevated standard of care? Absolutely, without question. So how do you meet this standard of care and compete effectively against banks and trust companies employing teams of specialized professionals and infinitely larger marketing budgets than you have? It begins with your processes.
Because courts evaluate the process, not specifically the outcome, best in class processes can provide a strong defense should you find yourself in court with a disgruntled beneficiary (let’s face it, there are just some inherently antagonistic people that can’t be pleased), because your processes will be scrutinized, not the outcome. Your processes must be documented as policies and procedures, and they must be followed, which requires periodic training. Your processes should also be evaluated periodically for their effectiveness and modified when laws, regulations, or the unique circumstances of the trust warrant.
At the same time, your processes can facilitate best in class service for your trusts and their beneficiaries, which naturally supports your ability to scale your practice and take on more clients. Customer service is a documented weakness for the large bank trust departments and trust companies, so develop processes that facilitate exceptional client experiences and exploit this vulnerability.
Finally, you must delegate. No trustee can be an expert in every area in which they need to be an expert and the UPIA and Restatement (Third) of Trusts both mandate that when trustees lack the skills and expertise required, they must either acquire it themselves (which could take years, if not decades) or they must delegate to someone who possesses those skills and expertise and oversee them. Banks and trust companies have internal teams that possess the technical expertise required to satisfy the professional fiduciary standard of care, it’s highly likely that you need an internal and external team to satisfy it. These are all topics that we’ll explore in greater detail as this series unfolds, so we’ll refrain from diving into them too deeply right now.
The main point of this piece is this; as a professional independent trustee, The Uniform Prudent Investor Act and the Restatement (Third) of Trusts both impose upon you a higher standard of care which is defined in part by how your peers, including the institutional fiduciaries within banks and trust companies, have acted or likely would have acted in a similar situation. Embracing the professional fiduciary standard of care serves a dual purpose; it can serve as a strong defense should you find yourself across the table from a disgruntled beneficiary and their legal representation, and it can help you compete effectively in the marketplace to scale your practice.
In the second part of this piece, we’ll look at two cases in which the professional fiduciary standard of care played a prominent role in the court’s decision. That piece will be published later this month.
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[i] See Harvard College vs Amory, 1830, further refined with the Uniform Prudent Investor Act, 1992, requiring trustees to act as prudent investors, not simply prudent people.
[ii] Section 2(f)
[iii] §90, comment d
