The following applies to Ontario trustees. Other provinces have adopted a similar regime. Let’s start with basic principles. Trustees are responsible for trust assets:
Duty to invest
The Trustee Act does not impose a duty to invest. The trust itself may do so, such as a trust indenture the provisions of a will that creates a testamentary trust. Or, the circumstances of the trust may dictate that such investment occurs.
The duty to invest arises:
Duty of prudence
With this in mind, let’s examine how the Trustee Act works. Step by step. First, let’s look at the duty to invest. The Trustee Act (full text from CanLII is here) provides:
27. (1) In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.
(2) A trustee may invest trust property in any form of property in which a prudent investor might invest.
Note the “must” only arises if the trustee decides to invest. It does not impose that duty at large.
So, what is prudence?
The criteria of prudence
27(5) A trustee must consider the following criteria in planning the investment of trust property, in addition to any others that are relevant to the circumstances:
So, we can see that prudence depends on the circumstances of the economy, tax implications, expected returns and the financial circumstances of the trust obligation, i.e. the use of the capital. This resembles the obligation on a financial adviser, to use due diligence to understand the client’s financial circumstances and to match investments to those circumstances.
Once the duty to invest arises, there follows a duty to diversify suitably:
27(6) A trustee must diversify the investment of trust property to an extent that is appropriate to,
(a) the requirements of the trust; and
(b) general economic and investment market conditions.
Return to the duty to invest for a moment. A short trust and a small amount of capital does not create a duty to diversify because there is no duty to invest other than the simple account described above.
Many – most - trustees are not professional investment advisers or counsel. What do these trustees do? Again, the Trustee Act tells us.
27(7) A trustee may obtain advice in relation to the investment of trust property.
(8) It is not a breach of trust for a trustee to rely on advice obtained under subsection (7) if a prudent investor would rely on the advice under comparable circumstances.
Investment may be a duty of the trustee. If so, the conduct becomes part of the trustee’s functions that are subject to scrutiny and second-guessing. And compensation. And a degree of protection from second-guessing.
The Trustee Act provides:
28. A trustee is not liable for a loss to the trust arising from the investment of trust property if the conduct of the trustee that led to the loss conformed to a plan or strategy for the investment of the trust property, comprising reasonable assessments of risk and return, that a prudent investor could adopt under comparable circumstances.
So, acting prudently seems to include relying on competent advice.
Delegation to an investment manager
For many larger estates, the trustee may prefer to delegate the investment obligation to an agent. In larger estates, this should be a professional money-manager, known as an investment counsel/portfolio manager (ICPM) holding the Chartered Financial Analyst (CFA) designation and licensed as such by the Ontario Securities Commission. Unfortunately, the provincial government has not (yet) regulated who may act as an agent.
30. The Attorney General may make regulations governing or restricting the classes of persons or the qualifications of persons who are eligible to be agents under section 27.1 and establishing conditions for eligibility.
Sure enough, the Trustee Act encourages delegation. It provides:
27.1 (1) Subject to subsections (2) to (5), a trustee may authorize an agent to exercise any of the trustee’s functions relating to investment of trust property to the same extent that a prudent investor, acting in accordance with ordinary investment practice, would authorize an agent to exercise any investment function.
The agent must conform to a plan, known in the industry as an Investment Policy Statement (IPS).
27.1(2) A trustee may not authorize an agent to exercise functions on the trustee’s behalf unless the trustee has prepared a written plan or strategy that,
(a) complies with section 28; and
(b) is intended to ensure that the functions will be exercised in the best interests of the beneficiaries of the trust.
Although the trustee is obliged to prepare the “written plan or strategy”, that is part of the job of the agent. Professionals with the CFA and certified financial planner (CFP) designations must conform to the standards of their professional organizations, which include creation of and conformance to the IPS.
The Trustee Act then spells out that the IPS must be a written agreement. With the power to invest comes an obligation to conform and to account. The Trustee Act provides:
27.1(3) A trustee may not authorize an agent to exercise functions on the trustee’s behalf unless a written agreement between the trustee and the agent is in effect and includes,
(a) a requirement that the agent comply with the plan or strategy in place from time to time; and
(b) a requirement that the agent report to the trustee at regular stated intervals.
Finally, the Trustee Act obliges the trustee to pay attention to choosing the agent and then to reviewing the performance by the agent. Trustees may not delegate by random selection, which brings the agent’s professional qualifications into play. Trustees may not ignore the ongoing activities of the agent. The Trustee Act provides:
27.1(4) A trustee is required to exercise prudence in selecting an agent, in establishing the terms of the agent’s authority and in monitoring the agent’s performance to ensure compliance with those terms.
(5) For the purpose of subsection (4),
(a) prudence in selecting an agent includes compliance with any regulation made under section 30; and
(b) prudence in monitoring an agent’s performance includes,
(i) reviewing the agent’s reports,
(ii) regularly reviewing the agreement between the trustee and the agent and how it is being put into effect, including considering whether the plan or strategy of investment should be revised or replaced, replacing the plan or strategy if the trustee considers it appropriate to do so, and assessing whether the plan or strategy is being complied with,
(iii) considering whether directions should be provided to the agent or whether the agent’s appointment should be revoked, and
(iv) providing directions to the agent or revoking the appointment if the trustee considers it appropriate to do so.
Duty of the agent
Once the trustee has made the agreement with the agent, the Trustee Act then gives specific directions to the agent. It provides:
27.2 (1) An agent who is authorized to exercise a trustee’s functions relating to investment of trust property has a duty to do so,
(a) with the standard of care expected of a person carrying on the business of investing the money of others;
(b) in accordance with the agreement between the trustee and the agent; and
(c) in accordance with the plan or strategy of investment.
The Trustee Act covers the high level of the duties on both trustee and agent. When it comes to the second-guessing, both the trustee and the agent are open to attack by unhappy beneficiaries. There are limited protections in the Trustee Act, as discussed above. Case law provides that financial advisers/agents are guarantors of the process, but (absent a contractual warranty or representation) they are not guarantors of the results.
The debate concerning whether the investments conformed with the duty of care can arise during the passing of accounts or during a civil action for damages. Even here the Trustee Act weighs in with guidance.
The Trustee Act provides:
27.2(3) If an agent is authorized to exercise a trustee’s functions relating to investment of trust property and the trust suffers a loss because of the agent’s breach of the duty owed under subsection (1) or (2), a proceeding against the agent may be commenced by,
(a) the trustee; or
(b) a beneficiary, if the trustee does not commence a proceeding within a reasonable time after acquiring knowledge of the breach.
29. If a trustee is liable for a loss to the trust arising from the investment of trust property, a court assessing the damages payable by the trustee may take into account the overall performance of the investments.
Who pays the agent?
Case law determines that the trustee may pay the agent from the estate assets, not from the trustee’s compensation.
In the Estate of Alaine Jackson Young, 2012 ONSC 343 (CanLII), Hainey, J wrote
 In my view, in today’s complex and sophisticated investment market, executors should be entitled to hire investment counsel to assist them in making investment decisions and the fees for doing so should not be deducted from their compensation. The fact that Canada Trust was able to manage the Estate’s investments in-house through its Common Funds from 2003 until 2008 should not disentitle it from engaging professional investment advice and being indemnified for the cost of that advice after it no longer has that expertise in-house.
What about conflicting interests?
If there are income beneficiaries and capital beneficiaries who are not identical, this may pose a real problem for trustees. It is outside the scope of this short paper, but trustees should be aware of the potential conflict between earning high income and preservation (or growth) of capital. The duty of keeping an even-hand prevails, although it may not be simple to define with precision in all cases.
John Hollander can be contacted toll-free at 1-888-288-2033 or by email.
[i] Although this duty does not arise in the statutes of some provinces, such as BC, it may still form part of prudence because of Modern Portfolio Theory. See: Miles v. Vince, 2014 BCCA 289 (CanLII), at 51-79