Investment Decision-Making for Trustees: Key Principles and Best Practices

Toni Cantin, Head of the ICTS Academy

Effective investment decision-making is fundamental to successful trustee management. Trustees play a vital role in managing assets to maximise returns while safeguarding the financial interests of beneficiaries. Navigating the complexities of investment decisions demands adherence to essential principles and best practices, ensuring that choices align with the fund’s goals and the best interests of beneficiaries.

Trustees are entrusted with managing funds that are often vital for the financial security of individuals, particularly in retirement. Their role involves making strategic investment decisions that impact the fund’s performance and, consequently, the financial futures of its beneficiaries. Trustees must balance the need for growth with prudent risk management. This balance requires a comprehensive understanding of investment principles, risk management techniques, and the specific objectives of the fund.

A fundamental aspect of a trustee’s role is their fiduciary duty to act in the best interests of the beneficiaries. This duty includes making well-informed and prudent investment decisions, which requires trustees to exercise a high standard of care. Trustees must ensure their decisions are based on a thorough analysis of relevant information and are aligned with the fund’s investment objectives.

Diversification is a cornerstone of sound investment decision-making. By spreading investments across various asset classes, sectors, and geographical regions, trustees can reduce the risk of substantial losses from poor performance in any single area. A diversified portfolio helps to stabilize returns and manage risk, making the fund more resilient to market fluctuations. This approach ensures that no single investment has a disproportionate impact on the overall performance of the fund.

Effective investment decisions involve careful risk assessment and management. Trustees must evaluate the risk profile of each investment option and ensure it fits within the fund’s overall risk tolerance. This includes understanding different types of risks such as market risk, credit risk, interest rate risk, and liquidity risk. To mitigate these risks, trustees can employ various strategies, such as using hedging techniques or selecting investments with varying risk levels.

It is crucial for trustees to ensure that investment decisions align with the fund’s specific objectives and constraints. This involves having a clear understanding of the fund’s investment horizon, liquidity needs, and return expectations. Trustees should develop an investment strategy that reflects these factors and should regularly review and adjust this strategy to respond to changing circumstances. Regularly aligning investment strategies with the fund’s objectives helps maintain consistency and focus on decision-making.

Thorough due diligence is essential for making sound investment decisions. Trustees should conduct comprehensive research and analysis before committing to any investment. This process includes evaluating the performance history, financial health, and strategic outlook of potential investments, as well as understanding any associated fees and costs. Consulting with professional advisors or investment managers can provide valuable insights and support, helping trustees make informed decisions.

Investment decision-making is not a one-time task but an ongoing process that requires regular monitoring and review. Trustees should continuously assess investment performance against benchmarks and the fund’s objectives. This involves reviewing financial statements, performance reports, and market trends. Trustees should be prepared to adjust the investment portfolio in response to evolving market conditions or changes in the fund’s goals.

Transparency in investment decisions is vital for maintaining the trust of beneficiaries. Trustees should provide clear and comprehensive reports on investment performance, the decisions made, and the rationale behind those decisions. This approach ensures that beneficiaries are well-informed and reassured that their interests are being prioritised.

Given the complexity of investment decisions, trustees should consider seeking advice from financial advisors or investment managers. These experts can offer valuable guidance on market conditions, investment options, and strategies tailored to the fund’s needs. In addition to seeking expert advice, trustees should invest in their own education and training to stay current with investment trends, regulatory changes, and best practices. Continuous learning helps trustees make informed decisions and adapt to evolving financial landscapes.

In order to contribute with confidence and engage constructively with professional advisors and investment managers, trustees require a certain minimum level of investment knowledge and expertise that can be easily acquired through completing available short courses designed for such circumstances.  The FSCA’s Trustee Toolkit examinations also require that trustees develop such investment skills.

ENDS