Newspaper article THE JOURNAL RECORD

New Law Broadens Mission of Trust Officers

Newspaper article THE JOURNAL RECORD

New Law Broadens Mission of Trust Officers

Article excerpt

In literature, as in life, trust officers have been characterized as the most conservative of creatures, unwilling to take even minor risks with the money they manage. Tales abound of family assets that were depleted by inflation or of investments that far underperformed the financial markets.

In their defense, trustees have long said that they are hamstrung. A large body of law makes preservation of capital _ and thus risk avoidance _ their primary objective, explained Isabel Miranda, director of the trusts and estates department at Citibank in New York.

But change is coming. On Jan. 1, the Prudent Investor Act takes effect in New York, which joins more than a dozen states in broadening the trustees' mission beyond capital preservation.

The law was heavily promoted by corporate trustees and estate lawyers, who find clients increasingly concerned about investment performance.

"It's a major milestone," said Mary Lehman, managing director of private advisory services for the New York City office of Bankers Trust Co. "Trustees will now be able to act like regular money managers."

The new law instructs the trustee to invest with an eye toward overall return, instead of limiting the trustee to the safest investments with the least chance of capital loss. Blue-chip stocks could be supplemented by small-company shares, for example.

Investments like stock options or international stocks may also be used. These vehicles, while risky in and of themselves, may actually reduce the volatility of an overall portfolio by rising when other holdings decline. The suitability of such investments will be based on the needs of the beneficiary and on the prevailing economic climate.

The law will no longer protect the trust officer who remains narrowly tied to bonds or bank deposits if those investments are likely to erode the value of the trust during a period, say, of high inflation.

Lehman said beneficiaries could now demand that trustees develop an investment strategy that met their needs _ not just one that preserved principal. …

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