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A Primer and Review for Financial Advisors
By Dr. David Edward Marcinko MBA, CMP™
www.CertifiedMedicalPlanner.org
More than a decade ago Charles L. Stanley, CFP™ gave an overview of the legislation and highlights areas of change for financial advisors and planners and to the financial services industry. To date, the Uniform Prudent Investor Act (UPIA) has been enacted in most states. Essentially, the act changed the legal criteria for “prudent investing” for trusts. All assets owned by a trust are considered “investments” for purposes of the Uniform Prudent Investor Act. Consequently, if a trust owns a life insurance policy or an annuity, it is considered an “investment” for purposes of the UPIA. Trustees and their advisors are subject to the act.
Background Review
The UPIA (California Probate Code Article 2.5) was adopted by the Uniform Conference of Commissioners on Uniform State Laws in 1994. When determining whether or not certain investing is “prudent,” the standard is applied to the whole portfolio rather than to individual investments.
The UPIA radically changes the analysis of risk. The UPIA considers that risk is unavoidable. For example, fixed income instruments carry the risk of loss of purchasing power, even though the principal may not be reduced in terms of real numbers. Risk is often desirable so long as it is sufficiently compensated. The UPIA seeks to compel the trustees to analyze the trade-offs between risks and returns, taking into consideration the needs and objectives of the trust.
Restrictions Reduced
The restrictions on what type of investments can be held in trust have been eliminated. The trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and that meets the other requirements of prudent investment. The trustee’s duty to diversify trust assets is codified in the UPIA. It is now recognized that proper effective diversification may enhance returns and/or reduce risk at the same time.
The UPIA rejected the traditional trust rule that generally prohibited “delegation of duty” by trustees, especially the duty of investment of trust assets. Delegation is now permitted, subject to safeguards. Agents are now made liable if they do not follow the new law.
What Must a Trustee Do to Comply with the Act?
According to Stanley, to comply with the UPIA, trustees must review trust assets and make and implement decisions to either keep or discard assets in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust:
- The trustee must diversify the assets of the trust unless it is prudent not to do so (16048). For example, it would not be acceptable for the trust to hold all municipal bonds.
- The trustee must either comply with the Act in full or have the trust amended to restrict the requirements to diversify trust assets.
- The trustee must delegate if he or she believes that he or she doesn’t the expertise to perform certain functions, this is particularly anticipated in the area of investment management. The trustee is expected to document all of the above to be available for review either by beneficiaries and/or courts should they become involved. This includes a written Investment Policy Statement. The act doesn’t specifically require this, but how would one prove they had been acting as a prudent trustee without documentation?
- The trustee must periodically review the circumstances, assets and any professional delegates whom he or she has retained to assist him or her. The portfolio must be periodically rebalanced to maintain the established risk/reward characteristics identified in the Investment Policy Statement. This is not specifically stated, but is implied in ¤16047(b) and is a part of proper portfolio management under Modern Portfolio Theory. The act requires the costs of management to be “reasonable.”
- The trustee must deal impartially with beneficiaries when there are two or more beneficiaries and must invest impartially, taking into account the differing interests of the beneficiaries.
Note: In most states, trust language can draft the trustee out of any and all requirements of the Uniform Prudent Investor Act. Many attorneys are doing this. So check trust language carefully.
Assessment
This essay is not a “final answer” in regard to compliance with the Uniform Prudent Investor Act. Financial advisors should consult with a competent attorney if you have any questions about a specific application with a specific physician investor or other client.
Conclusion
And so, your thoughts and comments on this ME-P are appreciated. How has the fiduciary standard altered the above Act; or the current Dodd-Frank Act [Wall Street Reform and Consumer Protection Act]? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.
Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com
OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:
- PRACTICES: www.BusinessofMedicalPractice.com
- HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
- CLINICS: http://www.crcpress.com/product/isbn/9781439879900
- ADVISORS: www.CertifiedMedicalPlanner.org
- FINANCE: Financial Planning for Physicians and Advisors
- INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
- Dictionary of Health Economics and Finance
- Dictionary of Health Information Technology and Security
- Dictionary of Health Insurance and Managed Care
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Filed under: CMP Program, Ethics, Financial Planning | Tagged: Charles L. Stanley, CMP, david marcinko, fiduciary, Investment Policy Statement, Prudent Investor Act, UPIA, www.certifiedmedicalplanner.com | 18 Comments »
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