Duties of unit trust trustees
| Pages | 260-264 |
| DOI | https://doi.org/10.1108/eb024934 |
| Date | 01 March 1997 |
| Published date | 01 March 1997 |
| Author | Stephen Lofthouse |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 5 Number 3
COMMENT
Duties of unit trust trustees
Stephen Lofthouse
Received: 12th April, 1997
4 North Several, Orchard Drive, London SE1 0QR; tel/fax: 0181 318 7132;
e-mail: Slofthouse@aol.com
Stephen Lofthouse
is a financial
writer.
He
has worked in the brokerage and fund
management industries. His books include
'Equity Investment Management' and 'How
to Fix Your Finances' and he has pub-
lished in numerous professional and aca-
demic journals.
ABSTRACT
The paper outlines the duties of unit trust trus-
tees in principal/agent terms. It then discusses
the reactions of
a
number of
trustees
to the sug-
gestion that they might be acting in breach of
trust because of poor performance by the funds
for which they are trustees. It concludes by
offering
suggestions
for remedial action by unit
trust trustees.
INTRODUCTION
A look at an elementary law text on trusts
will probably show that the initial trustees
are usually appointed by the settlor in the
trust instrument. The next section will state
that the trustees must take the same care of
the trust property as an ordinary prudent
man would take if he were making an
investment for the benefit of other people
for whom he felt morally bound to pro-
vide.
Finally, with regard to investing the
property, the trustees may do it themselves,
or hire managers.
Nowadays, among the most common
and important trusts are unit trusts and
pension funds. In this paper the author will
focus on unit trusts and, for them, the pre-
vious paragraph is utterly misleading.
If a fund manager is about to enter the
unit trust business there is no settlor pro-
viding funds or selecting trustees. Instead,
the unit trust manager appoints trustees,
typically a bank subsidiary, and drums up
the beneficiaries whose funds are to be
managed. It is now not immediately clear
who is the principal and who is the agent.
Presumably, the unitholders are the princi-
pals,
and the manager and trustee their
agents. But the unitholders probably do
not think in these terms.
The Principal/Agent Problem
There is a large economic literature on the
principal/agent problem. In essence, this lit-
erature assumes that agents will follow
their own economic interests whenever
they can. If they can be closely monitored
at little cost, they will usually be moni-
tored and will be forced to pursue the prin-
cipal's interests. But if monitoring is not
done, or is difficult, the principal's interests
will be pursued with less vigour.
Given the type of investors in unit trust,
we would expect them to be poor moni-
tors.
Many investors do, of course, switch
from fund to fund seeking superior perfor-
Journal of Financial Regulation
and Compliance, Vol. 5. No. 3,
1997, pp. 260-264
© Henry Stewart Publications,
1358-1988
Page 260
To continue reading
Request your trial