In his article, Is My Wealth Actually Diversified?, Liam Walker of Maqro Capital Pty focuses on hard decisions in managing investment portfolios for long term results – think of that as crafting choices about how to invest your financial or investment assets.

Our focus as lawyers is in helping decision makers work out the policy and strategy approach for their decisions that is defensible before they need to work through detailed investment choices.

Both Liam and his colleagues, as well as the lawyers at Autonomy First lawyers, help manage investment risk in different contexts. Each is part of the broader issues of dealing with the estate governance and administration objectives of our clients.

Our role as lawyers is to help clients manage the accountability and validity of their decisions. When dealing with client representatives or fiduciaries such as attorneys and trustees, we help clients appraise the defensibility of their decisions and help balance a client’s dignity of risk with a representative’s duty of care.

Depending on what is at stake, the combination of skills in collaboration may help produce a more reasoned and defensible decision that is closely aligned to the values and objectives of the wealth owner.

We believe this approach to collaborative working helps mitigate the risk of abusive and coercive conduct emerging in the administration of our clients’ affairs. Set out below are a number of questions we often face in our work. We explain how we approach these issues and introduce the idea that investment policy statements should be used to frame how attorneys and other fiduciaries approach the management of the capital with which they have been entrusted.

The link between risk and return

The link between risk and return is a reality of managing private capital. This is an area of work where we as lawyers need to collaborate with other professionals to deal comprehensively with the expectations and objectives of our clients.

“How do I make investment decisions for my (insert name and relationship of attorney to their donor)?”

This is often followed up by a question like:

“How much risk should I accept in making investments?”

Inevitably we have to start by saying that we are lawyers and so cannot give financial advice. That said, we can consider the legal rules that impose duties on people to take care when investing. An attorney often asks:

“What does the power of attorney say about what you can do?”

We then reply:

“Have you been given any guidelines about investments by your donor?”

Normally the Power of Attorney is very general and the donor has not been given any guidance. Our starting point, as the client is normally a fiduciary on whom is imposed a high duty of loyalty to the donor of the power of attorney. We look to the Trustee Act prudent person investment rules which in NSW are found in s14A-D of the Trustee Act (NSW). Similar provisions are found in each State and Territory.

These rules state in s.14A:

14A Duties of trustee in respect of power of investment

(1) This section has effect subject to the instrument (if any) creating the trust.

(2) A trustee must, in exercising a power of investment —

(a) if the trustee’s profession, business or employment is or includes acting as a trustee or investing money on behalf of other persons, exercise the care, diligence and skill that a prudent person engaged in that profession, business or employment would exercise in managing the affairs of other persons, or

(b) if the trustee is not engaged in such a profession, business or employment, exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of other persons.

Note : Some Acts deem investments under the Acts to be investments that satisfy the prudent person test. See, for example, section 6.3 of the Government Sector Finance Act 2018 .

(3) A trustee must exercise a power of investment in accordance with any provision of the instrument (if any) creating the trust that is binding on the trustee and requires the obtaining of any consent or approval with respect to trust investments.

(4) A trustee must, at least once in each year, review the performance (individually and as a whole) of trust investments.

Whilst potentially useful information, this is not particularly helpful without a settled process of decision making which draws on this knowledge. In the normal case, a trustee or a person acting in a similar role (e.g. attorney) should approach decision making by following the following steps:

    • Step 1: Identify the decision that needs to be made When you’re identifying the decision, ask yourself a few questions: …
    • Step 2: Gather relevant information
    • Step 3: Identify alternative solutions
    • Step 4: Weigh the evidence
    • Step 5: Choose among the alternatives
    • Step 6: Take action
    • Step 7: Review your decision and its impact (both good and bad)

So, in any given situation dealing with investment of funds we start by asking the question; “is the donor of the power a prudent person and what would they say about this subject if given the chance”. This is why investment risk conversations are needed when discussing or planning how a power of attorney is to be activated or a trust established. In discussing the estate governance steps we normally ask:

1. What policy of the donor do we need to follow in making these decisions, if any?

2. What strategic choices do we have to evaluate? What is the process for that evaluation?

3. What actions are required to implement the strategy chosen.

4. How is that choice to be monitored and evaluated?

Even if we go to the next level of detail in the rules, we are no closer to giving guidance about applying these rules to a given client situation. The list is set out at s.14C which states:

14C Matters to which trustee is to have regard when exercising power of investment

(1) Without limiting the matters that a trustee may take into account when exercising a power of investment, a trustee must, so far as they are appropriate to the circumstances of the trust, if any, have regard to the following matters–

(a) the purposes of the trust and the needs and circumstances of the beneficiaries,

(b) the desirability of diversifying trust investments,

(c) the nature of, and the risk associated with, existing trust investments and other trust property,

(d) the need to maintain the real value of the capital or income of the trust,

(e) the risk of capital or income loss or depreciation,

(f) the potential for capital appreciation,

(g) the likely income return and the timing of income return,

(h) the length of the term of the proposed investment,

(i) the probable duration of the trust,

(j) the liquidity and marketability of the proposed investment during, and on the determination of, the term of the proposed investment,

(k) the aggregate value of the trust estate,

(l) the effect of the proposed investment in relation to the tax liability of the trust,

(m) the likelihood of inflation affecting the value of the proposed investment or other trust property,

(n) the costs (including commissions, fees, charges and duties payable) of making the proposed investment,

(o) the results of a review of existing trust investments in accordance with section 14A (4).

(2) A trustee may, having regard to the size and nature of the trust, do either or both of the following–

(a) obtain and consider independent and impartial advice reasonably required for the investment of trust funds or the management of the investment from a person whom the trustee reasonably believes to be competent to give the advice,

(b) payout of trust funds the reasonable costs of obtaining the advice.

(3) A trustee is to comply with this section unless expressly forbidden by the instrument (if any) creating the trust.

Once again, we see a list of useful criteria in need of application. That is the job of the trustee and where we add value, helping evaluate a decision for compliance with these overarching policy level rules.

In many situations, it is utterly appropriate for attorneys to approach their investment management duties as if they were trustees.

In our view, the use of investment policy statements to help frame high stakes investment decisions would dramatically improve the quality of private client investment decision making. As lawyers, we operate at the policy and strategy level only when dealing with client estate management. To go deeper we need to draw on our financial professional colleagues with whom we regularly collaborate.

Our first concern is to look at risk from the client’s personal perspective. Dr Katherine Hunt’s Ethics of Risk Profiling session preceded ours at the FAAA Congress 2023. It was a thought-provoking session that challenged us to consider how we communicate risk concerns with clients. A copy can be found here. She calls on us to consider a client’s ethics (think values, principles and purpose that drive their behaviour) as well as their:

1. Psychological tolerance for risk

2. Risk capacity

3. Risk need.

This still needs the use of rules to apply to a client interview in order to resolve how a particular client can be characterised with these measures

Our next concern is to work with a client’s financial or investment adviser to look at risk from an investment management perspective. The article from Liam Walker Hunt of Maqro is a valuable window into approaches to diversification which are called for by the prudent person investment rules set out ins.14C (1) (b) above.

For all of this analysis, reflecting on the above discussion, I return to a threshold question that needs to be asked about any professional dealing with the estate governance and administration requirements of a client, irrespective of their professional discipline:

What risk does a client need to tolerate in order to achieve their personal and financial goals?

An understanding of a client’s attitude to all relevant risks (not just investment) is a key part of establishing an estate conservation and administration plan for a client. Estate succession then can be considered.

2024 will see us expanding our collaborative working pilot with professional financial planners. Please contact Michael Perkins or Amber Geake if you are interested in this work.

Contact details for Liam Walker and Katherine Hunt are:

Katherine Hunt – Email, LinkedIn

Liam Walker – Email