By Noelle Snyman (Candidate Attorney at Hayes Incorporated)
The office of trustee is one saddled with many duties. One of these duties is the duty to invest, in order to preserve and promote trust property. Investment of trust property is often a balance between risk and reward, making it a delicate practice. The duty to invest thus gives rise to uncertainties for a trustee. It is important for trustees to understand and appreciate the fundamental responsibilities underlying the duty to invest, in addition to what this duty entails.
The point of departure when considering the duties of a trustee is that the duties apply only if stated expressly or impliedly in the trust deed. There is, however, a more fundamental duty under which all trustees operate, which duty can be found in the Trust Property Control Act 57 of 1988. Section 9(1) of the Trust Property Control Act provides that every trustee has the duty to act with “care, diligence and skill which can reasonably be expected of a person who manages the affairs of another”, i.e. the trustee’s duty of care. This means that a higher standard can be expected from a trustee than from the reasonable person who manages his own affairs. The Trust Property Control Act expressly states that this fundamental duty of care may not be negated.
The Duty of Care and Investments
Historically, the position with regards to investments was very restricted. In the case of Sackville v Nourse and Another 1925 AD 520, the court concluded that trustees, when dealing with the investment of trust property, are to avoid any risk in his/her investments. This position was expanded upon in Peffers NO & Another v Attorneys, Notaries and Conveyancers Fidelity Guarantee Fund Board of Control. The Peffers case stated that, due to the high standard of care imposed on trustees, only certain types of investments were acceptable and such investments are to be made with diligence and skill. Fortunately, the duty to invest has changed substantially and a modern approach is now required. Low risk investments do not necessarily result in a sufficient yield and “trustees have to balance the elements of investment risk with the need to achieve the necessary capital growth and income generation for beneficiaries.” However, trustees must still invest prudently and carefully.
The pinnacle of the current position is found in Administrators, Estate Richards v Nichol & Another 1999 (1) SA 551 (SCA) (hereafter Nichol), which case confirmed the movement away from the avoidance of risk in investing trust assets. The Nichol case considered the trustees’ wide powers of investment, which include the power to invest on the stock market. The court ultimately decided that as the trustees were part of a group of experienced investors who consulted with major stockbrokers, it was sufficient to warrant the wide powers bestowed upon them by the trust deed. Every case must, of course, be considered on a factual basis and the court concluded by confirming that the point of departure must always be the duty of care as set out in the Trust Property Control Act. In order to ensure that the duty is fulfilled, the court gave certain practical guidelines to be considered when making investments on the stock market. The court stated that risk can be reduced if the trustee carefully selects and balances the share portfolio, which entails avoiding speculative shares, and spreading the investment to create a “balance of stability and growth.”
No formula for good investment exists, and therefore also no formula for the investment of trust assets. However, the duty to invest must always be informed by the duty of care, skill and diligence. Even though we have moved towards a more modern approach where investments are not arbitrarily limited to a specific list, the principles of prudence and care must still be applied. While it is clear that the duty to invest has kept up with modern times, the interests of beneficiaries must at all times remain the focus of the trustees.