Managing Risk and Investments for Trustees

Tax Professionals' Resource
June 13, 2013 — 1,392 views  
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Trustees are essentially those individuals that hold some position of power, land, or significant authority on the running of a certain business or organization. Trustees are primarily the fiduciaries that are placed in charge of the day-to-day running of a business and are also held accountable for any problems the business might face. 

Controlling Investment Risks

As with any kind of investment, there is always the risk factor. The fact that one is not in complete control of all factors that affect a business means that the fiduciaries are primarily tasked with making best decisions, based on a number of facts and figures. These details are generally made available for them by the staff of the organization. Controlling investment risks is all about making sure that you understand as many aspects of a business as possible.

Fiduciaries will generally use methods such as negative correlation in order to make decisions that affect the short-term as well as long-term future of their business entity. Optimization of the portfolio is also something that will steer them to a calmer business environment. Investment risk is considered to be a precise concept, which can be controlled, measured, as well as reduced. One of the common methods of controlling investment risk that fiduciaries use is known as ‘standard deviation.’ It measures an individual’s annual or monthly returns against the historical average rate of return – putting the current health of the business or individual and its assets into focus.

As the title suggests, one of the main roles a trustee is to perform include fulfilling the objectives that the individual who set up the trust had expected of him or her.

Aims and Objectives

The aims and objectives of the fiduciaries include ensuring that all decisions are made for the best interests of the business, while keeping all personal emotion and feelings out of it. Businesses will usually also have drafted trust agreements that will list the priorities for each beneficiary. In the event that the trust agreement does not contain any set guidelines for certain scenarios, it is essential that he or she consult with state and federal laws regarding the best course of action.

Because the fiduciary is rarely ever able to directly interact with the funds that he or she manages, it is easy to be sidetracked from the original aims and objectives of the trusts. In the event this occurs, other trustees must make sure that the objectives of their roles are met and consultation between them is essential.

Minimizing the Risk

Minimizing the risk when being a fiduciary will depend largely on exactly what kind of trust is being discussed. Methods such as stop loss systems will help reduce any downward spiral that any businesses may run into. Allowing the investment manager to do his work, when the value of the portfolio increases, will help stabilize the business.  

Being a fiduciary for a trust board is not an easy task. Making decisions that affect something or someone can be very nerve-wracking, but trustees are placed in that position because of the very fact that one person or a large group of people have faith in their judgment during the hardest times.

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