6 December 2006
Trustees warned over finance company failures.
As if 2006 wasn’t bad enough, with the high profile collapses of National Finance 2000, Provincial Finance and Western
Bay Finance, were these just the tip of the iceberg with more bad news due in 2007? Commentary around the release of the
KPMG annual Financial Institutions Performance Survey suggests tough times are set to continue for finance companies.
“This is the question trustees should be asking themselves if they are managing investment portfolios that include
finance company debentures” says Mark Maxwell, Chief Executive for Trust Management Specialists - Integrity Trust
Limited.
While the interest rates offered by finance companies may seem attractive to trustees they need to be aware of their
fiduciary obligations when making investment decisions. Trustees have an obligation to invest prudently on behalf of the
beneficiaries of the trust. Failure to do so may find trustees having to compensate the trust for investment losses
personally.
Prudent investment very often will not involve simply chasing the highest interest rates even if this is how they invest
personally. Trustees must remember it may not be acceptable for a trust’s investment portfolio to simply mirror what
they might choose personally.
It is also not acceptable for trustees to abdicate the decision making process for investments to a professional
advisor. While trustees have a duty to seek professional advice it remains their decision at the end of the day. “I just
invested in what my advisor told me to” is unlikely to be much of a defence if faced with court action from
beneficiaries
It is important trustees take an active interest in investment decisions and Maxwell recommends involving your trust
specialist and/or investment advisor in preparation of a written investment strategy for your trust. This will ensure a
robust process is in place for investment decisions and will support trustees to defend their actions should challenges
to investment decisions arise.
The Trustee Amendment Act 1988, Part II, section 13E provides trustees with a list of matters they should consider when
making investment decisions. Maxwell recommends all trustees and their investment advisors make themselves aware of this
list of considerations, referring to it for each investment decision.
When considering investments with finance companies, trustees should take particular note of (d) from the list mentioned
above - The risk of capital loss or depreciation. “Given the events of 2006 and the KPMG Survey, one would suggest that
any investment in finance companies is viewed with caution as part of an overall diversified portfolio” says Maxwell.
Mark Maxwell is Chief Executive and co-founder of Integrity Trust Limited (www.integritytrust.co.nz), a company
specialising in trust management. Mark has extensive experience in the trust industry after a 17 year career with Public
Trust where he held a number of senior roles, including General Manager of Charitable Services and National Manager,
Trustee Services Development.
ENDS