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SQE – Equity and Trust – The Trustee’s Duty to Take Advice Before Investing
Introduction
One of the most important responsibilities of trustees is the management and investment of trust assets. Modern trust funds frequently contain substantial investments, and poor investment decisions can significantly prejudice the interests of beneficiaries. Recognising the complexity of modern financial markets, the Trustee Act 2000 imposes a specific obligation on trustees to obtain and consider proper advice before exercising investment powers.
The duty to take advice forms part of the wider framework governing trustee investment decisions and complements the statutory duty of care under section 1 of the Trustee Act 2000 and the standard investment criteria contained in section 4. Together, these provisions seek to ensure that trustees make informed and prudent investment decisions in the best interests of beneficiaries.
The primary statutory authority governing this duty is section 5 of the Trustee Act 2000.
Statutory Basis
Section 5 of the Trustee Act 2000 provides that trustees must obtain and consider proper advice before exercising any power of investment.
The duty applies whenever trustees are making decisions regarding:
Relationship with the Standard Investment Criteria
The duty to obtain advice is closely linked to the standard investment criteria contained in section 4 of the Trustee Act 2000.
Before making investment decisions, trustees must consider:
Daniel v Tee
The importance of obtaining appropriate advice was reinforced in Daniel v Tee [2016] EWHC 1538 (Ch).
The court emphasised that trustees must have a coherent investment strategy and should obtain advice from suitably qualified individuals before making significant investment decisions.
The case also highlighted the importance of conducting regular reviews of investment performance and ensuring continued compliance with the statutory investment framework.
The decision demonstrates that obtaining advice is not a one-off exercise but forms part of an ongoing process of prudent trust management.
Exceptions to the Duty
The duty to obtain advice is not absolute.
Section 5(3) provides that trustees need not obtain advice where they reasonably conclude that, in all the circumstances, it is unnecessary or inappropriate to do so.
The key requirement is that the trustees’ conclusion must itself be reasonable.
Trustees who decide not to obtain advice must therefore be able to justify that decision objectively.
Situations Where Advice May Be Unnecessary
The Explanatory Notes to the Trustee Act 2000 provide examples of situations where obtaining advice may be unnecessary.
One example is where the trustees themselves possess sufficient expertise to make the decision without external assistance.
For instance, a trustee who is an experienced investment professional may already possess the necessary knowledge and practical experience.
However, trustees should be cautious before relying on their own expertise and should ensure that they genuinely possess the relevant specialist knowledge.
Example – Trustee with Investment Expertise
Suppose one trustee is a chartered financial analyst with twenty years of experience managing investment portfolios.
The trust wishes to invest a modest sum in a diversified portfolio of government bonds.
The trustees may reasonably conclude that external advice is unnecessary because the trustee already possesses sufficient expertise.
Provided this conclusion is reasonable, section 5(3) permits the trustees to proceed without obtaining independent advice.
Situations Where Advice May Be Inappropriate
The Explanatory Notes also recognise situations where obtaining advice may be inappropriate.
For example, where the value of the investment is very small, the cost of obtaining professional advice may be disproportionate to the value of the transaction itself.
In such circumstances, requiring formal advice could unnecessarily deplete the trust fund.
Trustees must nevertheless act prudently and document their reasons for proceeding without external advice.
Example – Small Investment Decision
A trust contains £5,000 of surplus cash that trustees wish to place in a low-risk savings account.
The cost of obtaining professional financial advice would exceed any likely benefit.
The trustees may reasonably conclude that obtaining advice would be disproportionate and unnecessary.
Their decision would likely fall within the exception provided by section 5(3).
Meaning of “Proper Advice”
Section 5(4) defines proper advice as:
“The advice of a person who is reasonably believed by the trustees to be qualified to give it by virtue of his ability in and practical experience of financial matters relating to the proposed investment.”
This definition focuses on practical expertise rather than formal qualifications alone.
The emphasis is on whether the adviser is reasonably believed to possess the necessary knowledge and experience.
No Requirement for Professional Qualifications
Interestingly, section 5(4) does not expressly require advisers to:
However, trustees must still act reasonably when selecting advisers, and professional qualifications may provide important evidence of competence.
Selecting the Appropriate Adviser
The nature of the proposed investment will often determine the type of adviser that should be consulted.
Different investments require different forms of expertise.
For example:
Example – Heritage Assets
A trust owns a valuable collection of rare paintings and is considering selling part of the collection.
The trustees seek advice from an internationally recognised art valuation specialist.
This would likely constitute proper advice because the adviser possesses practical experience and specialist knowledge relating to the assets in question.
Financial Services and Markets Act 2000
Although section 5 does not expressly require professional qualifications, trustees should also consider section 19 of the Financial Services and Markets Act 2000.
Section 19 generally provides that persons carrying on regulated investment activities must be authorised or exempt.
This requirement applies primarily to the adviser rather than to the trustees.
Nevertheless, prudent trustees would normally seek advice from an appropriately authorised individual where investment business is involved.
Doing so helps demonstrate compliance with both the statutory duty of care and the duty to act in beneficiaries’ best interests.
Relationship with the Duty of Care
The duty to obtain advice operates alongside the statutory duty of care contained in section 1 of the Trustee Act 2000.
Trustees must exercise reasonable care when:
Trustees must still exercise independent judgment.
Ongoing Investment Reviews
The obligation to act prudently does not end once an investment has been made.
Section 4 requires trustees to review investments periodically.
As emphasised in Daniel v Tee, trustees should regularly reassess:
Case Study
Facts
A trust worth £8 million holds a diversified investment portfolio.
The trustees wish to invest £2 million in a private technology company.
None of the trustees possesses specialist knowledge of venture capital investments.
The trustees seek advice from an experienced corporate finance adviser with extensive expertise in technology investments.
The adviser provides a detailed report assessing the risks and opportunities.
The trustees carefully consider the report before making their decision.
Analysis
The trustees have complied with section 5 by obtaining and considering proper advice.
The adviser possesses relevant practical experience and expertise.
The trustees have also fulfilled their duty of care by carefully evaluating the advice before proceeding.
Outcome
The trustees are likely to satisfy their statutory obligations even if the investment subsequently performs poorly, provided their decision-making process was reasonable and prudent.
Conclusion
The duty to obtain proper advice under section 5 of the Trustee Act 2000 is a fundamental component of modern trust investment law. It reflects Parliament’s recognition that investment decisions often require specialist expertise beyond the knowledge of many trustees. While trustees may dispense with advice where it is reasonably unnecessary or inappropriate, they must be able to justify that decision. Proper advice must come from a person reasonably believed to possess relevant expertise and practical experience, and trustees must continue to exercise independent judgment after receiving it. Together with the statutory duty of care and the standard investment criteria, the duty to take advice promotes prudent investment management and helps ensure that trust assets are administered in the best interests of beneficiaries.
References
Daniel v Tee [2016] EWHC 1538 (Ch).
Trustee Act 2000, ss 1, 4 and 5.
Financial Services and Markets Act 2000, s 19.
Law Commission, Trustee Powers and Duties (Law Com No 260, 1999).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
One of the most important responsibilities of trustees is the management and investment of trust assets. Modern trust funds frequently contain substantial investments, and poor investment decisions can significantly prejudice the interests of beneficiaries. Recognising the complexity of modern financial markets, the Trustee Act 2000 imposes a specific obligation on trustees to obtain and consider proper advice before exercising investment powers.
The duty to take advice forms part of the wider framework governing trustee investment decisions and complements the statutory duty of care under section 1 of the Trustee Act 2000 and the standard investment criteria contained in section 4. Together, these provisions seek to ensure that trustees make informed and prudent investment decisions in the best interests of beneficiaries.
The primary statutory authority governing this duty is section 5 of the Trustee Act 2000.
Statutory Basis
Section 5 of the Trustee Act 2000 provides that trustees must obtain and consider proper advice before exercising any power of investment.
The duty applies whenever trustees are making decisions regarding:
- the acquisition of investments;
- the disposal of investments;
- investment strategy;
- portfolio restructuring;
- significant changes to trust assets.
Relationship with the Standard Investment Criteria
The duty to obtain advice is closely linked to the standard investment criteria contained in section 4 of the Trustee Act 2000.
Before making investment decisions, trustees must consider:
- The suitability of the proposed investment.
- The need for diversification of trust investments.
Daniel v Tee
The importance of obtaining appropriate advice was reinforced in Daniel v Tee [2016] EWHC 1538 (Ch).
The court emphasised that trustees must have a coherent investment strategy and should obtain advice from suitably qualified individuals before making significant investment decisions.
The case also highlighted the importance of conducting regular reviews of investment performance and ensuring continued compliance with the statutory investment framework.
The decision demonstrates that obtaining advice is not a one-off exercise but forms part of an ongoing process of prudent trust management.
Exceptions to the Duty
The duty to obtain advice is not absolute.
Section 5(3) provides that trustees need not obtain advice where they reasonably conclude that, in all the circumstances, it is unnecessary or inappropriate to do so.
The key requirement is that the trustees’ conclusion must itself be reasonable.
Trustees who decide not to obtain advice must therefore be able to justify that decision objectively.
Situations Where Advice May Be Unnecessary
The Explanatory Notes to the Trustee Act 2000 provide examples of situations where obtaining advice may be unnecessary.
One example is where the trustees themselves possess sufficient expertise to make the decision without external assistance.
For instance, a trustee who is an experienced investment professional may already possess the necessary knowledge and practical experience.
However, trustees should be cautious before relying on their own expertise and should ensure that they genuinely possess the relevant specialist knowledge.
Example – Trustee with Investment Expertise
Suppose one trustee is a chartered financial analyst with twenty years of experience managing investment portfolios.
The trust wishes to invest a modest sum in a diversified portfolio of government bonds.
The trustees may reasonably conclude that external advice is unnecessary because the trustee already possesses sufficient expertise.
Provided this conclusion is reasonable, section 5(3) permits the trustees to proceed without obtaining independent advice.
Situations Where Advice May Be Inappropriate
The Explanatory Notes also recognise situations where obtaining advice may be inappropriate.
For example, where the value of the investment is very small, the cost of obtaining professional advice may be disproportionate to the value of the transaction itself.
In such circumstances, requiring formal advice could unnecessarily deplete the trust fund.
Trustees must nevertheless act prudently and document their reasons for proceeding without external advice.
Example – Small Investment Decision
A trust contains £5,000 of surplus cash that trustees wish to place in a low-risk savings account.
The cost of obtaining professional financial advice would exceed any likely benefit.
The trustees may reasonably conclude that obtaining advice would be disproportionate and unnecessary.
Their decision would likely fall within the exception provided by section 5(3).
Meaning of “Proper Advice”
Section 5(4) defines proper advice as:
“The advice of a person who is reasonably believed by the trustees to be qualified to give it by virtue of his ability in and practical experience of financial matters relating to the proposed investment.”
This definition focuses on practical expertise rather than formal qualifications alone.
The emphasis is on whether the adviser is reasonably believed to possess the necessary knowledge and experience.
No Requirement for Professional Qualifications
Interestingly, section 5(4) does not expressly require advisers to:
- hold professional qualifications;
- belong to a professional body;
- act in the course of a business.
However, trustees must still act reasonably when selecting advisers, and professional qualifications may provide important evidence of competence.
Selecting the Appropriate Adviser
The nature of the proposed investment will often determine the type of adviser that should be consulted.
Different investments require different forms of expertise.
For example:
- land investments may require advice from a land agent or surveyor;
- works of art may require advice from auction houses or specialist valuers;
- heritage assets may require specialist conservation advice;
- stocks and shares may require advice from an investment manager or stockbroker.
Example – Heritage Assets
A trust owns a valuable collection of rare paintings and is considering selling part of the collection.
The trustees seek advice from an internationally recognised art valuation specialist.
This would likely constitute proper advice because the adviser possesses practical experience and specialist knowledge relating to the assets in question.
Financial Services and Markets Act 2000
Although section 5 does not expressly require professional qualifications, trustees should also consider section 19 of the Financial Services and Markets Act 2000.
Section 19 generally provides that persons carrying on regulated investment activities must be authorised or exempt.
This requirement applies primarily to the adviser rather than to the trustees.
Nevertheless, prudent trustees would normally seek advice from an appropriately authorised individual where investment business is involved.
Doing so helps demonstrate compliance with both the statutory duty of care and the duty to act in beneficiaries’ best interests.
Relationship with the Duty of Care
The duty to obtain advice operates alongside the statutory duty of care contained in section 1 of the Trustee Act 2000.
Trustees must exercise reasonable care when:
- deciding whether advice is required;
- selecting advisers;
- evaluating advice received;
- implementing recommendations.
Trustees must still exercise independent judgment.
Ongoing Investment Reviews
The obligation to act prudently does not end once an investment has been made.
Section 4 requires trustees to review investments periodically.
As emphasised in Daniel v Tee, trustees should regularly reassess:
- investment performance;
- changing market conditions;
- suitability of investments;
- diversification of the portfolio.
Case Study
Facts
A trust worth £8 million holds a diversified investment portfolio.
The trustees wish to invest £2 million in a private technology company.
None of the trustees possesses specialist knowledge of venture capital investments.
The trustees seek advice from an experienced corporate finance adviser with extensive expertise in technology investments.
The adviser provides a detailed report assessing the risks and opportunities.
The trustees carefully consider the report before making their decision.
Analysis
The trustees have complied with section 5 by obtaining and considering proper advice.
The adviser possesses relevant practical experience and expertise.
The trustees have also fulfilled their duty of care by carefully evaluating the advice before proceeding.
Outcome
The trustees are likely to satisfy their statutory obligations even if the investment subsequently performs poorly, provided their decision-making process was reasonable and prudent.
Conclusion
The duty to obtain proper advice under section 5 of the Trustee Act 2000 is a fundamental component of modern trust investment law. It reflects Parliament’s recognition that investment decisions often require specialist expertise beyond the knowledge of many trustees. While trustees may dispense with advice where it is reasonably unnecessary or inappropriate, they must be able to justify that decision. Proper advice must come from a person reasonably believed to possess relevant expertise and practical experience, and trustees must continue to exercise independent judgment after receiving it. Together with the statutory duty of care and the standard investment criteria, the duty to take advice promotes prudent investment management and helps ensure that trust assets are administered in the best interests of beneficiaries.
References
Daniel v Tee [2016] EWHC 1538 (Ch).
Trustee Act 2000, ss 1, 4 and 5.
Financial Services and Markets Act 2000, s 19.
Law Commission, Trustee Powers and Duties (Law Com No 260, 1999).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
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