Trust Law: The Fiduciaries’ Investment Responsibility

Trust Law: The Fiduciaries’ Investment Responsibility

By John A. Hartog

This is part of our series of posts written by John A. Hartog of John A. Hartog, Inc. in Orinda, Calif., and Shirley L. Kovar of Henderson Caverly Pum Charney LLP, in San Diego, Calif., co-authors of the LexisNexis® Matthew Bender® Practice Guide titled California Trust Litigation (March 2011).  In this post, Hartog discusses how the principles under trust law are changing. Hartog and Kovar will be appearing at seminars and a webinar in the coming weeks.  For more information, please go to: www.ocbar.org and http://www.sfbar.org/.

One of the pockets of this discipline that is evolving very rapidly has to do with the investment responsibilities of fiduciaries of trustees.  We had an evolving law of duties of trustees, of what they could invest in, starting in 1817, all the way up through let's say the 1950s. And then the modern discipline of financial investment and economic analysis took off, and it became apparent that the restrictions on trustees was causing a drag on the investment return of trust portfolios, which were in turn causing disgruntled beneficiaries, and then that was causing litigation. 

The law evolved into a new uniform statute, what's called the Uniform Prudent Investor Act, which now codifies what financial analysts call the modern portfolio theory. And so that's why trust litigation is in flux, because now cases are being defined in terms of whether the trustees are investing under the modern portfolio theory, and they're failing to diversify, and that's a grounds for suing them.

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