John works as a financial advisor for the ABC Insurance Company and markets their investment and insurance products to clients. He is also a qualified attorney with a small firm doing general law work. He is now approached by a client to serve as “independent” trustee on the client’s family trust, called the Brick Wall Trust. The trust has a considerable investment portfolio and John sees this as an ideal opportunity to expand his business at the ABC Insurance Company. Can John accept the invitation to become a trustee to this trust of the Wall family with whom he has had a long standing relationship?
The obvious answer would be - “Why not?” However, the answer is not as easy as that once the lurking risks involved are properly analysed and looked at.
What are these risks? There are quite a number of which a potential conflict of interests might be the important one to consider and to fend for. A conflict of interest can arise when John finds himself in a situation where his private or personal interest is sufficient to appear to influence the objective exercise of his official duties as trustee. In real and practical terms, this will be the case where John accepts the appointment as trustee and then continues to market his products (investment or insurance) at the ABC Company to the trust (co-trustees) and to the founder, trustees and even the beneficiaries as before, without being acutely aware that by becoming a trustee, his role has changed and that independence of judgment and objectivity is now far more important than earning some commission or personal gain on the products sold.
In a number of court cases it has been decided that a trustee has an obligation not to permit conflicts of interest either between two competing fiduciary duties, between the trustee’s personal interests and the interests of the beneficiaries, the trustees or the trust or any other party to the trust – all which were sufficient grounds for the removal of the trustees. For a fiduciary duty to exist there must be a relationship, which means it must involve one person trusting (or at least, being entitled to trust) another to do something for his or her benefit or exercise judgment in his or her service. In relation to a trust it will basically mean to be holding assets in trust for the benefit of someone else. The nature of this relationship consists of the fiduciary (in the case of a trust the trustee) who owes specific duties as well as certain obligations to the beneficiary (the person entitled to the duties / obligations).
The exercising of a judgment in this sense means the ability to make certain kinds of decisions correctly more often than would a simple clerk with a book of rules and all, and only, the same information. When judgment is required, the decision is no longer routine. Judgment brings knowledge, skills and insight to bear in unpredictable ways. The rules when exercising any judgment or discretion of this kind, stem from age-old principles of natural justice. In terms of these rules a trustee must apply his/her mind to the actual exercise of any power or discretion. It is an inherent requirement of the exercise of any discretion that it be given real and genuine consideration actively and conscientiously (not just a quick resolution on the first investment product available) This requires that John (as trustee) has to exercise a wider and more comprehensive range of inquiry into all trust matters than just presenting for instance his own company ABC’s products but also of those of competing companies XYC. Should he not be a trustee he could have marketed his own products unashamedly to the trustees etc.
The same potential for a conflict of interest exists and the requirement for unbiased independent advice will apply, should John decide to act as an attorney and represent the Brick Wall trust (trustees) in any legal matter (especially in fields of law where there may be better qualified colleagues available). The potential for conflicts of interest is equally as big should John be an accountant and acting as such (drafting financial statements) and as a trustee for the same trust. Or John may be in the employment of a trust company working as a trustee of the Brick Wall Trust and the company compels John to market only the investment etc. products of that company or one of its affiliates.
A potential conflict of interest occurring quite frequently, is where there is a divorce between say John who is the founder and a trustee of the Brick Wall Trust and his wife Rose, who is also a trustee and both John and Rose are also beneficiaries, together with their children and they (the divorcing parents), in their divorce settlement, agree upon a division of trust assets without considering the interests of the other beneficiaries / the children.
Last but not the least example of a potential conflict of interest for a trustee is where he/she has to weigh up the conflicting interests of income beneficiaries (preferring income to be paid out as soon as possible) and capital beneficiaries (preferring income to be accumulated and capatilised) especially where they are not the same persons i.e. parents are income and children are capital beneficiaries. (Next article: How can trustee conflicts of interests be limited or prevented? – For more, see also Van der Westhuizen WM in Wills & Trusts LexisNexis Service Issue 21 and FISA Conference 2017 paper by WM van der Westhuizen)