Answering Questions from Beneficiaries during Volatile Markets
As a professional trustee or fiduciary, you’ve likely been fielding questions from beneficiaries and their families about the state of their investments. The degree of economic uncertainty and market volatility experienced in 2022 has a lot of people worried, but it can be especially concerning for those who lack an understanding of trusts and financial markets.
So, how can you help alleviate some of their worries? Here are some FAQs that may help you in your discussions.
Question: Why does my trust need to be invested at all; isn’t that risky?
Fiduciaries have the duty to act in the best interest of the beneficiary, and ensure that the trust is financially productive. While there are some situations that would warrant a trust not being invested (e.g. small corpus, wasting trust, etc.), in most cases the duty of loyalty and duty to make trust property productive would require the investment of the trust assets. The goal is to make the money in a trust last as long as possible and help cover expenses well into the future. That means the funds in the trust need to be able to grow (especially given the current state of high inflation). If a fiduciary is approving disbursements and the trust assets are not being invested (and instead are sitting in cash or a non-interest bearing account), the trust would likely run out of money more quickly. Thus, the goal is to make the trust financially productive in a prudent manner based on the needs (i.e., age, disbursement needs, etc.) of the beneficiary.
Question: Ok, but how do I know you’re investing it in a good way?
The Uniform Prudent Investor Act (“UPIA”) explicitly states “a trustee shall diversify the investments of the trust” (UPIA §3). On average, diversification yields higher long-term returns while helping to mitigate risk. Imagine investing all your assets in one company’s stock – if that stock lost 50% of its value, your portfolio would also lose 50%. But, if you were invested equally across 10 or even 100 stocks, that one company’s stock can go down 50%, but may only have a minimal impact on your portfolio because of diversification. There are many ways to diversify investments (e.g. across size of company, across industries, across geographies, etc.), and therefore it is prudent to ensure that the investment advisor you work with has diversification in their portfolios.
Question: Why do my statements keep showing my balance going down?
Most types of investments had negative returns in 2022 (slide 7), which means the balances of many portfolios went down; this impacts your trust assets since they are invested. When assets are invested in the stock market, it is understood that there will be periods of volatility that may cause the value of your investments, and the funds in your trust, to decrease. While negative returns last year were significant, periods of low performance are not considered unusual when looking at historic market cycles.
Note: Make sure that you are always clear that investments involve risk, including the risk of loss of principal and that past performance is not a predictor or guarantee of future results.
Question: I heard we’re in a recession. Shouldn’t we sell everything now?
Recessions tend to have large negative impacts on financial markets over relatively shorter periods of time. Historically, periods of significant negative returns are often followed by periods of significant growth (slide 18). For example, in the financial crisis of 2007-2009, returns from stocks tracked by the S&P 500 index dropped by 56.8%, but in the following 12-months, these returns increased by 68.6%. Additionally, recessions are a lagging economic indicator, while the stock market is more forward looking. For example, by the time a recession was called in 2008, the majority of the negative impact on the markets had already been done, and by the time the end of that recession was called, the markets had already recovered a significant portion of their losses. Many experts recommend against trying to time the market, and instead recommend investing for long-term growth. In other words, it’s not timing the market that’s important, it’s time in the market.
Note: Make sure not to guarantee that there will be a turn around. You can only describe what has happened in the past factually; you cannot predict what may happen in the future.
Question: What about inflation? I’ve noticed things getting more expensive, how will I be able to afford what I need?
While inflation has been particularly high lately, there has historically been price inflation over time. This means that what you can buy for a dollar 10 years from now is expected to be less than what you can buy for a dollar today. This is why you see things like a gallon of milk or pack of toilet paper becoming more expensive. Instead of leaving all your trust assets in cash (which has no potential for growth), some of your funds are invested in the stock market as a way of mitigating the impacts of inflation.
In addition to thinking about how you want to answer these types of questions, you may also want to consider these tips.
Tip #1: Communicate Proactively
Market uncertainty and negative performance can be stressful for everyone. If you haven’t already done so, reach out to your beneficiaries to preempt their questions and concerns. Reassure them you are monitoring the situation and are already in conversation with your investment advisors to make the right decisions for their assets, needs, and goals.
Tip #2: Get comfortable with the investment basics
While you don’t need extensive investment knowledge, equipping yourself with a basic understanding of investment principles can make it easier to reassure your beneficiaries. Having even a little bit of context (like what we’ve outlined above) can help you answer their questions thoughtfully and communicate confidently.
Tip #3: Leverage your investment advisor
You can – and should – lean on your investment advisor for guidance when answering questions about investments. The markets are volatile right now and the value of many portfolios have gone down. A good investment advisor will acknowledge this can be a stressful time, welcome any questions you may have, and assist you in communications.
And even if you don’t invest with us, we’re here to help. Reach out to our Head of Fiduciary services Peter J Wall at firstname.lastname@example.org with any questions.
This article is not intended to provide investment, tax, or legal advice. Before making decisions involving investing, legal, tax or accounting concerns, you should consult appropriate professionals regarding your speciﬁc situation.
All investing involves risk, including the possible loss of principle you invest, and past performance does not guarantee future performance.