Thank you to William J. Kambas and Linda B. Meade for today’s edition, the fourth of a periodic series of issues dedicated to topics related to private trust companies. This article discusses investment committees (ICs) and investment policy statements (IPSs) as tools for managing client families’ investments.

Introduction

Families holding assets across generations find trusts valuable for a variety of purposes including estate planning, holding family business shares, for pooled investment programs, and to achieve charitable goals. As the number of trusts increases, there can be greater pressure on the role of trustee to navigate this complexity. In some cases, families and their advisors turn to private trust companies (“PTCs”).

In PTCs, the role of the investment advisor (or committee) can be narrow or broad, but it is often significant. A well-structured investment committee (“IC”) serves as part of an institutional mechanism where fiduciary obligations, settlor and beneficiary expectations, and investment expertise converge. The IC aligns the critical elements of asset management through family trusts: fiduciary duties, voting authority, investment direction, and decisions about reinvesting or distributing funds. The IC also provides an opportunity to involve family members in these important discussions, adjust for the family’s desired risk tolerance, and incorporate legacy aspirations in investment decisions. This article explores ICs within PTCs, practices to professionalize the role, and the significance of a family investment policy statement (“IPS”) for each respective trust.

ICs: Merging Investment Management with Investment Governance

While the role of investment management is well-recognized, an investment governance framework is less often given the attention it deserves for a high-functioning PTC. Investment governance refers to the structured process through which a designated group makes investment decisions, delegates and exercises investment authority, and monitors ongoing investment activities.¹ An IC is perhaps the most common way to organize decision-makers for establishing a clear and effective investment governance framework. At its core, an IC is an executive group accountable to the PTC board that is tasked with developing and executing investment policies and making certain investment decisions delegated to the committee. ICs play a critical role in ensuring that PTCs fulfill their fiduciary obligations for each respective trust and maintain sound investment governance.

Professionalizing Practices

To operate effectively, many ICs have created some level of formal structure to help ensure they are guided by clear policies and committed to transparency and accountability. Some suggested practices include the following:

• Establish a Formal Charter. An IC that establishes a written charter recognizing unique features of the trust(s) for which it serves with a trustee is more likely to have a cohesive understanding of the IC’s purpose, authority, responsibilities, decision-making procedures, and record keeping requirements.² A charter would outline committee membership requirements and processes, including member nomination procedures, member compensation guidelines, and member succession rules.
• Maintain Optimal Size and Term Guidelines. To maintain a balance between diversity of views and organizational agility, an IC might aim for less than seven members.³ An odd number of members avoids deadlocks, and a small team promotes efficient decision making and permits guidance from a charismatic leader but no monopolization of personality. Staggered terms for members can promote continuity while introducing fresh perspectives.⁴
• Select Qualified Members. Ideally, an IC can be staffed with a mix of qualified family and non-family professionals⁵ with backgrounds in investment management, law, business, or governance. While not every member must be an investment expert, a solid grasp of core investment principles is necessary to contribute meaningfully to committee discussions and decisions.⁶ Members should be capable of analyzing financial information, evaluating investment risk, and ensuring that decisions are consistent with the IPS.
• Conduct Regular Meetings. Regularity and predictability of meetings is important, but the frequency (e.g., quarterly or annually) may vary depending on the complexity of the investments, transactions involved, and decision-making requirements. Meetings can be structured to restate and refresh the IC’s purpose and goals as well as to review investment performance and its alignment with an IPS. Regular meetings help ensure balance, stability, and achievement of the relevant financial goals.
• Maintain Documentation. Comprehensive written investment reports addressing performance metrics, compliance updates, and market commentary should be prepared and circulated timely to IC members before each meeting. The IC should keep detailed records of meetings, decisions, and reasons for decisions made, which should be shared with the PTC to ensure transparency and accountability.

By formalizing these practices, the IC can support the PTC’s fiduciary responsibilities for each respective trust and also reinforce long-term understanding and a collaborative relationship among the PTC, the family settlors and beneficiaries, and external advisors.

The Family-Oriented Investment Policy Statement (“IPS”)

As lawyers, we often like to see agreements reduced to writing. The IPS is just such a vehicle. An IPS outlines the family’s unique investment objectives, parameters, risk tolerance, and asset allocation objectives. The IPS can be developed by family representatives, the PTC’s board, and/or the IC in conjunction with professional advisors where appropriate. It is a roadmap for all parties involved, including the PTC board, the IC members, the family investors, and third-party advisors and custodians. While a standard IPS typically prioritizes financial performance, focusing on return maximization and institutional benchmarks, a family-oriented IPS would incorporate both financial (quantitative) and non-financial (qualitative) objectives, such as preservation of values and virtues, philanthropic goals, and the education and engagement of rising generations (future leaders). Family wealth need not be limited to the growth of financial capital; it can be used to grow human, intellectual, social, and spiritual capitals as well.⁷ This perspective, if adopted, provides a framework for an IPS that not only addresses numbers and but also considers the intentions and well-being of settlors and beneficiaries alike.

Consider the IC in a PTC that manages trusts with a charitable purpose. The IC finds itself tasked with both generating funds for local impact and also ensuring that family members receive benefits of practical experience by evaluating financial budgets, managing time commitments, and developing outreach strategies. Rather than pursuing these goals informally, the PTC’s board, with the IC, can incorporate these goals directly into an IPS. Beyond outlining standard financial objectives and risk parameters, the IPS can create guardrails for mission-aligned investments. By formalizing these provisions in an IPS, the IC can evaluate opportunities against criteria that reflects financial prudence and family values and can create benchmarks appropriate to its unique mandate. Select family members can gain structured opportunities to participate (e.g., attending committee meetings, analyzing proposals, and contributing to resource allocation discussions), and the IC will have an appropriate yardstick to measure the productivity of financial assets.

The IPS need not be static. It is a dynamic document and can evolve as the family (settlors, beneficiaries, clients, and investors) evolves and goals change, consistent with trust terms and family needs. Below are suggestions for topics to include when drafting an IPS:⁸

• Goals and Objectives. The IPS should articulate the family’s overarching investment goals, including target asset allocation, expected cash flows, investment time horizon, and acceptable levels of risk.
• Processes and Procedures. The IPS should define the roles and responsibilities of IC members and establish protocols for engaging, evaluating, or removing, adding or replacing advisors. It should also specify the frequency and format of communications between and among settlors and beneficiaries, the IC, the PTC board, and third-party advisors, including reporting schedules and meeting procedures.
• Performance Review Standards. The IPS should set standards for evaluating investment performance such as benchmarks and review intervals.
• Additional Relevant Information. The IPS should also address specific investment constraints, such as permitted or prohibited asset classes, diversification requirements, and any other relevant considerations tailored to the terms of the trusts and the settlor’s (and beneficiaries’) expectations and objectives.

A well-crafted IPS can serve as a stabilizing force for multi-generational families navigating complex financial landscapes. Take, for example, a family with multi-generational wealth and a diverse set of investment goals across generations. To manage complexity and promote cohesion, the family establishes a formal IPS that outlines their shared objectives, risk tolerance, asset allocation strategy, and governance protocols. When faced with a period of market volatility, the IPS serves as a stabilizing framework, helping the IC maintain discipline and avoid emotional or reactionary decisions that could jeopardize a trust’s long-term purpose. By adhering to the IPS, the IC and the trustees can avoid unnecessary fits and starts during periods of economic volatility.

In addition to mitigating financial risk, the IPS fosters transparency and accountability among IC members. It clarifies roles, expectations, and decision-making authority, reducing the likelihood of internal disputes and ensuring that investment decisions reflect the family’s collective values rather than individual preferences. This structure can help strengthen intergenerational communication and support continuity in governance, helping the trustees maintain strategic alignment for trust assets.

Conclusion

For PTCs, the IC can play an important role with respect to trust-held asset management. A professional, formal IC charter and a robust IPS can reflect and provide guidance on the convergence of the trustee’s fiduciary duties, expectations with respect to shared investments, and the family’s unique values, virtues, and cash-flow goals.

References

¹ Charlie Grace, Investment Governance: Creating a Framework That Works for a Family (Cambridge Associates LLC, September 29, 2022).

² Grace, Investment Governance.

³ John Ferguson and Patrick Nolan, Investment Committee Best Practices: Getting Organized (Northern Trust, April 2, 2024).

⁴ Ferguson and Nolan, Investment Committee Best Practices.

⁵ In the United States, IRS Notice 2008-63 does not require investment committee members of a PTC to be independent. Family members may serve on the investment committee without triggering estate or gift tax inclusion. Nonetheless, it is best practice to include at least one independent member on the investment committee to provide objective oversight, mitigate potential conflicts of interest, and enhance credibility with external advisors and beneficiaries.

⁶ While a PTC can and should offer forums for family input such as a family assembly or family council, the investment committee should be viewed as a separate, focused executive group composed of members who have demonstrated relevant skills and commitment to the family’s investment program. To support long-term governance continuity, families may allow younger or less experienced members to participate in or audit investment committee meetings in a non-voting, observational role. This practice enables rising generations to gain familiarity with investment principles, committee procedures, and fiduciary responsibilities, thereby preparing them for future service on the committee as their financial expertise develops.

⁷ James E. Hughes Jr. et al., Complete Family Wealth: Wealth as Well-Being (Bloomberg 2022).

⁸ Bernstein Private Wealth Management, Putting Family First: The Power of Governance in Family Offices (2023). See also Greg Coffey, Investment Policy Statements (Russell Investments Research, October 2019).

DISCLAIMER: The views expressed in this article are those of the authors only. The information contained in this article is provided solely for informational purposes. This article does not constitute legal or tax advice or create an attorney-client relationship.

About the Contributors

Linda B. Meade is a senior associate in the private client and tax team of Withersworldwide. She advises US and non-US families, business owners, and investors on structuring, tax, and compliance matters, with an emphasis on the formation and administration of single-family offices and private trust companies. https://www.withersworldwide.com/en-gb/people/linda-meade