This information is provided for members of the Michigan Guardianship Association (MGA). At the 2019 MGA Spring Conference, a Focus Group of conservators met to determine how a primary sponsor could provide insights to conservators in Michigan. The first several installments of this Bulletin will demonstrate how understanding the Michigan Prudent Investor Rule can help conservators fulfill their fiduciary responsibilities.
Step One: Remembering You Must Make Decisions On Investments.
This may sound obvious. But some conservators are so worried about making a mistake that they never act. This is a mistake in itself! If you don’t make adjustments to a client’s investments – that is a decision you will be held accountable for. Notice this part of the Rule:
“Duties at inception. Within a reasonable time after accepting appointment . . . a fiduciary shall review the assets, and make and implement decisions concerning the retention and disposition of assets. . . .” MCL 700.1505
A “reasonable time” is not very specific. But don’t view that as “wiggle room” to postpone your decision. Let’s put the shoe on the other foot. Suppose you are a client of a financial advisor. You ask your advisor to review your investments. How would you feel if the advisor doesn’t get back to you for a month and your portfolio loses 10% during that time? You would likely blame the advisor for his procrastination and negligence.
Step Two: Understand The Circumstances.
The Prudent Investor Rule identifies a few circumstances that a fiduciary must consider for each client. In this issue, we will look at 4 of these circumstances one at a time.
“A fiduciary’s investment and management decisions . . . shall be evaluated . . . having risk and return objectives reasonably suited to the fiduciary estate.” MCL 700.1503(1)
This is important enough that the Rule lists it as a separate paragraph. The risk-return scale is the relationship between the amount of risk you must take to get a potential return. The more growth you want, the more risk you need to be able to tolerate.
You might want to choose investments that offer the best returns. But higher returns often means higher risk. The main question is: How much risk can your client comfortably handle? For example, in 2007, one sector of the market returned over 39%. A great investment, right? In 2008, that sector lost 53%¹! Before investing, ask yourself, What is my client’s age and health? A 40-year-old in good health may be in a better position to afford a bad year in a portfolio than someone who is 80 or in poor health. The healthy 40-year-old will likely live for decades, so he has time for the investment to recover from a bad year or two. On the other hand, an unhealthy person or older person may not be able to afford a significant loss in his portfolio, because there may not be enough time for the investment to recover.
The Rule further states that a fiduciary must consider “general economic conditions”. MCL 700.1503(2)(a).
Going back to our 2008 scenario, let’s suppose your client lost 10% in his portfolio during that year. A judge would likely not criticize you, since the market as a whole was down more than 38%². Alternatively, if your client’s portfolio grew 5% last year (2019), that might be cause for concern, since even U.S. investment grade bonds were up almost 9%.
“The possible effect of inflation or deflation”. MCL 700.1503(2)(b)
Over a 50 year period, the average annual inflation rate has been 3.85%³. Think about what that means for your clients. If your client will need to buy something in 2030 that costs $20,000 today, in 2030 it will cost him $42,494. Will your clients be able to afford the things they need if most of their money is cash in the bank?
“The expected tax consequences of an investment decision or strategy.” MCL 700.1503(2)(c)
When it comes to tax consequences, it helps to consult with a financial advisor who understands the Rule. For example, what happens if your client pulls $150,000 out of their IRA to pay off their mortgage? I recall meeting with someone who told me he had just done that. If he had gone forward with the transaction, his tax bill would have been over $50,000 that year! The last thing you want for your clients is a surprising tax bill.
The Prudent Investor Rule identifies additional circumstances that must be considered. I will address those circumstances in the next article of this series. It is important to realize that you don’t have to go it alone. One very beneficial part of the Rule allows you to reduce your liability if you delegate that responsibility to an agent. However, it is important to select an agent that will act in accordance with the Rule. We will discuss how to make a good selection in the next article.
¹Source: “Building Portfolios for the Long Term”, Fidelity Institutional Asset Management
²Key Dates and Milestones in the S&P 500’s history, Reuters Business News (Caroline Valetkevitch) May 6, 2013.
³U.S. Bureau of Labor Statistics, Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W); U.S. City Average. 1967-2017.
Terence Paulauskis has over 20 years of experience helping seniors and the disadvantaged as a paralegal for probate and elder law firms while simultaneously holding insurance licenses in several states. He is Vice President of Wealth Management for Redbridge Financial, licensed by FINRA as a Registered Representative and offers securities through Ameritas Investment Corp. (AIC). Neither AIC, Redbridge Financial, nor their representatives provide tax or legal advice. This bulletin is provided as an overview and for informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary or investment advice. At Redbridge Financial we value the advice provided by attorneys who specialize in probate and elder law. If a situation calls for it, we will recommend an attorney for you, or we can partner with an attorney you prefer.