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A discretionary trustee is an individual or firm that is granted the responsibility of identifying, selecting and monitoring investment opportunities on behalf of some type of trust. A trustee of this type is expected to conduct these tasks in a manner that is in the best interests of the beneficiary of that fund. Typically, the strategies used by a discretionary trustee must be in compliance with any governmental regulations that are currently in effect, a requirement that further serves to protect the interests of the beneficiary. For example, a discretionary trustee managing a fund in the United States would be responsible for acting in accordance with the Employee Retirement Income Security Act of 1974, commonly known as ERISA.
The defining characteristic of a discretionary trustee is the ability to make decisions without the need to constantly consult the plan sponsor or the beneficiary. This allows the trustee to move quickly if there are indications that an asset currently held by the trust is about to undergo some type of decrease in value, thus minimizing the chances for experiencing a loss in the plan assets. At the same time, should the trustee identify an investment that is expected to increase in value in the near future, the trustee has the authority to act now rather than waiting for permission from the sponsor or beneficiary. The discretionary trustee can sell a portion of the current assets, acquire shares of this new security, and increase the overall worth of the trust on the beneficiary’s behalf.
These broad powers of investment monitoring and management are somewhat different from the function of what is known as a directed trustee. This type of trustee is required to work with the plan sponsor on management of the trust assets, and usually does not have the ability to make decisions independent of that working relationship. A trust that is set up with a directed trustee does have the advantage of preventing any single entity from making investments affecting the value of that trust, an aspect that may be important to the plan sponsor.
A third party functioning as a discretionary trustee may be an individual, but is more likely to be a bank or some type of investment firm. Since the trustee must abide by both the provisions of the trust and any applicable governmental regulations, regular audits by independent accounting firms are conducted on a recurring basis. This helps to make sure the trustee is complying with all applicable terms and is in fact acting in the best interests of the beneficiary.
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