What is a Master Trust?

Malcolm Tatum

A master trust is an investment vehicle in which contributions from individual investors are combined as a means of obtaining pricing on various securities that would be impossible for them to receive individually. From this perspective, this type of trust arrangement can be seen as a form of shopping in bulk, allowing investors to combine their purchasing power and obtain the desired securities at a lower price. As with other trust arrangements, a master trust functions by providing an administrator with the authority to buy and sell securities on behalf of the investors.

Individual investments may be pooled to obtain favorable pricing on the purchase of various securities.
Individual investments may be pooled to obtain favorable pricing on the purchase of various securities.

Investors may choose to use the services of a trust company to create this pool of investment resources. The trust company functions as the trustee for the master trust, and may manage a wide range of securities as part of the process. The trustee often is responsible for several trusts that are treated as a single trust property for purposes of management and making investments. By using the cumulative buying power of this umbrella trust strategy, the trustee is often able to exercise a greater degree of leverage and obtain discounts on the purchase of stocks, mutual funds and other investments that would not be possible otherwise. This allows the money invested by the individual holders to be used more efficiently, eventually resulting in greater returns for everyone concerned.

In exchange for managing the master trust, the trustee often receives a portion of the profits earned from the venture. This creates a situation where it is in the best interests of the trustee to secure the greatest discounts possible for the investors associated with the trust. Doing so not only allows investors to secure investments they can later sell at a profit when the unit price of the shares have increased, but also allows the trustee to earn a greater return for his or her efforts.

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Along with acquiring securities for the master trust, the trustee also is responsible for selling off investments that are predicted to fall in value and remain in that state for an extended period of time. The trustee will also prepare periodic reports that are provided to each investor within the group. This helps to ensure accountability and provides the investors with the opportunity to review how the trust is being managed and respond in whatever way they feel is appropriate. Depending on the exact structure of the trust, the trustee may interact frequently with the investors, or communicate with them on an infrequent but regular basis.

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