Best Practices in Trust Banking and Fiduciary Risk Management

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Michael P. Kurtz, CPA

There have been many news reports in recent years relating to what are failures in investment and fiduciary risk management by professional fiduciaries. The economic uncertainty and market volatility in recent years makes it even more critical that best practices are employed by professional fiduciaries. Best practices of trust banks and professional fiduciaries in carrying out their fiduciary duties include, but are not limited to, the following:

  • Reconcilements of customers’ investment safekeeping positions should be performed at least monthly. The safekeeping reconciliations should be performed by a trust operations employee who is independent of the account administration and portfolio management functions. The reconcilement process should include a second review by a management-level individual who is also independent of account administration and portfolio management. Suspense, demand deposit and operating accounts should also be reconciled at least monthly and reviewed by management.
  • Independent operations personnel perform annual physical inventories of assets and important documents held in the bank’s vault. These inspections should be reconciled to trust vault safekeeping reports at least annually, if not quarterly. Strong dual control procedures should also limit access to fiduciary assets maintained in the vault so that two individuals are required to access the vault and transfer assets maintained in the vault. A record of transfers should be maintained by trust operations personnel.
  • Blank check stock should be maintained under dual control with a log of written and unissued checks also maintained under dual control.
  • Strong internal controls over trust account discretionary distributions are critical. Controls over distributions from IRAs and investment management accounts are also important. The bank should have a policy that specifies approval limits for discretionary distributions from trust accounts. Discretionary approvals by a trust officer alone should be kept to a minimal level with Trust Committee or Trust Administrative Committee approval required for most discretionary distributions. Discretionary distributions should be reported in the monthly Trust Committee minutes with the name of the beneficiary and purpose of the distribution documented.
  • Fraud and defalcation of fiduciary client assets has occurred due to inadequate controls over the wire transfer and distribution process of a Trust Department. Call back procedures should be performed by an employee who is independent of the account administrator for wire transfer requests made via email or facsimile. The call back procedures should be made to the authorized person on the account and utilize a password. Wire transfer agreements should be executed with fiduciary customers who request wire transfers from a fiduciary account. Trust operations policies should address procedures for sending outgoing wires from fiduciary accounts.
  • Portfolio managers maintain a current listing of approved funds and stocks to be held or purchased for discretionary accounts. These securities are selected through prudent investment research performed by qualified investment portfolio managers. The listing should be reviewed and approved by the Trust Investment Committee monthly or, if necessary, more often. These portfolio managers also maintain a listing of investment exceptions (securities held, but not on the approved listing) held in discretionary accounts. Investment exception status reports are also presented to the Trust Investment Committee for review. A strong investment exception tracking system is also a best practice, especially in the period of market volatility that we’ve observed in recent years.
  • An approved listing of broker-dealers used to execute trades should be maintained and reviewed at least annually by the Trust Committee and/or the Board. The bank should exercise due diligence during the initial selection and ongoing retention of broker-dealers. Factors to consider include the broker-dealer’s financial position, as evidenced by a review of their financials, history of Financial Institution Regulatory Authority violations, reputation, timeliness and accuracy of trade execution and settlement, and level of experience.
  • An active tickler reporting system is utilized as a best practice. Ticklers should be established for critical, time-sensitive matters relating to the administration of a fiduciary account. Tickler status reports are reviewed frequently by management to ensure that administrators have addressed items for which ticklers were established. An active tickler reporting system can increase efficiencies in account administration.
  • Waivers, releases and indemnifications are obtained from appropriate parties (usually beneficiaries). When accepting an account managed by a prior fiduciary, obtain a waiver, release and indemnification from the beneficiaries for the actions of the prior trustee for the legal file before formally accepting an account. When closing trust accounts, a receipt, waiver and release should be obtained from the beneficiaries upon final distribution of the assets. These agreements can protect your bank from litigation claims by beneficiaries.
  • Written approval from co-fiduciaries should be obtained for investment decisions, discretionary distributions, and the hiring of agents, attorneys, appraisers, accountants and other professionals who charge a fee to the trust account. Written approval from the co-fiduciary should be obtained for all key decisions affecting the account. The corporate co-trustee should also maintain custody of any account assets, not the individual co-trustee.
  • In some cases trust beneficiaries may need a credit card with monthly balances paid for by the trust. Credit card statements should be reviewed by a person other than the account administrator before distributions are made. Generally, cash distributions to beneficiaries in advance of spending needs are recommended instead of a credit card.

The best practices listed above are not an exhaustive list; however, they are examples of a few best practices used by professional fiduciaries and leading trust banks. A thorough internal risk assessment process and risk based external fiduciary audit can identify areas where best practices can be implemented when providing professional trust banking and asset management services. We provide tailored, proactive and timely trust banking and asset management review services to professional trust banks throughout the Rocky Mountain Region. Our trust review services can help your organization identify fiduciary risks and implement industry leading best practices.