When it comes to managing assets through a conservatorship, guardianship, or a trust, one must be aware of the strict guidelines set by the state of California.
California has adopted a set of rules referred to as the Uniform Prudent Investor Act (UPIA), which emphasizes the need for conservators, guardians, and trustees to follow the concepts of Modern Portfolio Theory.
What is the Uniform Prudent Investor Act (UPIA)?
The UPIA outlines that responsible parties must show that investments are carefully picked to have moderate to low correlations.
Correlation in finance refers to the degree in which certain securities move in relation to each other. If a portfolio has securities that each move in the same direction, then they would have a correlation equal to 1. If a portfolio has securities that move in opposite directions, then they would have a correlation of -1.
In a nutshell, the guardian, conservator, or trustee must be able to prove that careful thought and analysis has been used in crafting an investment portfolio on behalf of the income beneficiary. Reports that are recommended are:
- Risk/Reward Scatterplots
- Correlation Reports
- Explanation of the Investment Process
- Investment Policy Statement
- Financial Plan or Long-Term Cash Flow Model
- Accounting of Cost Associated to Investing
Strategies to Satisfy the UPIA Requirements
One option to complying with the UPIA is to leave the funds sitting in a low interest baring account.
However, the trustee must also take into consideration the needs of the beneficiary. It is just as important to try and grow the money over time as it is to reduce the risk of loss.
If it is apparent that leaving the funds in a low-interest baring account poses a high risk of deficits in the future, then this decision may possibly be used against the trustee or conservator for neglecting an attempt to grow the funds over time.
Another approach is to hire a Certified Financial Planner™ or experienced investment advisor to help manage your portfolio.
Proving whether or not securities have a weak, moderate or strong correlation may be difficult for an individual investor. Consulting with a financial professional can help you oversee a conservatorship or third-party trust assets.
Comprehensive Investment Management with Chatterton & Associates
At Chatterton & Associates, our clients benefit from comprehensive financial planning, tax planning, and wealth management services – all under one roof.
Our team of financial planners, tax planners, and wealth advisors work together to craft investment solutions that meet your needs, goals, and UPIA compliance. We also review performances periodically and make adjustments, if necessary.
Contact us today to request a complimentary consultation.