Investment Duties, the Prudent Person Standard and Asset Management
The prudent person standard requires a trustee to exercise the care, diligence and skill that a prudent person engaged in the management of another person's property would exercise. Under the Trusts Act 2019, the default duty to invest prudently includes a duty to consider diversification, the suitability of investments to the trust's purposes, and the need to review the portfolio. The deed may modify this default duty, but it cannot remove the requirement to act honestly and in good faith.
A candidate must know the difference between the general investment power (broad, subject to the deed) and specific restrictions (for example, a prohibition on lending to the settlor or on holding unlisted shares). Traps include assuming that a high-return investment is automatically prudent, and forgetting that a trustee with special expertise is held to a higher standard than a lay trustee.
Asset management also engages the FMC Act 2012 where the trust is a managed investment scheme: the manager owes conduct duties, and the trustee/custodian must independently hold the assets. Conflicts of interest in investment (for example, a trustee investing in a company they own) must be managed by disclosure, recusal or independent advice.
Worked example: A trustee proposes to invest the entire trust fund in a single speculative share. Applying the prudent person test, the lack of diversification and the mismatch with the trust's income needs mean the investment is imprudent, even if the trustee honestly believes it will perform well. The trustee should document advice and diversify.