Trustee Investment Powers and Duties in Hong Kong: Managing Trust Assets Responsibly

Introduction

One of the most important responsibilities of a trustee is the management and investment of trust assets. Whether the trust holds listed securities, real estate, private equity stakes, cash, or a family business, the trustee must exercise sound investment judgment to preserve and grow the trust fund for the benefit of the beneficiaries. The trustee who takes excessive investment risks may lose the beneficiaries' capital; the trustee who is excessively cautious may allow the trust fund to be eroded by inflation and fail to generate the income needed to meet the beneficiaries' needs.

Under Hong Kong law, trustees' investment powers and duties are governed by the Trustee Ordinance (Cap. 29), the Perpetuities and Accumulations Ordinance (Cap. 257), and the terms of the trust deed itself. This article explains the legal framework for trustee investment in Hong Kong, the standard of care that trustees must meet, the specific duties that apply in the context of investment decisions, the power to delegate investment functions to professional managers, and the consequences of breaching investment duties.

The Statutory Investment Standard

The Trustee Ordinance (Cap. 29) was amended in 2000 to modernise the investment powers and duties of trustees. Before the 2000 amendments, trustees in Hong Kong were limited to investing in a prescribed list of "authorised investments" unless the trust deed expanded their powers. The 2000 amendments replaced this restrictive approach with a more flexible, principles-based standard that gives trustees wide investment discretion subject to overarching duties of prudence.

Under the current statutory framework, a trustee has the power to make any kind of investment as if the trustee were the absolute owner of the trust property. This broad investment power—sometimes called the "full range" investment power—allows trustees to invest in equities, bonds, real estate, private equity, hedge funds, derivatives, and any other asset class, subject to the duty of prudence and the specific terms of the trust deed.

In exercising investment powers, a trustee must have regard to the standard investment criteria set out in the Trustee Ordinance. The standard investment criteria require the trustee to consider: the suitability of the proposed investment to the type of investment authorised for the trust; and the need to diversify the trust's investments (to the extent that it is appropriate to the circumstances of the trust). In addition to considering the standard investment criteria, the trustee must obtain and consider proper advice before making an investment decision, unless the trustee reasonably concludes that it is unnecessary or inappropriate to do so in the circumstances.

The duty to obtain proper advice is a significant obligation. "Proper advice" means advice from a person who is reasonably believed by the trustee to be qualified to give advice on investments by reason of their ability in and practical experience of financial and other matters relating to the proposed investment. Typically, this means investment advice from a licensed investment manager, a qualified financial adviser, or an experienced trust company investment team. Trustees who make significant investment decisions without obtaining advice from a qualified person risk personal liability to the beneficiaries if the investment fails.

The Duty of Prudence

The overarching standard that governs trustee investment decisions is the duty of prudence. Under Hong Kong law (derived from the English law of trusts), a trustee must invest with the same care and prudence as a reasonably prudent person of business would exercise in managing the affairs of another. This is an objective standard: it is not enough for the trustee to act honestly and in good faith; the trustee must also act with a reasonable level of skill and care.

The duty of prudence does not require trustees to maximise returns or to adopt an aggressive investment strategy. It requires them to balance the twin objectives of preserving capital and generating a reasonable return, having regard to the specific circumstances of the trust, including: the nature and duration of the trust; the needs and interests of the current and future beneficiaries; the tax position of the trust and its beneficiaries; the risk tolerance of the trust (having regard to the nature of the trust fund and the beneficiaries' circumstances); and any specific investment objectives or restrictions in the trust deed.

A trustee who is a professional—such as a licensed trust company, a bank, or a professional adviser acting as trustee—is held to a higher standard of care than a lay trustee. A professional trustee is expected to exercise the skill and care of a competent professional in the relevant field, not merely the care of a reasonably prudent layperson. This distinction is important: a family member appointed as trustee without professional qualifications is held to a lower standard than a professional trust company, though both must still meet the basic duty of prudence.

The Duty to Diversify

The Trustee Ordinance imposes a duty on trustees to consider the need to diversify trust investments. Diversification—holding a spread of investments across different asset classes, geographies, and sectors—reduces the risk that the trust fund will be severely affected by a downturn in any single market or sector. A trustee who concentrates the trust fund in a single stock, a single sector, or a single asset class without good reason may be in breach of the duty to diversify.

The duty to diversify is not absolute. It is qualified by the phrase "to the extent that it is appropriate to the circumstances of the trust." Some trust funds are specifically designed to hold a concentrated position—for example, a family trust established to hold shares in a family company—and the trust deed may expressly permit or require the trustee to hold the concentrated position. In such cases, the duty to diversify does not require the trustee to liquidate the concentrated position against the express terms of the trust.

However, where the concentration of the trust fund in a single asset or sector is not mandated by the trust deed and arises instead from historical accident or inertia, the trustee should actively consider whether diversification is appropriate and document its reasoning for retaining the concentrated position. Courts have held trustees personally liable for investment losses where they failed to consider diversification and the trust fund suffered as a result.

Reviewing Investments

The duty of prudence requires trustees not only to make sound investment decisions at the outset but also to review the trust's investments at regular intervals and to make adjustments as necessary. Under the Trustee Ordinance, trustees must review the trust's investments from time to time and consider whether they should be varied in light of current market conditions and the standard investment criteria.

The frequency of investment review depends on the nature of the trust fund and the volatility of the assets held. A trust holding a diversified portfolio of listed securities should be reviewed at least quarterly; a trust holding illiquid private equity or real estate assets may be reviewed annually or as material events occur. Trustees should keep records of their investment reviews and the decisions made, as these records will be the primary evidence available in the event of a future dispute about the management of the trust.

Delegation to Investment Managers

The Trustee Ordinance permits trustees to delegate the exercise of their investment functions to an agent, provided certain conditions are met. Delegation to an investment manager—sometimes called "asset management delegation"—allows trustees to appoint a licensed fund manager or investment adviser to make day-to-day investment decisions within a policy framework set by the trustee.

To delegate investment functions lawfully, the trustee must: prepare a written policy statement that sets out the terms on which the agent is to exercise the delegated functions (including the investment mandate, risk tolerance, and any asset class restrictions); appoint the agent under a written agreement; and monitor the agent's compliance with the policy statement and their general performance. The trustee remains responsible for overseeing the agent's performance and must review the policy statement and the agent's conduct at regular intervals.

Even after delegating investment management, the trustee retains overall fiduciary responsibility for the trust. If the trustee delegates to an unsuitable agent, fails to provide an adequate policy statement, or fails to monitor the agent's performance, the trustee will be personally liable for any resulting loss. Delegation is not an excuse for abdicating fiduciary responsibility; it is a mechanism for bringing professional investment expertise to the management of trust assets while preserving the trustee's oversight role.

Conflicts of Interest in Investment Decisions

Trustees owe a duty of undivided loyalty to the beneficiaries. This means that trustees must not allow personal interests or the interests of third parties to influence their investment decisions. Common conflicts of interest in the investment context include: a trustee who is also an investment manager receiving fees for managing the trust's investments; a trustee who directs the trust to invest in a company in which the trustee has a personal interest; and a trustee who places trust assets with a bank or financial institution in which the trustee has a beneficial interest.

Trustees who face conflicts of interest must disclose those conflicts to the beneficiaries and, if the conflict is material, obtain the beneficiaries' informed consent before proceeding. Professional trustees who have a standing policy of managing trust assets through affiliated investment managers should ensure that this arrangement is fully disclosed to the settlor at the time the trust is established and to beneficiaries on request. The trust deed may expressly authorise the trustee to act in circumstances that would otherwise constitute a conflict of interest, which provides additional protection.

Breach of Investment Duties: Remedies and Liability

A trustee who breaches their investment duties—by failing to exercise proper care, failing to diversify, failing to review investments, or making investments in breach of the trust deed—is personally liable to make good the loss suffered by the trust. The measure of loss is the difference between the value of the trust fund as it actually stands (after the breach) and the value it would have had if the trustee had properly performed their duties.

Beneficiaries who suffer loss from a breach of investment duty can bring an action for breach of trust in the High Court. The court can order the trustee to: restore the trust fund to the position it would have been in but for the breach; account for profits made by the trustee from the breach; or pay equitable compensation. Trustees who act honestly and reasonably may apply to the court for relief under the Trustee Ordinance, and the court has a discretion to excuse the trustee from liability if it is satisfied that the trustee acted reasonably and ought fairly to be excused.

To protect against the risk of personal liability, trustees—particularly individual lay trustees—should: take professional investment advice before making significant investment decisions; document investment decisions and the reasons for them; review and maintain a written investment policy for the trust; delegate investment management to a licensed professional where the trust fund exceeds the trustee's own investment expertise; maintain adequate records of investment reviews; and consider whether trustee liability insurance is available and appropriate.

Conclusion

Managing trust assets is one of the most demanding aspects of being a trustee. The duty of prudence, the obligation to diversify, the requirement to obtain proper advice, and the responsibility to monitor investments all impose significant obligations on trustees, whether they are professional trust companies or lay individual trustees. Trustees who fail to meet these standards risk personal liability for investment losses suffered by the trust.

Alan Wong LLP's Private Wealth & Trusts practice advises trustees—both professional and individual—on all aspects of trustee investment duties, including reviewing investment policies, advising on conflicts of interest, and advising trustees who have received claims from beneficiaries regarding investment losses. Contact us to discuss your trust investment governance requirements.