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Don’t make Herbert Brede’s mistake

In 1999 in America, Herbert Brede was named guardian of his son Sean’s inheritance after Herbet’s wife died.  The inheritance was valued at USD$168,000.

Herbert did research on a respected database (Morningstar) and read publications renowned for containing serious financial information (such as Forbes and the Wall Street Journal). He decided to invest Sean’s inheritance in a specific type of investment known as a 5-star mutual fund.

Unfortunately, in 2000 the tech bubble burst, the mutual funds peformed extremely poorly and Sean’s inheritance plummeted in value. Five years later, Herbert was removed by a court as guardian of Sean’s money. He was also ordered to pay $47,000 for Sean’s losses and $46,000 in legal fees.

Why? Because Herbert had failed to comply with a piece of American legislation named the Prudent Investor Act. Specifically, the Court felt that Herbert had failed to appropriately diversify Sean’s investments.

There is no Prudent Investor Act in Australia, but various Australian states have equivalent provisions in their legislation. In NSW, the Trustee Act requires that a trustee must “exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of other persons”.

If you’re acting as trustee of a trust (such as a family trust or a self-managed super fund), you don’t want to fall afoul of that requirement. FWO recommends that all trustees seek appropriate financial planning and other advice.

FWO is not authorised or licensed to provide financial advice, but is well placed to dicuss legal issues relating  to trusts and SMSFs. If you have any questions in that regard or would like a referral to an appropriate financial planner or accountant, please call principal Jay Clowes on (02) 6650 7016 or principal John Watson on (02) 6650 7017.

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