This article was co-written by Patrick Collins and Josh Stampfli and published in the November/December 2007, Wealth Strategies Journal.

What Trustees Should Know about Asset Management Approaches and Rebalancing Elections

Trust beneficiaries are best served when trustees select investment portfolio management approaches that enhance (1) the probability of achieving settlor objectives; and (2) beneficiary utility. Investors and fiduciaries would like to know, prior to implementation, the probable consequences of decisions to incur extra costs and taxes by rebalancing the portfolio to maintain investment policy guidelines and asset allocation targets. Two issues, in particular present themselves. Are there rule-of-thumb rebalance strategies that are optimal under all asset management regimes and market conditions; and, do past empirical results constitute a credible basis for making decisions regarding future rebalance elections? If terminal wealth has value because of remainder interest considerations, the trustee will select asset management and rebalance strategies to augment the utility of final dollar values. If, however, the settlor does not have these preferences, any unspent money may merely represent lost consumption opportunities for current beneficiaries. The choice of a rebalancing strategy is a function of beneficiary utility as constrained by the settlor’s guidelines memorialized in the trust instrument. This essay argues that, although rebalance strategy is a critical bridge between asset allocation and trust distribution policy, there appears to be no universally optimal rule of thumb regarding either asset management approaches or the rebalance strategies designed to maintain them.