new prudent investor rule: impartiality vs. caution

Xavier Newsome, CFA, serves as trustee for the Block Corporation’s trust. Newsome is 31 years old. The trust requires a certain amount of current income to support Mr. Block’s widow. After her death, the trust proceeds will go to the Block grandchildren. Newsome is a member of a running club as are several of the Block grandchildren. As part of his duties as trustee, Newsome makes portfolio decisions that favor growth of the principal and puts the current income at risk. Has he violated any fiduciary standards? A) No, because he acted impartially. B) Yes, because he did not use caution. C) Yes, because he did not act impartially. Your answer: B was incorrect. The correct answer was C) Yes, because he did not act impartially. Newsome was not impartial with respect to the current income beneficiary relative to the remaindermen interests. (Remaindermen referes to the group that is to receive the remainder of the trust once its term is complete. Of course, some trusts never expire so not every trust has remaindermen.) This could also be perceived as a loyalty violation in that he did not act in the best interest of all beneficiaries. Caution deals with the investment decisions of the portfolio. i see no reason even after reading the explanation of why it is impartiality and not caution. take a look at the definitions they give for each in the los: Caution must be used to balance the need for current income with the need to guard against inflation. In addition, a total return approach to money management should be employed. Principal growth (not just maintaining purchasing power) could indeed be a goal in certain circumstances. Impartiality requires that the trustee act “in a fair and reasonable manner” when handling the conflicting interests of beneficiaries.

Its a Schweser stretch. By running with the youngins, Newman is growing the principal that they will reap the benefits for at the expense of current income. Violating impartiality.